Forex Analysis & Today's Strategy EURUSD 25 July 08

USD rally faces key test as equity markets renew sell-off. Carry trades finally knocked for big losses. UK GDP on tap. EURUSD mulls what it ought to do at 55-day moving average support after more ugly German survey data… Overnight News Bullets § GE PMI Manufacturing (Jul A) out at, 50.9 vs. 52.0 exp. 52.6 prior. § GE PMI Services (Jul A) out at, 53.3 vs. 51.5 exp. 52.1 prior. § SW PPI MoM/YoY (Jun) out at, 0.5%/3.0% vs. 0.4%/2.9% exp. 0.1%/2.9% prior. § SW Unemployment (Jun) out at, 8.1% vs. 7.3% exp. 5.9% prior. § GE IFO – Business Climate (Jul) out at, 97.5 vs. 100.1 exp. 101.3 prior. § GE IFO – Current Assessment (Jul) out at, 105.7 vs. 106.5 exp. 108.3 prior. § GE IFO – Expectations (Jul) out at, 90.0 vs. 93.2 exp. 94.7 prior. § E-Z Euro-Zone Current Account SA/NSA (May) out at, -7.3B/-21.4B vs. --/-21.4B exp. -0.3B/-9.2B prior. § E-Z PMI Manufacturing (Jul A) out at, 47.5 vs. 48.7 exp. 49.2 prior. § E-Z PMI Services (Jul A) out at, 48.3 vs. 48.8 exp. 49.1 prior. § E-Z PMI Composite (Jul A) out at, 47.8 vs. 49.0 exp. 49.3 prior. § UK Retail Sales MoM/YoY (Jun) out at, -3.9%/2.2% vs. -2.6%/4.4% exp. 3.5%/8.1% prior. § US Initial Jobless Claims (Jul 19) out at, 406K vs. 380K exp. 366K prior. § US Continuing Claims (Jul 12) out at, 3107K vs. 3160K exp. 3122K prior. § US Existing Home Sales (Jun) out at, 4.86M vs. 4.94M exp. 4.99M prior. § US Existing Home Sales MoM (Jun) out at, -2.6% vs. -1.0% exp. 2.0% prior. § US EIA Natural Gas Storage Change (Jul 18) out at, 84 vs. 80 exp. 104 prior. § JN Tokyo CPI (Jul) out at, 1.6% vs. 1.8% exp. 1.5% prior. § JN National CPI (Jul) out at, 2.0% vs. 1.9% exp. 1.3% prior. O/N Data Heat map: EU US JP UK SZ AU CA NZ NO SE FR - - - - Calendar Today's Highlights: Time (GMT) Region Release Consensus 07:30 SE Trade Balance (Jun) 08:00 E-Z Euro-Zone M3 3.mth/YoY (Jun) 10.4%/10.3% 08:30 UK GDP QoQ/YoY (2Q A) 0.2%/1.6% 08:30 UK Index of Services (May) 0.4% 12:30 US Durable Goods Orders (Jun) -0.3% 12:30 US Durables Ex Transportation (Jun) -0.2% 14:00 US U. Of Michigan Confidence (Jul F) 56.4 14:00 US New Home Sales (Jun) 503K 14:00 US New Home Sales (Jun) -1.8% 17:00 US Baker Hughes U.S. Rig Count (Jul 25) This and Next Week’s Highlights: Date Region Release Jul 28 JN Jobless Rate, Household Spending, Retail Trade, Jul 28 GE GfK Consumer Confidence Survey Jul 29 SE Retail Sales Jul 29 UK M4 figures, Net Consumer Credit, Mortgage Approvals Jul 29 US S&P/CS Composite Home Prices, Consumer Confidence, ABC Consumer Confidence Jul 29 JN Industrial Production Jul 30 AU Building Approvals Jul 30 NZ Money Supply Jul 30 E-Z A string of Euro-Zone confidence figures Jul 30 SZ KOF Swiss Leading Indicator Jul 30 US MBA Mortgage Applications, ADP Employment Change, DOE/API Inventories Jul 30 CA Industrial Product Price, Raw materials Price Index Jul 30 UK GfK Consumer Confidence Survey What's going on? § Following substantial losses in the U.S. equities on Thursday, Asian stocks have dropped the most in a 6-wk period in overnight trading. National Australia Bank, largest bank in Australia, sold off heaviest since September 2001 on credit concerns, dragging the rest of financials down. § Sudden reversal in the equity market sentiment has also reversed the formation of carry trades, pushing for yen for a first weekly gain against euro in 3-month period. As we expect the European session to see continued losses today, we expect the carry trades to remain under pressure in today’s trading. § Further direction to the health of U.S. economy will be gained with the release of June Durable Goods Orders, scheduled for 12:30 GMT. While the median surveyed expectation points to a -0.3% figure, the analyst estimates display a wide spectrum, ranging from a high of 1.0% to a low of -2.5% FX EUR USD JPY GBP CHF AUD CAD NZD NOK SEK PLN + + FX Trading Strategies Pair Supp. Resis. Comments EURUSD 1.5760 1.5670 while the pair failed to close below 1.5670 in yesterday trading, we are looking for further downside to open at the break pivot support at 1.5673 which also coincides with 50-day MA. We place an order to sell at 1.5670 offered. Stop at 1.5695 bid, Targeting 1.5580 area. MAJOR HEADLINES – PREVIOUS SESSION § Japan Jul. Tokyo CPI out at 1.6% YoY vs. 1.8% expected and ex Fresh Food and Energy at 0.3% vs. 0.4% expected. § Japan Jul. National CPI out at 2.0% YoY vs. 1.9% expected and ex Fresh Food and Energy at 0.1% vs. 0.0% expected. § Japan Jun. Corporate Service Prices rose 1.2% YoY vs. 0.7% expected. § Germany Jun. Import Price Index out at 1.5% MoM vs. 1.0% expected. THEMES TO WATCH – UPCOMING SESSION Key Risk Events (All times in GMT) § Sweden Jun. Trade