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It has been an unsettled week in the US equities markets as traders try to assess how higher money costs will play in the markets. This is not to say that the initial Fed taper will commence in September, but this is what the markets believe.

Responding to the expected initial Fed tightening, the yield on the US ten year bond has gone to 2.85% this afternoon. Last Friday the yield on the ten year was about 2.60%. For the month, the ten year yield is up 29 basis points, and almost 100 for the year. Contrast this with the yield on the Italian ten year, down 28bp in the last month, and down 161bp for the year. Isn't there something wrong with this picture?

Part of the strength of the US economy is attributed to the housing recovery. It is debatable if housing starts are a leading indicator. Though building permits and housing starts where ahead of last month, they fell short of the expectations. Builders are aware what rising rates do to housing demand, so the single family starts at 581K are well below the high in February this year of 652K.

If consumers are unable to buy single family homes, chances are they will rent. New construction of rentals was up to 290K multi-units from last month's 231K. US existing home sales will be announced August 22nd, and we will see if the consumer has been affected by the higher rates. It is expected to show home sales of 5.15M units, up from 5.08M units.

It looks like the euro is going to make minor gains versus the USD (EURUSD, FXE, UDN), though the euro was unable to muster enough strength to take out the 1.34 handle. This makes six straight weeks the euro has gained on the USD, a rally from 1.2755 to about 1.34.

There is not a lot of important data coming next week. On Thursday, there are numerous EU PMIs to be released. The same day in the US, notes from the last FOMC will be released, and the Initial US Jobless Claims will be announced. The new COT report released this afternoon shows sufficient euro buying to cover the spec short position. Small specs remain short, but large ones are long.

The British pound turned in a solid performance this past week. Some of this may have been some modest short covering. The GBPUSD went to 1.5655 today, an eight-week high. During this rally, large specs have been short the whole way. This afternoon's COT report shows they are still short. Have we identified one of the big shorts? Today Morgan Stanley said the pound would return to 1.48.

There will be some meaningful reports next week in the UK. On Wednesday, we get two major reports about the UK Public Finances, and the Public Sector Net Borrowing. There will also be a manufacturers' survey of anticipated orders. This will be followed on Friday with a Quarterly GDP announcement. This is expected to be unchanged at plus 0.6%.

It should be a light week for numbers coming from Japan. Changes in monetary and fiscal policy will be the major driver. Trade in the yen versus the USD was weaker this week, though we are now trading off the weekly low. Today's COT report shows the spec short in the yen was reduced to 100.5K from 110.7K in the prior period. The total open interest was down 19.7K so there was general liquidation.

Liquidation was also the theme in the Australian dollar for the week, where the total OI was down 26.6k. Most of this was a reduction of spec short who had held a record position. They remain short 84.8K, down from 104.2 in the prior period. It is a light week for A$ data, however, we get a Chinese report, which can influence the aussie. On Wednesday, the Chinese release the flash PMI Manufacturing Report. This has been running under 50 for the last three reports. A number over 50 could prove friendly to the A$.

Source: This Week In Forex: Review And Preview