Forex Market Update

Analysis by:John Hardy
Market trying to take USD to new lows for the cycle after equity comeback late yesterday.

AUDUSD toying with 12-month highs. Last year apparently never happened....

MAJOR HEADLINES – PREVIOUS SESSION

* New Zealand Jul. Building Permits rose 5.0% vs. 8.0% expected and -9.6% in Jun.
* UK Aug. GfK Consumer Confidence steady at -25 vs. -24 expected
* Japan Jul. Jobless Rate rose to 5.7% vs. 5.5% expected and 5.4% in Jun.
* Japan Jul. Household Spending fell -2.0% vs. -0.5% expected
* Japan Jul. CPI ex Food and Energy fell -0.9% YoY vs. -0.8% expected and -0.7% in Jun.
* Sweden Jul. PPI out at +0.7% MoM vs. +0.3% expected
* Sweden Jul. Retail Sales rose +1.9% MoM vs. +0.4% expected
* UK Q2 GDP fell -0.7% QoQ vs. -0.8% expected and -0.8% in Q1
* EuroZone Aug. Consumer Confidence out at -22 vs. -21 expected and -23 in Jul.
* EuroZone Aug. Industrial/Services Confidence out at -26/-11 vs. -28/-17 expected and -30/-18 in Jul.
* Switzerland KOF Swiss Leading Indicator rose to -0.04 vs. -0.6 expected and -0.85 in Jul.
* Canada Q2 Current Account out at CAD -11.2B as expected and vs. CAD -7.7B in Q1
* Canada Jul. Industrial Product Price fell -0.5% as expected
* US Jul. Personal Income/Spending out at 0.0% /+0.2% vs. +0.1%/+0.2% expected
* US Jul. PCE Deflator out at -0.8% YoY vs. -0.9% expected and -0.4% in Jun.
* US PCE Core out at 1.4% YoY as expected


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

* US Aug. University of Michigan Confidence (1400)
* UK Aug. Hometrack Housing Survey (Sun. 2301)
* Japan Aug. Nomura/JMMA Manufacturing PMI (Sun. 2315)
* Japan Jul. Industrial Production (Sun. 2350)
* Japan Jul. Retail Trade (Sun. 2350)
* Australia Jul. HIA New Home Sales (Mon. 0100)
* Japan Jul. Labor Cash Earnings (Mon. 0130)
* New Zealand Aug. NBNZ Business Confidence (Mon. 0300)
* Japan Jul. Housing Starts (Mon. 0500)
* Japan Jul. Construction Orders (Mon. 0500)
* Japan BoJ Governor Shirakawa to Speak (Mon 0530)

Market Comments:

After late yesterday's nasty bear squeeze in equity markets that punished short-term traders' long USD positions, the market has been looking for a follow up move today in USD weakness, but this has mostly been frustrated outside of the commodity currencies, where USDCAD was down to tickle the 1.0800 level and AUDUSD has been having a go at the mid-August high, which was the highest level since last September. So many market indicators of risk are at their "post-Lehman" highs that we begin to wonder if the last year ever happened... The markets apparently don't think so. The rosy view of the future is simply astounding, and fighting it has been no pleasant task...

The weak USD move...
Considering the quality of yesterday's move on scant liquidity, it was clear that this was more of a stop-fest than a "real market move". There may be an element of nervousness about month-end fixing today and Monday as well. Last month saw a tremendous fall in the USD on the last day of July and first day of August, a move that generated the low for the year in the USD, before it spent the rest of the month range trading with no new impulse. In other words - be suspicious of the next couple of days of market action, after yesterday, it certainly appears that the market wants to test new lows in the greenback, but every consensus technical trade from market developments of late has been frustrated, so we throw up our hands and wait for next Tuesday for more clarity. Very tactically, a close back below 1.4325 today would make the USD sell-off look very suspect. Until then, it's Bombs Away! for the USD bears.

CAD: Deficit Nation?
The Canadian Current Account Deficit fails to draw much attention as CAD trades at strong levels vs. the market once again. Why is this? Is it not remarkable that a nation that formerly ran a large and consistent current account surplus is now running an annualized current account deficit of -3% of GDP? A year ago, the country was running surpluses of around +2% GDP - making for an overall delta of almost -5%. Ah, yes, but last year never happened and we're quickly going to revert to the good old 2004-06 status quo, so everything will simply return to the way it was before...

Japan's Election
The election in Japan is to be held this weekend and promises a sea change in the national political scene, as the opposition Democrats will sweep to power. The implications for markets are very unclear at this time. Everyone notes that the party will be less interested in supporting the industrial/exporting complex as this tired LDP policy now (finally!) holds zero credibility. At the same time, the Democrats have criticized weak JPY policies that were part and parcel of the LDP support for industry in the past. They would prefer to see support for individual incomes and consumption. But how they will accomplish such a miracle after a couple of generations of engrained behavior is not at all clear. They should start with subsidies for child-bearing, judging from the dire state of the country's demographic profile. Everything adds up to uncertainty in the shortest term, which all things being equal means a weaker JPY going into the elections. We'll watch for signs of JPY resilience in the non-USD crosses going forward, however.

Pie in the Sky
As we go to press, the US equity markets are opening at new highs on the year on Intel's new upbeat forecasts (merely a 12% shrinkage of last years Q3 revenues are now expected for Q3 of this year - wildly bullish!) It appears green shoots are turning into sturdy saplings and the last twelve months never happened and all of the profound structural changes underway that are rapidly wiping away the old global imbalances are going to halt forthwith as we ease back into the good old days of the Great Credit Bubble. The market seems to be eating a very large portion of pie in the sky.