The dollar was mostly lower after Treasury Secretary Henry Paulson asked Congress for authority to buy shares in Fannie Mae and Freddie Mac and the Federal Reserve Bank authorized the companies to borrow directly from the Fed. The greenback initially traded higher on the plans as they provided some calm to the financial markets. However, the emergency measures also highlighted the stress in the financial system and the risk to the dollar from the government's commitments. Sterling advanced as the UK PPI's rise at the highest annual rate in at least 22 years reduced the chance of Bank of England rate cuts. The Canadian dollar was higher on energy and gold prices. The USD/JPY was little changed testing important support at the 106- handle. The euro fell modestly after Pimco, the world's biggest bond fund, turned bearish on the euro for the first time since the currency's inception in 1999. The Bank of Canada is expected to leave its benchmark interest rate unchanged at 3.00% tomorrow.

The AUD/USD rose to a 25-year high of $0.9735 and traded above the 0.9650 level. This level had earlier been tough resistance and now acts as support. The pair is supported by rising commodity prices and high interest rates. The 1.00 level acts as resistance. We buy the pair. We also buy the EUR/USD and sell the GBP/USD

Financial and Economic News and Comments

US & Canada

• The Federal Reserve voted on July 13 to open a lending facility for Fannie Mae and Freddie Mac, if they need emergency capital. The congressionally-created mortgage giants would be able to post their own securities as collateral. 'The Board of Governors of the Federal Reserve System announced Sunday that it has granted the Federal Reserve Bank of New York the authority to lend to Fannie Mae and Freddie Mac should such lending prove necessary. Any lending would be at the primary credit rate and collateralized by U.S. government and federal agency securities. This authorization is intended to supplement the Treasury's existing lending authority and to help ensure the ability of Fannie Mae and Freddie Mac to promote the availability of home mortgage credit during a period of stress in financial markets,' according to the Fed's statement Sunday

Europe

• Eurozone industrial production fell 1.9% m/m in May, the biggest drop since December 1992, led by output declines in Germany and France, Eurostat reported. Industrial production unexpectedly decreased 0.6% y/y, the first annual decline in three years. Output in both Germany and France fell 2.6% m/m in May.
• UK producer prices rose a more-than-expected 10% y/y in June, the fastest pace since records began in 1986, data from the Office for National Statistics showed. Prices increased 0.9% m/m in June. Accelerating UK producer-price inflation makes it more difficult for the Bank of England to lower interest rates as the UK is headed for a recession.
• European Central Bank council member George Provopoulos said the ECB 'will continue to take any action necessary to ensure the firm anchoring of inflation expectations.'
  

Asia-Pacific

• China's foreign-exchange reserves rose 35.7% y/y to a record $1.81 trillion at the end of June, the People's Bank of China said. The assets rose $126.6 billion from the end of March following a $153.9 billion gain, the biggest on record, in Q1 2008. The data increases bets on further yuan gains.
  

FX Strategy Update