Balance and Jun. Household Lending (0730) § UK Q2 GDP (0830) § UK May Index of Services (0830) § US Jun. Durable Goods Orders (1230) § US Jul. Final University of Michigan Confidence (1400) § US Jun. New Home Sales (1400) Market Comments The German IFO survey for July surprised to the downside again yesterday as the mood at German businesses continues to sour, especially in terms of forward expectations. While the Current Assessment component of the survey has edged steadily lower since the beginning of 2007, the Expectations component has plummeted in recent months and is now close to levels not seen in over 5-years. The preliminary German releases for the July Services and Manufacturing PMIs also show the manufacturing sector edging close to contraction, while the broader EuroZone surveys were both below expectations and well below 50. This data continues to underline the rapidly decelerating EuroZone economy and will likely serve as a drag on the EUR for here on out. The peak in the broader EUR index may be behind us. The question is: have we also seen the top for EURUSD? We mentioned yesterday that our conviction was that the equity rally was unlikely to last and that we would also like to see the USD able to maintain strength even as equities sell off. Yesterday provided the first real test for this idea as equities saw their worst day of the month. The USD survived reasonably well, but needs to push through the next layers of resistance for conviction. Let's see how we close the week, but the USD recovery story is showing signs of promise. Here's how one version of a continuing USD recovery could play out: the worst of inflation is finally behind us as oil continues another 10% lower and begins to simply trade back and forth in a range. Inflation numbers finally begin to tick down on the commodities correction and slackening demand and other data point to increasingly weaker economies around the world, building up the negative momentum already developing. A drastic downward reduction in forward rate expectations causes the higher yielders to continue to loser their shine and the ECB is forced to beat a hasty retreat, cutting rates to 3.00% by the summer of 2009. The US economy worsens less than its global counterparts and the Fed is able to maintain rates at 2.00% while the housing market shows signs of less precipitous deceleration (the very generous housing bill just passed should definitely begin to slow the pace of the US housing decline in the months ahead - this is a massive boon to homeowners and home buyers, the long-term fiscal effects aside). All of this is just a scenario, of course, but the gist of this scenario is necessary for a continued USD recovery. A couple of significant wild cards out there in the coming months are the US presidential election and the geopolitical risks stemming from Iran's nuclear ambitions. We suspected (as did market expectations) that the May UK Retail Sales data was an aberration and that the June numbers would do much to reverse the impression of any strength building in UK private consumption. But the market was not prepared for the truly awful data point (a -3.9% drop MoM - by far the worst in over 20 years) that immediately knocked GBP for sharp losses. The weak shorts who had been squeezed out of short GBP positions just the previous day apparently all dove back in and GBP lost ground sharply almost across the board. GBPUSD is looking soft again as long as it remains below the 1.9900 resistance (former support). Watch out for the GDP release today. The JPY is finally showing some backbone as it should in this environment, and we wonder if this could be the start of something big for the currency. The strength in JPY and CHF could accelerate if the trifecta of lower commodities, yields and equity prices continues. GBPJPY saw a spectacular reversal yesterday after breaking the neckline of a massive upside down head and shoulders formation and the 200-day moving average. USDJPY is also barely back below its 200-day moving average as of this writing after breaking this obviously key technical level for weeks. We have a look at AUDJPY below. Charts: EURUSD and AUDJPY EURUSD: EURUSD has found support close to the 55-day moving average (the red line), which is also the middle of the seemingly eternal range we've been embedded in since March. This level looks like the next important test for the pair if we are to see the USD stronger still. The key resistance zone is now in the 1.5750 (0.382 Fibo of move down from recent 1.5950 peak) and 1.5770 area (10-day EMA that seemed to be serving as support recently).

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