Global Markets: The Three Little Bears - Dollar Bear, Bond Bear and the Ratings Bear

HIGHLIGHTS

• The stand out market trends of the past month or so have been the massive sell off in long bond yields, the substantial depreciation of the USD and the surprising power of credit rating agencies with some of their recent pronouncements on sovereign credit rating risks.
• With further job losses to come, inflation more likely than not set to fall and any pressure for the Fed to flag the start of a monetary policy tighten cycle well into the future, U.S. 10 year bonds appear set for a correction towards 3.25%
• TD now forecasts that the Canadian dollar will reach parity with the U.S. by the end of 2009 based on a variety of factors discussed in this report.
• The publication also includes quarterly interest rate and exchange rate forecasts for the U.S., Canada, Australia, and New Zealand, and also offers additional exchange rate forecasts for the Japanese yen, the euro, the U.K. pound, and the Swiss franc.

The stand out market trends of the past month or so have been the massive sell off in long bond yields, the substantial depreciation of the USD and the surprising power of credit rating agencies with some of their recent pronouncements on sovereign credit rating risks.

The first two events - the sharp jump in long bond yields and the USD decline - are probably related. The supply of U.S. government bonds is hitting the market at an unprecedented rate, while at the same time, there is a chunky maturity profile of outstanding bonds coming through plus there is an issue with just about every other country in the world ramping up its bond issuance to cover large and increasing budget deficits. The story unfolding is that yields may well have to rise to attract a given amount of global capital. We have tended to downplay this link between rising supply and rising yields simply because the historical experience in fact shows the opposite trend. That is, high bond issuance results from a recession, which results in low inflation and risk aversion, which in all, is bond supportive. Low bond issuance, on the other hand, is usually associated with strong economic growth, upside inflation pressures, and a strong appetite for risk, all of which are bond bearish.

General trends in bond yields, it seems, are much more likely to be influenced by headline inflation than bond supply. This makes the sharp 150 basis point and more back up in U.S. 10 year yields over the past couple of months somewhat hard to fathom with inflation still flat to lower in annual terms and further falls in inflation likely to emerge in the next few months.

We are still not thoroughly convinced that bond supply will have a lasting influence on bond yields. We would prefer to look at likely trends in monetary policy settings (on hold or lower are still dominant themes around the world) and inflation as the greatest lasting influence on bond yields. While inflation is indeed currently very low, there may be some budding inflation pressures being hinted at in both the CPI and PCE deflators. We note that in the first four months of 2009, the core readings in both these key inflation measures have increased at an annualised pace around 2 ¾ % - not fatally high after the inflation fears of 2008, but a trend that is at least a little disconcerting given the amount of policy stimulus flooding around the world. Our bullish bond call and suggestion that the yield curve will flatten significantly, is based on these inflation trends reversing as the recession rolls on.

Where the budget deficit issue may have a more lasting effect is in the USD. With the U.S. heavily reliant on foreigners to fund its budget (more than 50% of all Treasurys are held offshore), the USD may have to cheapen to attract sufficient foreign interest, especially when virtually all governments in the world are escalating their bond issuance to fund their deteriorating fiscal positions.

What's more, with Standard & Poors flagging a negative watch for the U.K. in the light of its fragile public finances, the market superimposed that logic to the U.S., observed an even more parlous position in the U.S. and now is nervous about the ability of the U.S. to contain debt over the medium term. This view looks valid, a point that is likely to weigh on the USD over the medium term, even though rating agencies said that there is no threat of a downgrade in the U.S.

Allowing for all of that, the economic fundamentals of the globe remain extremely bad. The run of Q4 2008 and Q1 2009 GDP results in all major and most minor economies show shrinkages in output. Further, house prices just about everywhere are flat at best, or are still falling sharply at worst while unemployment is rising at a rapid pace. The so-called green shoots of recovery that are being touted by some as a sign of a meaningful recovery in the economy are invariably indicators declining at a less rapid pace which admittedly is always a first thing to turn before a fully fledged recovery, but nonetheless do not inspire unambiguous optimism about the sustainability of the recovery in the near term.

