USD Weaker for Third Week in a Row

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MAJOR HEADLINES – PREVIOUS SESSION

• SZ Trade Balance (Aug) out at 0.64B vs. 0.93B expected.

• SZ PPI MoM/YoY (Aug) out at 0.3%/2.7% vs. 0.1%/2.6% expected.

• IT Unemployment Rate (2Q) out at 6.0% vs. 6.2% expected.

• UK Retail Sales MoM/YoY (Aug) out at 0.6%/4.9% vs. 0.0%/4.0% expected.

• UK M4 Money Supply (Aug P) out at 1.2%/13.5% vs. 0.8%/12.9% expected.

• UK M4 Sterling Lending (Aug P) out at 23.0B vs. 15.1B expected.

• SZ ZEW Survey (Sep) out at -26.7 vs. -10 expected.

• E-Z Construction Output MoM/YoY out at 0.0%/1.7% vs. 0.5%/2.6% prior.

• US Initial Jobless/Cont. Claims out at 311K/2544K vs. 321/2575K expected.

• CA Wholesale Sales MoM (Jul) out at 2.0% vs. 0.5% expected. Prior at 0.1% (revised from 0.2%)

• JN MOF Foreign Net Stocks Invest (Sep 14) at –Y602.7B vs. –Y43.9B prior.

• JN MOF Foreign Net Bonds Invest (Sep 14) at Y684.5B vs. –Y95.9B prior.

THEMES TO WATCH – UPCOMING SESSION

FX - The Pound was been the currency in focus this week

A lot of focus has been given to deteriorating pound this week and with good reason. The sub-prime worries really hit the European financial sector when Northern Rock and GBP took a significant hit right after the news hit the market. So with inflation YoY now down below the BoE's comfort zone at 1.8% and the growth outlooks decreasing along with disappointing housing figures (which has been a key economic support driver), the pound is likely to come under additional pressure in the short term, which is supported by the fact that the next move by the BoE will be a cut.....and we believe that from an FX standpoint the GBP remains as vulnerable to unwinding as the AUD and NZD on a bearish outlook for the future cash rate. The short end of the curve has outperformed in the short term as the BoE has stepped into help Northern Rock (which looked political more then anything else) which should be negative for swap spreads giving a helping hand to the view mentioned above. From a trading perspective we still think GBP weakness could give some favorable trades. We still think that the most attractive shorts are against NOK, EUR and CHF.

For the USD, It has been a week on the retreat since the Tuesday, where the Fed decided to cut rates more than the market expected, sending the USD to new lows versus the EUR and the CAD. Fundamentally, the data releases coming from the US has in the past weeks supported at weaker USD, but the market sat tight prior of the release not reacting to any fundamentals. In the current US environment, as national account deficits are widening, it will not be ease to attract foreign capital, which also was reflected in the weak Long-Term TIC Flows (out Tuesday at $19.2B vs. $85.0B expected). EURUSD easily broke higher on the rate decision and is currently hovering around 1.41. We see next resistance coming in at 1.4150/60 and still favor a weaker USD in the upcoming months waiting for the figures to show an increase in inflation, which already has been priced in to the fixed income market – especially in the short end of the curve.

Note: the support/resistance levels used in the matrix’s of this document are levels derived from yesterday high, low and close. Reference in the text to other support/resistance levels will occur.