Currency Pair Overview: Dollar Continues To Gain as Oil Declines

Overall: Markets were unsure about what effect the Russian/Georgian conflict would have on oil prices, which right now are playing a crucial role with regards to the dollar and equity markets. News of a possible supply disruption on geo-political tensions has been a good enough reason to see oil appreciate fairly strongly in the past (indeed, a flat tire in Nigeria was previously reason enough), but the present bearish sentiment on the commodity seems to be outwieghing this. After turning almost 1% higher in the overnight session, oil went negative at about 11:00 EDT as equity indexes turned positive and that allowed the dollar to resume its rise against the major currencies.

The euro (Eur/Usd) rose as high as 1.5082 in overnight trading as oil rose 1%, then continued its decline from last week as oil fell 1.8% during N.Y. trading. In Germany, the Federal Statistics Office said wholesale prices in July rose 1.4% and increased 9.9% in the year, bringing the y/y rate to the highest since November 1981. In France, the Euro zone's second largest economy, the Insee statistics office said industrial output for June was down 0.4% following a 2.9% fall in May that was 0.3 percentage points more than originally reported. On the daily chart, it looks as though EUR/USD will form a bearish pin bar on the close. French CPI will be reported on August 12 at 02:45 EDT.

The cable (Gbp/Usd) rose with the other majors against the dollar, then resumed its decline as oil price fell and U.S. stocks picked up. In the U.K., the Office for National Statistics [ONS] reported on factory gate inflation. Output prices rose 0.4% in July and by 10.0% in the year, the fastest pace since record began 20 years ago. There was some good news on the input side though; prices fell 0.6 in June, the largest fall since January 2007 while the yearly rate fell to a still-massive 30.1%, 0.7 percentage points off the record high in June. The BRC Retail Sales Monitor and RICS House Price Balance will be released today at 19:01 EDT. The ONS will report on July CPI, DCLG HPI and RPI on August 12 at 04:30 EDT.

The aussie (Aud/Usd) was sold to its lowest level since January 30, as commodites weakened and the dollar re-asserted itself during the N.Y. session. The RBA released its quarterly policy statement early Monday and indicated it may cut borrowing costs soon after saying "on the assumption that the subdued demand conditions are likely to continue, scope to move to a less restrictive monetary policy stance in the period ahead is increasing." The bank also expects "significant reduction in inflation over time." The aussie has declined 10% against the dollar since hitting a 25-year high on 98.49 cents on July 16. The RBA believes "demand pressures in the economy now appear to be easing" and said it expects a "significant period" of slower economic growth.

The cad (Usd/Cad) continued to rise Monday from its break of trend line resistance on July 25, reaching its highest level since August 17 2007 after oil and other commodity prices continued to decline. The was another weak economic report from Canada today that figures to add pressure on the Bank Of Canada to lower rates at its September 3 meeting. The Canadian Mortgage and Housing Corporation reported that the yearly rate of urban single and multiple housing starts decreased 14.8% in July. Multiples fell 20.2% and singles fell 6.6%. Urban single starts for the January to July period were 15.5% lower than they were a year earlier, while multiple starts were up by 19.0% over the same period. Also, Statistics Canada said today that Canadian new home prices increased 3.5% from June 2007, the smallest gain since March 2002.

The swissy (Usd/Chf) rose as U.S. equity markets advanced and treasuries declined, reaching its highest level since February 26. USD/CHF maintained a break above daily trend line resistance drawn from June 15, August 16 and September 3 2007.

The yen (Usd/Jpy) traded within a fairly narrow 75 pip range as U.S. equity markets traded higher. The trend of yen weakness looks to be continued after the Japanese government acknowledged on last Wednesday that the economy is "deteriorating," and that "there is a high possibility the economy has entered a recession." Overall exports fell in June for the first time in 55 months and for the tenth straight month to the U.S. (the largest monthly decline since November 2003), factory output has fallen for two straight quarters and Japan's jobless rate rose. Traders will be looking closely at the preliminary Q2 GDP announcement on August 12 at 19:30 EDT.

Disclosure: None.