The 'greens shoots', it should also be noted, may simply reflect simple forecasting errors from the consensus. At the depths of the low, there may well have been a bias (subliminal probably), to tilt the forecasts to the downside. This may then have seen a few 'less bad' results that sparked some optimism, risk taking and bond bearish trends. As an aside, who frankly can forecast things like consumer sentiment, the ISM or a raft of other indicators in a credible manner. As a result, surprises in these data releases, which may be seen as green shoots, have little credibility, even though markets may have knee jerk reactions to them.

Suffice to say, global GDP is shrinking, wealth is declining and household incomes are under downward pressure. This is not the material that inspires confidence about a sustained recovery, nor does it validate the back up in long bond yields. It does give one confidence about forecasting low inflation which, as the chart above shows, is usually a key driver of lower 10 year yields.

With many comparisons being made between the current situation in the U.S. and the 1990s in Japan, it is noteworthy that even during what has to be one of the most phenomenal bond rallies ever seen (10 year JGB yields fell from 5% to 0.75%), there were a couple of episodes, which lasted up to 6 to 9 months, where 10 year JGB yields jumped around 150bps. Both were associated with positive expectations for the economy but both were quickly reversed.

With further job losses to come, inflation more likely than not set to fall and any pressure for the Fed to flag the start of a monetary policy tighten cycle well into the future, U.S. 10 year bonds appear set for a correction towards 3.25%, possibly less. Longer end yields are also likely to be dragged lower, and as a result, the yield curve is poised for a major flattening.

(BOJ) Statement on Monetary Policy, June 16, 2009

Statement on Monetary Policy

1. At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided, by a unanimous vote, to set the following guideline for money market operations for the intermeeting period:

The Bank of Japan will encourage the uncollateralized overnight call rate to remain at around 0.1 percent.

2. Japan's economic conditions, after deteriorating significantly, have begun to stop worsening. Domestic private demand has continued to weaken against the background of declining corporate profits and the worsening employment and income situation. On the other hand, exports and production have begun to turn upward, and public investment has also increased. In the coming months, Japan's economy is likely to show clearer evidence of leveling out over time. Meanwhile, financial conditions have generally remained tight, although there have been signs of improvement. CPI inflation (excluding fresh food) has recently moderated reflecting the declines in the prices of petroleum products and the stabilization of food prices, and, with increasing slackness evident in supply and demand conditions, will likely become negative.

3. With inventory adjustments having proceeded both at home and abroad, economic activity will be greatly influenced by developments in final demand. The Bank's baseline scenario through fiscal 2010, in which expectations of both medium- to long-term growth and inflation are assumed to remain generally unchanged, projects that the economy will start recovering and the rate of decline in prices will moderate from the latter half of fiscal 2009, supported partly by the positive effects of measures to stabilize the financial system and of fiscal and monetary policy measures, in addition to a recovery in overseas economies and improvements in conditions in global financial markets. If these developments continue, there are prospects for Japan's economy to return to a sustainable growth path with price stability in the longer run. However, the outlook is attended by a significant level of uncertainty stemming mainly from developments in overseas economies and global financial markets.

4. With regard to risk factors, those that demand attention in the area of economic activity are the continued high downside risks to the economy stemming from future developments in the global financial and economic situation, changes in medium- to long-term growth expectations, and financial conditions in Japan. Regarding the outlook for prices, there is a possibility that inflation will decline more than expected, if the downside risks to the economy materialize or medium- to long-term inflation expectations decline.

5. The Bank, paying attention for the time being to the downside risks to economic activity and prices, will continue to exert its utmost efforts as the central bank to facilitate the return of Japan's economy to a sustainable growth path with price stability.

(BOE) Minutes of Monetary Policy Committee Meeting 3 and 4 June 2009

Publication date: 17 June 2009
MINUTES OF THE MONETARY POLICY COMMITTEE MEETING 3 AND 4 JUNE 2009
These are the minutes of the Monetary Policy Committee meeting held on 3 and 4 June 2009.
They are also available on the Internet
The Bank of England Act 1998 gives the Bank of England operational responsibility for setting interest rates to meet the Government's inflation target. Operational decisions are taken by the Bank's Monetary Policy Committee. The Committee meets on a regular monthly basis and minutes of its meetings are released on the Wednesday of the second week after the meeting takes place. Accordingly, the minutes of the Committee meeting to be held on 8 and 9 July will be published on 22 July 2009.

