Friday, July 27, 2007



Fundamental Outlook at 1400 GMT (EDT + 0400)

The euro gained marginal ground vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.3740 level and was supported around the $1.3690 level. Technically, today’s intraday high was right around the 38.2% retracement of the move from $1.3565 to $1.3850. Today’s range was relatively limited as traders continue to digest a variety of factors, not the least of which is the ongoing correction in the U.S. credit markets. Subprime mortgage industry problems continue to worsen and risk aversion is growing. Many traders believe the reassessment and repricing of credit risk will actually strengthen the U.S. dollar as traders will reduce emerging market exposure and exposure in foreign markets in favour of more highly-rated assets such as U.S. Treasuries. In recent weeks, the yield on the 10-year U.S. Treasury Note has fallen from 5.31% to 4.83%, evidence that market participants are reinvesting in assets with higher credit ratings. Interestingly, the U.S. dollar’s recent gains have coincided with a growing perception the subprime mortgage problems may force the Federal Reserve to lower interest rates this year. Data released in the U.S. today saw June new home sales off 6.6% to an annualized 834,000 units, weaker-than-expected. The Fed’s Beige Book was released yesterday and reported consumer prices continue to expand “at a moderate rate.” The Federal Open Market Committee will next deliberate interest rates on 7 August. Other data released today saw weekly initial jobless claims fall 2,000 to 301,000 while continuing jobless claims were off 19,000 to 2.55 million. Additionally, new orders for durable goods were up 1.4% m/m after declining a revised 2.3% in May. Excluding transportation goods, durable goods orders were off 0.5% and non-defense capital goods orders excluding aircraft orders were off 0.7% after falling 1.5% in May. It was also reported that June building permits were revised to -7.0% from -7.5%. In eurozone news, the German July Info business climate index fell to 106.4 from 107.0 in June while the EMU-13 M3 money supply was up 10.9% in June from 10.6% in May. These data suggest the European Central Bank may be inclined to raise its refinancing rate by +25bps to 4.25% in September followed by another +25bps hike to 4.50% by the end of 2007. Euro bids are cited around the US$ 1.3635 level.