Daily Market Review 12/08/2008

UK housing and consumption showing few signs of life as GBPUSD dips to 1.9000. US and Canadian trade data up today. USD rally continues, but perhaps getting stretched in short term soon. Major resistance still somewhat far away in bigger picture, however.

MAJOR HEADLINES – PREVIOUS SESSION UK Jul. RICS House Price Balance rose to -83.9% vs. -90.0% expected and -86.9% in Jun. Japan Jul. Domestic Corporate Goods Price Index rose 7.1% YoY vs. 5.7% expected Japan Jul. Consumer Confidence out at 31.6 vs. 32.9 in Jun. New Zealand Jul. REINZ House Sales fell -32.6% YoY vs. -42.4% in Jun.

THEMES TO WATCH – UPCOMING SESSION Key Risk Events (All times in GMT) UK Jul. CPI/RPI (0830) UK Jun. DCLG UK House Prices (0830) Canada Jun. International Merchandise Trade (1230) US Jun. Trade Balance (1230) US Weekly ABC Consumer Confidence (2100) Australia RBA's Lowe to Speak (2315) Japan Q2 GDP (2350) Japan Jun. Current Account (2350) Australia Aug. Westpac Consumer Confidence (0030) Australia Q2 Wage Cost Index (0130) China Jul. Retail Sales (0200)

Market Comments EURUSD is under further pressure and trading new lows below 1.4850 as of this writing as the ECB's Bini Smaghi made further comments indicating that the EuroZone economy will be far weaker than anticipated. With this kind of reaction, it's beginning to feel like this USD rally is a bit too much too fast, though we would be the last to step in and call a bottom. Also, the technicals are very fast and loose, with not much to grab on to in the way of support until we get down below 1.4600 (see chart below). More depressing news from the UK yesterday and overnight, as the RICS house price balance (the best indicator of the UK housing market) showed a slightly better than expected, if still scarily negative, reading. The BRC July Retail Sales Monitor also showed the four drop in same store sales in the last five months - a 0.9% drop. Yesterday, the PPI Input/Output prices were below expectations (perhaps beginning to ease the objections by the BoE members to the desperately needed monetary medicine) and the Jun. Trade Balance number showed a far worse than expected deficit. Still, the GBP may continue to look resilient against the EUR as long as the EUR is under pressure from the USD and JPY. Watch out for the CPI/RPI data today ahead of tomorrow's important Quarterly Inflation Report, which could begin to signal rate cuts from the BoE. USDCAD sailed higher as the pair has seen a remarkable and persistent rally, in which it has closed higher on 14 of the last 15 days. The Canadian International Merchandise Trade number is up today and yesterday's housing starts number is beginning to confirm the downtrend in Canadian housing, which has barely gotten underway, especially compared to its neighbor's housing market to the south. USDCAD, despite its overstretched look in the short term, still looks like a buy on the dips with 1.1000 as an eventual destination. Equity markets rallied yesterday - perhaps on further weakness in energy markets, but were weaker into the close, and this kept a lid on the JPY crosses to say the least. Most JPY crosses have fallen in sympathy with the fall in yields of late, but some of the key yield benchmarks are trading near critical levels, as we look at whether yields continue lower or find support. A reminder for why Japan has been so weak came in the form of the CGPI overnight, which registered a 27-year high at above 7%. This kind of inflation in a market with CB rates of 0.50% shows why the commodity rally has countered JPY strength at almost every turn in recent history. As long as commodities remain under pressure and if the bizarre equity rally turns back, the JPY crosses may continue lower still. Watch out tonight for the Japan GDP figures, which are expected to show a contracting GDP. The Japanese government has begun announcing stimulus measures. One factor we must keep an eye on for risk appetite and energy prices in particular is the conflict in Georgia, which has quickly blown up into the hottest war and diplomatic crisis since the 2003 Iraq war began. The pipeline from Azerbaijan to Turkey (and running through Georgia) in particular is in focus, as it transports close to a million barrels a day of oil for export - over 2% of OECD imports. The pipeline has already been shut down recently for other reasons, but the pipeline situation is an important potential wildcard. USD/RUB and USD/CNY position unwinding are also undoubtedly contributing to the move in USD strength. (This is after measures announce late last week by China and rapidly declining Chinese CPI on the commodities unwind easing pressure on CNY appreciation, and after Russia made a clear protest against the ever stronger Ruble by saying that USD/RUB is "no longer a one-way trade". Now, ironically, Russia is having to intervene like mad to buy USD as the trade is coming unwound too quickly due to the Georgia conflict) Chart: EURUSD The latest look at where we stand in the very big picture. The sell-off looks very steep, but the monthly chart shows how far we've come before this sell-off. Next big areas of interest to the downside come in just below 1.4600, where we have the first major rising trendline and the old high from 1992 coming in near the same level. The 0.382 Fibo retracement for the move from below 1.1700 to 1.6000+ doesn't come in until way down at 1.4357 and still looks pretty far away. It also coincides with the support of the old range around the turn of the year. To the upside, there is plenty of room for a large rally to consolidate some of the move so far. The key resistance for now is the old range marker just below 1.5300.

FX

EUR USD JPY GBP CHF AUD CAD NZD NOK SEK PLN - + - - 0 - 0 - 0 0 0

FX Trading Strategies

Pair Supp. Resis. Comments EURGBP 0.7765 0.7950 A lot of data out of the UK today and with the bias last week being towards softer European data, we think the time has come to the UK,especially with no significant selling interest below 0.7800. We placed an order to buy at 0.7837 stop bid, target 0.7900+, stop at 0.7817 offer.

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