Move in USD strength now confirmed. poorly positioned market will be squeezed mercilessly if risk aversion maintains head of steam.


MAJOR HEADLINES – PREVIOUS SESSION

  • New Zealand Jul. Performance of Services index out at 50.1 vs. 45.0 in Jun.

  • UK Aug. RightMove House Prices fell -2.2% MoM vs. +0.6% in Jul.

  • Japan Q2 GDP rose +0.9% QoQ vs. 1.0% expected

  • China Jul. Actual FDI fell -20.35% YoY vs. -16.8% expected and -17.9% in Jun.

  • Switzerland Jun. Retail Sales rose 0.9% YoY vs. -1.4% in May

  • Norway Jul. Trade Balance out at 30.8B vs. 22.1B in Jun.

  • EuroZone Jun. Trade Balance out at 1.0B vs. 1.3B expected and 1.1B in May

  • US Aug. Empire Manufacturing out at 12.08 vs. 3.00 expected and -0.55 in Jul.

  • US Jun. Net Long-term TIC Flows out at 90.7B vs. 17.5B expected and -19.4B in May

  • US Jun. Total Net TIC Flows out at -31.2B vs. 23.0B expected


THEMES TO WATCH – UPCOMING SESSION

  • US Aug. NAHB Housing Market Index (1700)

  • Australia RBA July Meeting Minutes (0130)

  • Japan Jul. Department Store Sales (0530)

Last Friday's University of Michigan Confidence number reminded us that despite the media and the market's deafening proclamations that the worst is over and that we are on the road to recover, the real consumer out there is feeling none of it and is not likely to join the party. The action on the day sent the USD and JPY stronger and commodity currencies headed back behind the shed for the inevitable thrashing that these moves entailed.
The action apparently had investors sweating their positions over the weekend, as this week was launched to further salvos of USD and JPY buying that clearly has the. The accelerator for all of the action today has been a brutal sell-off in Chinese equities, which tacked on almost 5% of further losses after selling off over the last two weeks as well. With the latest move, this confirms the move in USD strength and sets up expectations for more in the days ahead. The key level to watch for EURUSD is now around 1.4000 and then the more distant 1.3750 area. Considering that we seem to be back in the old pattern of risk aversion equaling USD strength, then we will almost certainly have to see an accompanying further sell-off in equities and falling bond yields.

The resilient bond market is key to watch this week and in the future, as it did an excellent job of setting up this move by refusing to correct lower as market observers and equity market participants bulled up the prospects for economic recovery almost daily.. Currencies were surprisingly leading as well, as some of the riskier currencies refused to rally ahead of this correction - particularly in EM - though that may have been a head-nod to the weakness that was increasingly evident in China, even as US markets were fairly steady. Regardless, in this part of the cycle, the equity market proved that it had the most dumb money. So our coincident indicators here will be the Shanghai composite, US t-bonds and EuroBunds, and EM currencies for judging how the action will continue to unfold in FX land.

The bulls will have the strong US Empire Manufacturing number to point to from today, but we have to remember why the confidence data is the be all and end all of the US economy: the service sector and private consumption are about four times more important for the rate of economic growth - depressed consumers do not a recovery make, so for the moment, the ugly Retail Sales and confidence data from last week are more important than production, manufacturing data. For this week, there will be considerable focus on the numbers for the US housing market, as the strong June data raised the bar and expectations for July. Watch the NAHB survey today for clues to the data later this week, as this survey has been an excellent leading indicator in the past. That's about all for this thin week of data from the US, and most of the rest of the world as well, for that matter. At the end of the week, the Kansas City Fed kicks off its Jackson Hole, Wyoming conference, which has been an interesting to watch in the past for central banker thought processes and observations.

Insult was added to injury for the Aussie as China cut a deal with an Australian competitor (Fortescue) of Rio Tinto's to supply iron ore at a significant discount to the prices agreed elsewhere for 2009 and 2010. At the same time, it will extend Fortescue a large loan to expand production. This kind of pressure is not good for the strong Aussie story and the action since last week is making that clear. AUD is not perfection. If we broaden this theme further, this phenomenon could apply to any strategic commodity in China, as long as world demand remains relatively in check. So if commodity markets weaken enough again, China likely also has the clout to go to any number of oil producers and buy up future production at advantageous, but guaranteed long term prices.

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