MINUTES OF THE MONETARY POLICY COMMITTEE MEETING HELD ON 3 AND 4 JUNE 2009

1 Before turning to its immediate policy decision, the Committee discussed financial market developments; the international economy; money, credit, demand and output; and costs and prices. Financial markets
2 Financial market sentiment had generally improved on the month, although strains remained and many spreads continued to be elevated. The publication of the outcomes of the stress tests for 19 major US banks on 7 May had been received positively. Sentiment had probably also been supported by the mounting evidence that the pace of contraction in the global economy was abating.
3 The spread between the three-month Libor rate and the risk-free rate had fallen by nearly 20 basis points. Long-term bank debt and corporate bond spreads had also fallen. Three-month Libor spreads were now broadly similar to those existing prior to the failure of Lehman Brothers, although spreads on longer-term bank and corporate debt remained elevated compared with this benchmark. Some of the major UK banks had issued medium-term unguaranteed debt during May, but feedback from market participants was that the volume of term wholesale funding remained limited. Gross capital market issuance by private non-financial companies had been above the average of recent years.
4 The Committee's decision on 7 May to keep Bank Rate at 0.5% and expand the scale of its asset purchase programme to a total of £125 billion had not immediately led to significant changes in short rates of interest or gilt yields. But short-term rate expectations and medium-term gilt yields had fallen somewhat following the publication of the Inflation Report.
5 Medium and long-term government bond yields in the United States and euro area had increased by around 20-50 basis points over the month. UK gilt yields had generally increased by a lesser amount, particularly at medium-term maturities. Following the 21 May announcement that Standard and Poor's had placed the United Kingdom's sovereign rating on negative outlook, medium and long-term gilt yields rose by around 10 basis points. Nevertheless, the rise in yields on the day was not confined to the United Kingdom, with reports of increased market concerns about the prospects of downgrades to industrialised countries more generally.
6 Sterling had appreciated by 4% on the month and by 12% since of the start of year. The appreciation could have been caused by a correction to excessive pessimism around the start of the year about the United Kingdom's prospects relative to its major trading partners.
7 Over the past month the dollar ERI had depreciated by 5.5%. That was consistent with investors being more willing to diversify portfolios out of the main international reserve currency as financial market sentiment improved, but could also signify increased concerns about the US economy.
8 The major equity price indices in the United Kingdom, United States and euro area were broadly unchanged over the month.

The international economy

9 Euro-area GDP had contracted by 2.5% during the first quarter; a somewhat larger fall than market participants had expected. During the first quarter, activity had generally fallen most in those euro-area countries that had run current account surpluses in recent years and in which exports accounted for a larger proportion of GDP. Activity in Japan had fallen by a record 4.0% in 2009 Q1. Nevertheless, there was relatively little new information in these data, which served mainly to confirm that global activity had contracted sharply around the turn of the year.
10 More timely indicators for 2009 Q2 suggested that the rate of contraction in the global economy was declining and that the trough in activity might be reached soon. The JPMorgan global manufacturing Purchasing Managers Index (PMI) had continued to rise, reaching 45.3 in May, its highest level for nine months. The scores for both output and new orders had risen. The US and euro-area manufacturing PMIs had both increased, with the new orders component in the United States rising above 50, a balance consistent with increasing activity, for the first time since November 2007. These encouraging signs had been apparent also in Asia. The service sector activity PMI for the euro area had also risen.
11 Dollar oil prices had risen by 18% on the month to levels last reached in mid-October 2008. Other commodity prices had also increased over the month. The rise in oil prices was likely to be in part related to increasing optimism about economic prospects, set against the background of the cuts in OPEC quotas announced during the fourth quarter of 2008. But oil prices might also have been boosted by demand for a hedge against a prospective rise in world inflation.
12 These developments in near-term activity gave little insight into the likely strength and durability of the recovery in global activity. The outlook depended, in part, on the ability of surplus countries to generate more domestic demand.

