The US dollar and Japanese yen were the weakest of the majors, giving up most of their gains from Monday, as FX carry trades and equities bounced, with the S&P 500 closing up 1 percent at 989.67.
The market showed little reaction to US data, as the producer price index (PPI) fell more than anticipated at a rate of -0.9 percent in August, amidst weaker energy prices. Ultimately, this brought the annual rate of growth down to a record low of -6.8 percent, but even excluding volatile factors like food and energy, annual pace of growth slowed to more than one-year low of 2.6 percent pace from 3.3 percent. Meanwhile, housing starts unexpectedly fell 1 percent in July to an annual pace of 581K while building permits dipped 1.8 percent to an annual pace of 560K. As leading indicators for other US housing reports, the data doesn’t bode well for upcoming new and existing home sales and suggests that cheaper prices, lower interest rates, and an $8000 tax credit for many new homebuyers will not be enough to fully counter the impact of rising unemployment.
Looking ahead, there will be no key US data released on Wednesday. We have reason to believe, however, that the rise we saw in risky assets on Tuesday will not last. First, according to Technical Strategist Jamie Saettele on the DailyFX Forex Stream, trading volume in stocks this week has been at its lowest since July 2, 2009 (ahead of the US Independence Day holiday), December 24/26, 2008 (before and after the Christmas holiday), and November 28 (the day after the US Thanksgiving Day holiday), suggesting the increase will not last. Indeed, meaningful rallies typically occur only with higher trading volumes. Second, a quick Google News search of “carry trade” shows that optimism may be hitting an extreme, as evidenced by the trumpeting a headline like Why the ‘Carry Trade’ is Back in a major media publication (the Wall Street Journal). Also, the August 2009 issue of Futures Magazine shows a bull in the mist, suggesting that a bull market in stocks is emerging. Third, on Monday the Federal Reserve’s Senior Loan Officer Survey showed that banks tightened lending in Q2 due to a “more uncertain economic outlook,” suggesting that credit conditions are nowhere near normal and adding to evidence that the financial sector could continue to lead the US stock market on a gradual decline.
We noted yesterday that pairs like, EURUSD, GBPUSD, EURJPY, GBPJPY, and NZDJPY, among other, broke below trendlines that have served as support since early to mid-July, and on Tuesday those levels were tested as they now form resistance. Given the noted signs of an important turn lower in equities and FX carry trades, there looks to be great upside potential for safe haven currencies like the US dollar and Japanese yen in coming weeks.
[B]Check out the Daily Fundamentals in its entirety for a look at what happened across the majors.
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