Trading mixed in Monday's volatile session, the dollar was supported by falling commodity prices and signs of the US economic slowdown spreading globally but pressured by signs of continuing credit crunch. The greenback reduced its early gains after an equity rally on lower oil prices fizzled. The yen fell despite renewed worries about financial health as Freddie Mac and Fannie Mae plunged on worries they may need to raise more capital to overcome writedowns related to credit losses. The USD/JPY lost its close correlation with the equity market and will likely test the 108-area resistance. Sterling fell on a larger-than-expected fall in manufacturing production. The AUD/USD declined following a new attempt at the 0.96-area resistance as Australia's construction index shrank for a fourth month in June. The Canadian dollar was little changed.

The EUR/USD fell after Germany's industrial production declined more than expected. The pair found support at the 1.56-handle on renewed US credit concerns. We believe the EUR/USD sideways movement will continue. There are important resistance at the 1.60-handle and significant support at the 1.54-handle. A break of the support will reverse the long EUR/USD uptrend, while a penetration of the resistance will indicate the beginning of a new high.

Financial and Economic News and Comments

US & Canada

• The US economy has entered a mild recession, according to the qEcon/Globicus economic indexes. The leading index recovered modestly to -2.3 in May from March's low reading of -3.0, indicating an economic contraction but not a deep recession. However, it is premature to call for a US economic recovery as the indicator remains in a recessionary territory. The coincident index for the six-month smoothed growth rate declined to -1.5 in May from -0.5 in April.
  

• The coincident index, which measures the current economic activity, peaked in October/November 2007, indicating the beginning of a mild US recession.
  

• The Conference Board employment trends index declined 0.6% in June to 111.9 from 112.6 in May and fell 8% since July 2007, suggesting more US job losses in the coming months, data from the Conference Board showed.
• The Canadian Conference Board index fell 6.2 points to 79.6 in June, indicating Canadian consumer confidence dropped to the lowest since Q4 1995, Canada's Conference Board said. The proportion of consumers who said it was a bad time to buy a major item such as a car or home rose to 54.9%, a 6.1 percentage-point increase.
• Canada's building permits unexpectedly rose 1.1% in May, staying at their highest level since October despite the softening Canadian housing sector, following a revised 17.0% spike in April, Statistics Canada reported. 'It was the first back-to-back increase in construction intentions since November 2006, and could point to busy construction sites in the coming months,' Statistics Canada said.
  

Europe

• Germany's industrial production fell 2.4% m/m in May, the biggest drop since February 1999, the Economy Ministry said. The IP increased 0.8% y/y in May, down sharply from April's 5.0% y/y.
  

• The UK manufacturing production index unexpectedly declined 0.5% m/m in May, the lowest since September. The manufacturing production fell 0.8% y/y.
  

Asia-Pacific

• The Australian construction index edged up to 40.3 in June from 36.9 in May, indicating Australia's construction industry contracted for a fourth month in June, the Australian Industry Group and Housing Industry Association reported.
• The Japanese economy has worsened in eight of the nine regions since April due to costlier energy and raw materials, the Bank of Japan said. 'Growth of the economy as a whole continued slowing recently, mainly due to the effects of high energy and material prices, although there were some regional differences,' the BOJ said in a quarterly report, leaving its overall assessment unchanged
  

FX Strategy Update