Money, credit, demand and output

13 Nominal GDP had fallen for the third successive quarter in Q1, and by almost 2.5% compared with a year earlier. That was the weakest four-quarter growth rate since quarterly records began in 1955.
14 M4 growth had continued to fall in April, with the three-month annualised growth rate falling to 7.8%. However, these data were distorted by the impact from money holdings of institutions that intermediate between banks. The three-month annualised rate of growth of M4 excluding the deposits of these intermediaries had increased in April. The bulk of this underlying increase had been concentrated in non-bank financial corporations' money balances. That might suggest that the programme of asset purchases was beginning to have an impact on the quantity of broad money. More timely market intelligence gathered during May indicated that a significant proportion of the gilts purchased by the Bank had been sold by institutional investors. But as yet there had been no rise in private non-financial companies' holdings of money.
15 M4 lending to households remained weak in April, and the twelve-month growth rate of lending to private non-financial companies (excluding the effects of securitisation) had fallen to 0.8%. The demand for credit was likely to have fallen as households and firms responded to the deterioration in macroeconomic conditions. But the supply of bank credit had probably been reduced too. In a survey conducted by the Agents during May, over 80% of respondents reported that external finance had become more expensive and harder to obtain over the past year. The supply of credit by banks to households and private non-financial firms was likely to remain constrained as long as banks were restructuring their balance sheets. Non-financial firms were making greater use of capital markets to raise finance but there were limits on the extent to which capital markets could serve as a substitute for bank lending, especially for smaller firms. Moreover, despite relatively strong gross debt capital market issuance in the three months to April, repayments had also been strong, so that net borrowing had been weak.
16 The CIPS/Markit survey measures of manufacturing and services output had both increased in May, with the services index pointing to increasing activity for the first time since April 2008. These surveys pointed to a smaller contraction in activity in the second quarter than had been anticipated at the time of the May Inflation Report. Other surveys, however, from the British Chambers of Commerce and CBI had suggested less of an improvement. The ONS manufacturing output index had stabilised in March. Overall, it was less likely than in May that activity would continue to decline at the exceptional rates observed in the final quarter of 2008 and the first quarter of 2009.
17 Consumption was estimated to have fallen by around 1% in both 2008 Q4 and 2009 Q1. Since then, however, the available surveys on consumer spending, together with reports from the Bank's regional Agents, had suggested an easing in the pace of decline. There were a number of possible explanations for such a stabilisation. Households could already have made significant progress in adjusting their consumption plans in response to the worsened economic outlook. Or households could be currently underestimating the size of the adjustment to consumption necessary in response to the recession. Finally, it could be that the stimulatory monetary and fiscal policies were providing a greater-than-expected boost to current consumption. The apparent near-term resilience in consumption was more likely to persist if the first explanation had been an important factor, but it was not possible to discriminate between these different hypotheses on the basis of the available data. As such it would be premature to conclude that the medium-term prospects for consumption had strengthened.
18 Housing market activity had picked up. The number of loan approvals for house purchase had increased by 8% in April and the preview of the May survey of the Royal Institution of Chartered Surveyors showed further improvement across most housing market activity indicators, with new buyer enquiries and sales both picking up. Both the Nationwide and Halifax measures of house prices had increased in May, the first time that that had happened since August 2007, and had increased by an average of 1.9%. But activity remained subdued, with the level of loan approvals for house purchase less than half of its average of the past decade. In such a thin market there was likely to be greater volatility than usual in housing market indicators. A stabilisation of house prices at current levels would benefit homeowners, limiting the reduction in their net wealth and capping the scale of negative equity, and would provide support to the balance sheet position of banks.
19 Business investment had fallen by 5.5% during the first quarter. Intelligence gathered by the Bank's regional Agents suggested that tighter financing conditions were acting as a dampening influence on capital investment.
20 Stockbuilding was estimated to have detracted less from GDP growth during the first quarter than it had a quarter earlier. It was possible that stockbuilding would make a small positive contribution to output growth in the second quarter.
21 Net trade had contributed 0.1 percentage points to growth during the first quarter. This was a smaller contribution than in the final quarter of 2008, reflecting a larger fall in exports. But net trade was likely to continue making a positive contribution to GDP as the depreciation of sterling supported exports and encouraged import substitution. That effect could, however, be attenuated by the deterioration in global demand conditions or a persistence of the more recent appreciation of sterling.

