HIGHLIGHTS OF THE WEEK

• Post-tax credit U.S. home sales plummet by 27% in July, pushing inventories of unsold homes to a new peak of 11.3 months and renewing recovery fears.
• New orders of U.S. durable goods orders rose slighly by 0.3% in Jul. Core capital goods fell by 8.0%, pointing to a slowdown in the pace of equipment and software investment in the third quarter.
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Framed by an United States housing market in far worse shape than previously expected, an American GDP revision not quite a poor as predicted, a German economy exhibiting almost 9.0% annual growth in the second quarter and widening sovereign spreads in Europe, currency markets choose the better part of valor and kept to a narrow two figure range all week. The slowdown in trading volatility cannot last; a new narrative will emerge in September. We have already seen a preview and it depends on the intensity of the US contraction.

Market Outlook

Tactical view:

• GBP: selective gains targeted on AUD, CAD underperformance

Selling rallies in pro-risk and carry trade strategies is favoured in G10 currency markets and should translate into steady demand for safe haven harbours.

Market Movers ahead

• Market focus is likely to remain on the US economy in the coming week. The minutes of the most recent FOMC policy meeting could reveal important information about the Federal Reserve's decision to reinvest the proceeds of its MBS portfolio in Treasuries.
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Overview

The rush into top-rated Treasury paper continues, new record low yields set for Swiss ten-year Conf (1.05%), Bund (2.09%), German 30-year (2.58%) and US ones (3.46%%), though Brazilian, Mexican and Russian benchmark yields are up from last week's record lows.

FX Briefing

Highlights

• Ifo goes up - Euro goes down
• Dollar strengthens on double dip fears
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Fundamental Outlook for US Dollar: Bullish

• Pessimism surrounding risk appetite trends keeps the dollar from a deeper correction
• Fading growth trends and the Fed’s effort to buy Treasuries undermines the dollar’s fundamental future
• The dollar makes an end-of-the-week drive to set up a possible rally come next week

The dollar stood up surprisingly well this past week because pessimism remained an indelible part of the speculative crowd’s psyche.