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Daily Forex Strategy Briefing

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Dollar Mixed on Plunging Stocks

Tue, Aug 26 2008, 00:10 GMT
by Hans Nilsson

CMS Forex

Dollar Mixed on Plunging Stocks

• The dollar traded mixed Monday as US stocks plunged 2%, led by losses in AIG, as investors worried over the financial sector and credit market. US July existing home sales rose more than forecast but homes available for sales rose to a new record, indicating further price declines. The euro fell following a report the International Monetary Fund cut its 2008 and 2009 growth estimates for the eurozone. After touching a 2-year low in thin trading as London was closed for a bank holiday, the pound later recovered to above the 1.85 support. The Australian and Canadian dollars declined as metal prices fell and oil prices increased only modestly.


• The USD/JPY fell on increased risk aversion as US stocks led by financial stocks dropped despite a successful Freddie Mac debt auction. The pair was also pressured by Bank of Japan Governor Masaaki Shirakawa’s comments that Japan is likely to avoid a serious economic downturn. The pair is in an uptrend but unable to penetrate the 110-area resistance. If it is penetrated, the USD/JPY will move significantly higher. Support exists in the 107-area.

Financial and Economic News and Comments

US & Canada

• US existing home sales increased a more-than-expected 3.1% m/m in July to a 5 million annual rate, the highest since February, from 4.85 million in June, data from the National Association of Realtors showed. Existing home sales fell 13.2% y/y. Despite the monthly sales increase, home inventories expanded 3.9% m/m in July to a record-high 4.67 million available for sale. Sales increased in the Northeast, Midwest, and West, but fell slightly in the South. By type of home, sales were up for both single-family units and condos/coops. The median home price was $212,400 in July, down slightly from June and off 7.1% y/y. Single-family home prices fell 7.7% y/y. The months’ supply of existing homes at the current sales rate rose to 11.2 in July from 11.1 in June; however, all of the increase was due to condos/coops. The months’ supply of single-family homes declined to 10.6 from June’s 11.0. Overall, the figures indicate the US housing slump is far from over and home prices are likely to drop further in the next quarters.

• The Dallas Fed general business activity improved to -18.8, remaining weak in August, from -27.4 in July, the Federal Reserve Bank of Dallas said. The production index remained flat in August, while new orders dropped to -14.6 from -7.7. Price indexes receded in August; however, price pressures were still prevalent. The prices paid index dropped to 51.5 in August from 65.4 in July, and the prices received index fell to 21.6 from 31.7. The employment index dropped to -6.9, compared to July’s 3.8. Overall, the August weak figures signal further signs of softness in Texas manufacturing.

Europe

• The International Monetary Fund cut its 2008 growth estimate for the eurozone to 1.4% from 1.7% and also lowered its 2009 forecast to 0.9% from 1.2%.
• European Central Bank council member Yves Mersch said the ECB will announce changes to the rules governing its money-market auctions soon to head off the risk of abuse by financial institutions. “At the margins there can still be cases where you see dangers of gaming the system,” Mersch said on August 23 in Jackson Hole, Wyoming. “The Governing Council has been discussing the whole issue,” agreeing on a “certain amount” of refinement to the existing rules. “It’s not a broad-based revolution. We are satisfied with our framework. But since there are always on the margins evolutions, we have to adjust our framework regularly to market practices,” Mersch said.

Asia-Pacific

• Bank of Japan Governor Masaaki Shirakawa said Japan is likely to avoid a serious economic downturn. However, he also said interest rates will probably remain accommodative as economic growth is expected to remain sluggish for the time being. “Japan’s economy is unlikely to experience a deep adjustment phase,” but growth will remain sluggish in the near term due to high energy and material prices and weaker export growth, Shirakawa said in Osaka, western Japan.


• The Korea Development Bank refuted speculation it might consider buying Lehman Brothers.

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Published on  Tue, Aug 26 2008, 00:15 GMT