Costs and prices

22 According to the Labour Force Survey (LFS), employment had fallen by 157,000 in the three months to March. And unemployment had risen by 244,000 over the same period, a somewhat larger increase than in previous months. The more timely claimant count measure of unemployment for April had increased, but by the smallest amount since October. Moreover, surveys of employment intentions had picked up in May, pointing to smaller future declines in employment than had been the case in previous months.
23 The more optimistic near-term employment indicators might prove misleading; either way unemployment was likely to continue rising significantly for some months. But the claimant count and surveys of employment intentions could also indicate that labour demand was moving in tandem with activity, rather than lagging behind, as had been the case in past downturns. Additionally, it could be that average hours, which on the LFS estimate had fallen by 1.4% in the three months to March, would absorb a greater share of any ongoing adjustment, tempering future unemployment rises. Such outcomes would be consistent with greater labour market flexibility than in past recessions.
24 Earnings growth remained extremely subdued. According to the average earnings index (AEI), whole-economy average earnings increased by just 1.0% in the twelve months to March, having been negative during the previous two months. Total earnings had been depressed by the weakness of bonuses during the first quarter. Excluding bonuses, twelve-month AEI growth had increased by 2.8% in March, little changed compared with a month earlier. Settlements remained subdued too.
25 As expected, CPI inflation had fallen sharply to 2.3% in April. The Committee continued to expect annual CPI inflation to fall back over the remainder of 2009, moving below the 2% target. RPI inflation had fallen further and remained negative in April.
26 Medium-term measures of inflation expectations had not changed significantly on the month according to Citigroup/YouGov, and were close to their average over the past six months. Although market-based measures had increased over the month, they showed no discernable trend over the quarter.
27 The recent rise in oil and other commodity prices posed an upside risk to inflation in the short run. Set against these price rises, the exchange rate had appreciated further during May, particularly against the US dollar. That would tend to dampen inflationary pressures.

