Hawkish ECB Talk Helps Euro

The dollar traded mixed Wednesday after US durable-goods orders unexpectedly advanced in July and oil prices rose for a third day as Tropical Storm Gustav is moving toward production platforms in the Gulf of Mexico. The yen was little changed despite higher US stock prices. The euro rose on hawkish ECB comments. Sterling continued its decline following yesterday's important break of support at the 1.85-handle. The Canadian and Australian dollars were little changed.

The EUR/USD rose after contrasting statements from ECB and Fed officials. ECB council member Axel Weber said discussion about a reduction in interest rates is 'premature' and ECB council member Klaus Liebscher said 'vigilance is more necessary than ever' regarding inflation. Meanwhile, Atlanta Fed President Dennis Lockhart said: 'Current Fed policy is consistent with an easing in overall inflation given the dynamics of the economy.' The Fed believes the slowing growth will fix the inflation problem despite its lax monetary policy, while the ECB believes monetary policy has to be tight to control inflation. Unfortunately, the Fed's lax policy increases worldwide inflation, so the ECB has limited power in controlling inflation. The pair has been trading in the 1.46-1.49 for the last two weeks reducing its oversold condition. There are strong support in the 1.44-1.45 area and good resistance in the 1.49 area. We believe there will be a test of the support. If this support is broken, the pair may fall to 1.35.

Financial and Economic News and Comments

US & Canada

• The US dollar index was lower today but up for the week. The index is testing resistance around the 78- handle. The index has broken the long downtrend and may need some consolidation as it is overbought. A fall to support in the 75-area would not change the bullish implication as it would just be the beginning of an inverted head-and-shoulder.
  

• US durable-goods orders unexpectedly jumped 1.3% m/m to $219.3 billion in July, partly due to stronger demand for aircraft, following an upwardly revised 1.3% m/m rise in June, the Commerce Department said. Excluding transportation, durable-goods orders unexpectedly increased 0.7% m/m. Durable-goods orders fell 2.4% y/y, but jumped 5.5% y/y excluding transportation. A barometer of business-equipment spending -- orders for non-defense capital goods excluding aircraft -- rose 2.6% m/m in July after increasing 1.3% m/m in June. Shipments rose 2.5% m/m in July to $218.3 billion. Unfilled orders increased 0.8% m/m to $824.4 billion. Inventories increased 0.8% m/m to $335.8 billion. Despite the healthy rise in July durablegoods orders, the domestic economy remains weak.
  

• Federal Reserve Bank of Atlanta President Dennis Lockhart said the Federal Reserve's interest-rate stance is 'consistent' with slowing inflation, while signaling readiness to hike rates if needed. 'Current Fed policy is consistent with an easing in overall inflation given the dynamics of the economy,' Lockhart said in Atlanta. At the same time, 'I am mindful of today's elevated risks and am prepared at any point to change tactics to ensure inflation expectations do not become unanchored.'
  

Europe

• Germany's consumer prices declined 0.3% m/m in August and rose 3.1% y/y, preliminary data from the Federal Statistics Office showed. Germany's preliminary harmonised index of consumer prices (HICP) in August eased to 3.3% y/y from 3.5% y/y, and fell 0.4% m/m.
• German import prices rose a less-than-expected 0.3% m/m in July, following a 0.6% m/m increase in June, the Federal Statistics Office said.
• European Central Bank council member Axel Weber sees no room for interest-rate cuts, saying the ECB may need to hike rates once the eurozone economy recovers from its slowdown. 'Monetary policy at the moment is roughly where it should be and I think the discussion about declining rates in Europe is premature... .If the economic outlook brightens somewhat again towards the end of the year and next year, which I still expect, we'll have to see if action is necessary,' Weber said in Frankfurt. 'I don't expect inflation to come down necessarily just with weaker growth... .Inflation is still the No. 1 worry for central bankers in the euro region,' he said.
  

Asia-Pacific

The Bank of Thailand raised its key interest rate for a second consecutive month to tame inflation, conflicting with the government that called for borrowing costs to be kept on hold. The BOT increased its one-day bond repurchase rate by a quarter-point to 3.75%, the BOT said.

FX Strategy Update

Hans Nilsson
Capital Market Services, L.L.C.
www.cmsfx.com

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