Dollar Surges on Further Signs of Economic Slowdown

Daily Forex Fundamentals | Written by CMS Forex | Aug 08 08 22:27 GMT |

The greenback surged on short covering and further signs the US economic slowdown is spreading globally. The EUR/USD fell to a 5-month low, the AUD/USD was also at a 5-month low, the USD/CAD rose to a 12- month high and the GBP/USD was at its lowest point in 20 months. The USD/JPY reached the highest level since the beginning of 2008. The dollar index traded near 76 today, about 5 points above April's low and just below the resistance from the long-term downtrend that started in 2005. If this resistance is broken, the USD rally will continue. The EUR/USD broke the 1.54 support yesterday after the European Central Bank acknowledged risks to European economic growth. The pair fell the most in 8 years as stops were hit and traders bet the euro's interest rate advantage will diminish. Elevated US productivity growth and modest US labor-cost increase also pressured the pair. The EUR/USD is likely to test the 1.49 support. If it is broken, the next major support is the long-term uptrend at 1.45. Financial and Economic News and Comments US & Canada US nonfarm productivity increased at a 2.2% annual rate in Q2, less than expected, after rising 2.6% in Q1, data from the Labor Department showed. Non-farm productivity rose 2.8% y/y. The productivity rise eases the Federal Reserve's pressures on balancing risks to both economic growth and inflation while holding interest rates low. US unit labor costs advanced at a 1.3% annual rate in Q2, up a modest 1.5% y/y, indicating the economic slowdown and slackening labor market are making it more difficult for workers to command higher wages. Real compensation, adjusted for inflation, fell at a 1.4% annual rate in Q2 but increased 0.1% y/y. US wholesale inventories increased 1.1% m/m in June to a seasonally adjusted $435.85 billion, faster than forecast, after advancing an upwardly revised 0.9% m/m in May, data from the Commerce Department showed. Wholesale sales rose 2.8% m/m in June to a seasonally adjusted $411.23 billion, also more than forecast, following an upwardly revised 2.2% m/m increase in May. The inventory-to-sales ratio declined to 1.06, a new record low, compared with May's 1.08. Wholesale inventories gained 9.5% y/y, while wholesale sales rose 17% y/y. Canada unexpectedly lost 55,200 jobs, the most in 17 years in July, after a 5,000 drop in June, Statistics Canada reported. The unemployment rate fell to 6.1% in July from June's 6.2% as 74,100 people left the labor force. Europe European Central Bank council member Nout Wellink said the eurozone economy "deteriorated pretty quickly in the second quarter" and economic growth "won't look that good." "It is not going very well, let me say that," Wellink, De Nederlandsche Bank President, told Dutch RTL television. "It is partly a cyclical movement and partly there are structural adjustments ongoing in our economy, mainly as a result of the increased energy and food prices," Wellink told RTL. "And there's a crisis in the financial world." Growth in Q3 won't be great either, Wellink told Dutch television NOS in a separate interview, saying he hopes growth will pick up in Q4. The seasonally adjusted number of unemployed in Switzerland fell 110 to 99,819, the State Secretariat for Economic Affairs in Bern said. The Swiss unemployment rate was unchanged at 2.5%, the lowest level since 2002 for a sixth month. Asia-Pacific Japan's Economy Watchers index fell to 29.3, indicating sentiment among Japanese merchants in July dropped to the lowest level since October 2001, from 29.5 in June, the Cabinet Office said. The index of conditions in two to three months declined to 30.8 from June's 32.1. The gauges indicate further slowdown for the Japanese economy. FX Strategy Update EUR/USD USD/JPY GBP/USD USD/CHF USD/CAD AUD/USD EUR/JPY Primary Trend Positive Flat Flat Negative Negative Positive Positive Secondary Trend Negative Positive Negative Positive Positive Negative Flat Outlook Negative Flat Negative Positive Positive Negative Negative Action Sell Sell Sell None None None None Current 1.5015 110.19 1.9197 1.0806 1.0672 0.8888 165.49 Original Position 1.5312 109.45 1.9790 N/A N/A N/A N/A Objective N/A N/A N/A N/A N/A N/A N/A Stop 1.5640 111.90 1.9655 N/A N/A N/A N/A Support 1.4900 1.4500 108.00 106.00 1.9180 1.9000 1.0500 1.0300 1.0500 1.0300 0.8880 0.8500 165.00 162.00 Resistance 1.5300 1.5500 110.50 113.00 1.9500 1.9800 1.0820 1.1000 1.0700 1.1000 0.9300 0.9500 167.00 170.00 Hans Nilsson Capital Market Services, L.L.C. www.cmsfx.com ©C2004-2005 Globicus International, Inc. and Capital Market Services, L.L.C. 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