The immediate policy decision

28 The Bank had acquired just less than £80 billion of assets financed by the issuance of central bank reserves. It would take a further two months to meet the £125 billon target for purchases. It remained too early to assess the impact of the asset purchase programme on nominal demand. Nevertheless, excluding the effect of money holdings of financial institutions that intermediate between banks, M4 growth had increased during April with the majority of this underlying increase concentrated in other financial corporations' money balances. This provided tentative evidence that the asset purchase programme was succeeding in boosting the money holdings of institutional investors, a first stage in the transmission mechanism from asset purchases through to the economy. But the growth rate of households' and private non-financial companies' money balances remained subdued. The Committee would continue to monitor carefully the evidence about the effect of its asset purchases on the economy.
29 There was tentative evidence that the corporate asset purchase schemes had been helping to improve market functioning. Since the launch of the commercial paper facility the value of commercial paper issued by lower-rated companies had increased and issuance spreads had fallen. The corporate bond facility had contributed to improved price transparency in secondary markets through the disclosure of auction results, and there was evidence that bid-ask spreads had declined. But it was difficult to know whether these improvements in the secondary market had contributed to the recent strength of primary market issuance by companies. Moreover, there had not yet been a fall in many indicators of liquidity premia. The Governor informed Committee members that the Bank was planning to consult the market about the introduction of a Secured Commercial Paper Facility and a Supply Chain Finance Facility to support the provision of working capital to companies.
30 Survey and market-based measures of medium-term inflation expectations were broadly unchanged compared with a quarter earlier and did not suggest that expectations had become de-anchored from the inflation target. The Committee would continue to monitor inflation expectations and other measures of its credibility when assessing the appropriate stance of policy. It would also continue to communicate how and why the asset purchase programme would work, and that it could and would tighten policy once the current exceptional degree of monetary stimulus was no longer warranted.
31 The news over the month had been mostly encouraging. Conditions in financial markets had continued to improve. Activity indicators for Q2, especially the PMI surveys, suggested that the rate of contraction in the global and UK economies had slowed, and there were signs of improving business confidence. There had also been signs that the second-quarter decline in consumption would be smaller than the Committee had previously anticipated. The housing market showed signs of stabilising. According to the LFS, unemployment had increased sharply between February and March, but more timely indicators, including the claimant count measure of unemployment, provided some evidence that unemployment was beginning to increase more slowly.
32 Such positive developments had the potential to reinforce each other. Evidence of better-than-expected near-term demand and output could encourage firms to maintain the size of their workforces rather than shed labour aggressively. A more muted rise in unemployment, combined with signs of stabilisation in the housing market, could also bolster household confidence and temper the need for increased precautionary saving. And such developments had the potential to limit the size of losses to which UK banks were exposed, improving their willingness and ability to lend.
33 Set against these positive developments, sterling had appreciated and oil prices had increased sharply over the month. The appreciation of sterling in recent months might represent the unwinding of some excess pessimism about the United Kingdom's prospects compared with other major industrialised economies. But it would reduce the boost to net trade arising from the depreciation since Summer 2007, particularly if sterling appreciated further in coming months. The appreciation of sterling would tend to reduce inflationary pressures in the short term, while the increase in oil prices would have the opposite effect.
34 Even if developments over the month had been positive, the increase in confidence apparent in some financial market indicators and some household and corporate sector surveys remained fragile. Adverse shocks had the potential to derail the improvement in confidence and forestall the recent improvement in economic conditions.
35 Significant risks remained domestically and overseas. Developments over the month had not altered the key downside risks to the medium-term outlook that had been identified in the Inflation Report. In particular, the outlook for credit supply remained constrained. Firms were making greater use of capital markets but those markets were not likely to substitute fully for the banking sector. Smaller firms and households would remain heavily reliant on the banking sector and there was no compelling evidence that the recovery in the supply of credit from banks would be any quicker than the Committee had assumed a month ago. This highlighted the importance of banks continuing to strengthen their balance sheets, without constraining lending. It would be premature to conclude from the most recent data on consumption that the risks of a pronounced rise in household savings had diminished. Savings could rise sharply if households became more uncertain about their job prospects, revised down their expectations of future post-tax incomes or became more pessimistic about their future access to credit.
36 Overall, the risk of a continued sharp contraction in output in the near term had receded somewhat. However, there was no reason to conclude that the medium-term outlook for the economy, and thus inflation, had changed materially since the Inflation Report had been finalised.
37 At its May meeting, the Committee had judged that Bank Rate should be maintained at 0.5% and that the asset purchase programme should be expanded to a total of £125 billion. While the near-term prospects had improved somewhat the balance of risks to inflation further out had not altered materially since then. The Committee agreed that Bank Rate should remain at 0.5% and that no change should be made to the scale of purchases under the asset purchase programme.
38 The Governor invited the Committee to vote on the proposition that:

Bank Rate should be maintained at 0.5%;
The Bank of England should continue with the programme, as announced following its 7 May meeting, of asset purchases totalling £125 billion financed by the creation of central bank reserves.

The Committee voted unanimously in favour of the proposition.
39 The following members of the Committee were present:
Mervyn King, Governor
Charles Bean, Deputy Governor responsible for monetary policy
Paul Tucker, Deputy Governor responsible for financial stability
Kate Barker
Tim Besley
Spencer Dale
Paul Fisher
David Miles
Andrew Sentance
Dave Ramsden was present as the Treasury representative.

USD/CAD Testing Resistance

The dollar closed the week lower against its rivals on Friday as China renewed its call for a new international reserve currency based on the IMF's SDR. US personal income jumped more than expected and consumer sentiment rose to the highest level since February 2008. The S&P 500, little changed for the week, declined 1.36 points to 918.90. The USD/JPY fell but closed above the 94.50 support as Japan's consumer prices fall at a record pace. The GBP/USD closed above the 1.65 handle but below the 1.66 resistances. The EUR/USD was supported by China's call for a “super-sovereign” reserve currency. The AUD/USD rose for a fourth day after finding support from its uptrend. Next week the market will focus on US employment data that will be released on Thursday due to the Independence Day holiday.
Unable to penetrate the resistance from its long-term downtrend, the USD/CAD fell modestly for a second day. Highly correlated with risky assets, the pair fell to a low on June 2, which coincided with a high in the CRB index. The recent consolidation in commodities and stocks has pushed the USD/CAD higher. The pair has also been supported by Bank of Canada Governor Mark Carney's comment that an appreciating loonie hurts a Canadian economic recovery. If the resistance from the downtrend is broken, the USD/CAD will rise to 1.18 or 1.20.

Financial and Economic News and Comments

US & Canada
US personal income rose a more-than-expected 1.4% m/m in May, the most in a year, after an upwardly revised 0.7% m/m increase in April, driving the savings rate to 6.9%, the highest level since December 1993, while personal spending was up 0.3% m/m in May, the first gain in three months, after April's upwardly revised 0.0% m/m, figures from the Commerce Department showed. Personal income increased 0.3% y/y while personal spending declined 1.8% y/y. The rise in May personal income reflected tax cuts and social security payments from the Obama administration's stimulus plan. Disposable personal income was up 1.6% m/m in May, up 0.2% y/y. The personal consumption expenditure deflator was up 0.1% m/m in May, up 0.1% y/y. The core PCE deflator, which excludes food and energy, was also up 0.1% m/m in May, up 1.8% y/y.

The Reuters/University of Michigan US consumer sentiment final index for June rose to 70.8 from a preliminarily reported 69.0, indicating US consumer confidence rose for a fourth consecutive time and to the highest level since February 2008, following 68.7 in May, Reuters and University of Michigan reported. The current conditions index climbed to 73.2 in June, the highest since September, from 67.7 in May, while the consumer expectations index slightly declined to 69.2 from 69.4.

Europe
Germany's consumer prices, calculated using a harmonized European Union method, increased 0.4% m/m in June, while the annual inflation rate remained at zero for a second month, the lowest rate since harmonized records started in 1996, preliminary June CPI data from Federal Statistical Office showed.
Germany's import prices were unchanged m/m in May after a 0.8% m/m decline in April, the Federal Statistical Office said. May import prices fell 10.4% y/y, the largest year-on-year drop in more than 12 years.
Switzerland's KOF leading indicator for June increased more than expected to -1.65 from May's upwardly revised -1.85, according to data from the Konjunkturforschungsstelle Swiss Institute for Business Cycle Research.
Asia-Pacific
Japan's core consumer prices, which exclude fresh food, fell 1.1% y/y in May, as forecast and the deepest decline since records began in 1971, after a 0.1% y/y slide in April, CPI data from the Statistics Bureau showed. The CPI excluding food and energy declined 0.5% y/y in May, as estimated and the fastest pace in 22 months. Tokyo's core CPI fell a more-than-expected 1.3% y/y in June after a 0.7% y/y decline in May. The CPI figures suggest deflation is deepening in Japan.

Japan's all industry activity index rose a more-than-expected 2.6% m/m in April, indicating Japanese businesses increased spending for the month, after an upwardly revised 1.8% m/m decline in March, according to data from the Ministry of Economy, Trade and Industry.

FX Strategy Update

	EUR/USD	USD/JPY	GBP/USD	USD/CHF	USD/CAD	AUD/USD	EUR/JPY
Primary Trend	Neutral	Neutral	Negative	Neutral	Neutral	Neutral	Neutral
Secondary Trend	Positive	Neutral	Positive	Negative	Negative	Positive	Positive
Outlook	Neutral	Neutral	Neutral	Neutral	Neutral	Neutral	Neutral
Action	Sell	Buy	Buy	None	None	Buy	None
Current	1.4068	95.19	1.6523	1.0812	1.1539	0.8067	133.90
Start Position	1.3904	95.69	1.4845	N/A	N/A	0.6601	N/A
Objective	N/A	N/A	N/A	N/A	N/A	N/A	N/A
Stop	1.4235	93.40	1.5860	N/A	N/A	0.7670	N/A
Support	1.3750	94.50	1.5900	1.0600	1.1000	0.7800	128.00
	1.3550	91.00	1.5500	1.0400	1.0800	0.7500	125.00
Resistance	1.4100	99.50	1.6600	1.1000	1.1600	0.8200	139.00
	1.4300	101.00	1.7000	1.1300	1.2000	0.8500	142.00

Hans Nilsson
Capital Market Services, L.L.C.©C2004-2005 Globicus International, Inc. and Capital Market Services, L.L.C. Any information in this report is based on data obtained from sources considered to be reliable, but no representations or guarantees are made by Capital Market Services, L.L.C. with regard to the accuracy of the data. The opinions and estimates contained herein constitute our best judgment at this date and time, and are subject to change without notice. Capital Market Services, L.L.C. accepts no responsibility or liability whatsoever for any expense, loss or damages arising out of, or in any way connected with, the use of all or any part of this report. No part of this report may be reproduced or distributed in any manner without the permission of Capital Market Services, L.L.C.

GBP/USD Sticks in its Range

The Cable predictably bottomed at June 23rd lows, continuing the pattern we notice over the past 10-15 days. The Cable is strengthening along with the EUR/USD as investors divest from the greenback in reaction to China’s repeated request for a new standard currency. However, volume is subsiding to the upside, and it seems the Cable may peak again below previous June highs and our 3rd tier downtrend line. Despite the near-term resilience of the GBP/USD, an immediate-term break above our 3rd tier trend line may be difficult since gains in the Pound are being constrained by comments from the BOE. The BOE voiced concern in its semi-annual financial stability report. Although UK banks have stabilized since the height of the crisis last fall, the financial system remains very vulnerable to any near/mid-term shocks. The cautionary tone from the BOE coincides with that of the Fed and ECB, signaling the global financial system remains in a fragile condition.
Even though gains in the Cable have been tempered lately, the currency pair is trading back above our 2nd tier downtrend line, the more heavily weighted of the three. Additionally, our 3rd tier trend lines are reaching an inflection point today. Hence, there remains the possibility we could witness a little breakout to the upside. We haven’t seen too many hiccups in British economic data, and Britain’s numbers have been more encouraging as compared to the U.S. and EU. Hence, the GBP/USD is well positioned for a breakout to the upside should market conditions improve. That being said, the S&P futures are heading lower as they struggle with 900 while the 30 Year T-Bond futures are adding onto recent gains. Therefore, the GBP/USD’s correlations aren’t moving in favor of the currency pair’s uptrend thus far today. Hence, we wouldn’t be surprised to see the GBP/USD to stay inbounds as the bulls and bears slug it out. The U.S. Dollar is at a crossroads, and it will be interesting to see where investors side. We maintain our neutral stance until the technicals are tested and the trading range broken.
Present Price: 1.6501
Resistances: 1.6315, 1.6371, 1.6412, 1.6702, 1.6768
Supports: 1.6472, 1.6412, 1.6371, 1.6315, 1.6241
Psychological: 1.65, 1.60

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USD/JPY Steps Back From its 2nd Tier Trend Lines

The USD/JPY is backing away from our 2nd tier uptrend line again as the Dollar appreciates across the board in reaction to China's repeated call for a new global monetary standard. In the mean time, the USD/JPY remains the beacon for investor indecisiveness. While bears are tempted to test the downside potential of the USD/JPY with the currency pair trading in a dangerous zone, the bulls continually come to the USD/JPY's defense to keep the currency pair from falling off a cliff. The result is a relatively tight and moderate trading rage. As for the immediate-term, it will be interesting to see how the USD/JPY interacts with June 23rd and 24th lows. We've seen the USD/JPY play with fire before only to pop back above our 2nd tier. However, if the USD/JPY is serious about a pullback this time, we could witness a near-term movement towards our 1st tier uptrend line. After all, we have several trend lines reaching their respective inflection points today. Declining volume supports a movement to the downside, yet the USD/JPY would likely need a large, corresponding movement across the marketplace to fall beneath May 22nd lows.
Present Price: 95.25
Resistances: 95.73, 96.33, 96.90, 97.45, 98.05
Supports: 94.99, 94.45, 93.76, 93.32, 92.46
Psychological: 90, 95, 100

Disclaimer: FastBrokers assumes no responsibility or liability from gains or losses incurred by the information herein contained. There is a substantial risk of loss in trading futures and foreign exchange. © Fast Trading Services, LLC. All materials are proprerty of Fast Trading services, LLC and unless otherwise indicated,any unauthorised reproduction is prohibited.