We may get a short covering bounce from oversold levels, but we are not convinced more selling will not pick up in this holiday shortened week.
Bonds: As money flowed out of securities it found its way into the debt market as prices from the short end to long end traded higher. We have been able to trade the short end with euro-dollars and the long end with 30 year bonds and will go back to the drawing board to devise another play. We chose to take the long September bond play off ahead of the Fed meeting. Although we did leave money on the table, we felt it better to take a profit for clients since unable to confirm with 100% certainty how the market would react. The next market movers should be non-farm payrolls and the ECB, both on Thursday. Although we have a bullish bias for now, we expect treasuries to remain range bounds as investors continue the tug of war between inflation and growth. Support in September bonds is 114’30 with resistance at 116’17. Support in September notes is 113’12 with resistance at 114’20.
Currencies
The U.K.'s Office for National Statistics said that real GDP was up 2.3% in the first quarter from a year ago, down from its 2.5% estimate a month ago and weaker than expected. The September British pound was up 129 ticks at $1.9760, the highest close in three months. We are still looking to get short, but as we expressed last week, perhaps from higher levels as the upside resistance gave way last week. We will be looking for an entry to get short future and the 195 September put is on our radar; settled at $1012.50 on Friday.
Japan's core rate of inflation was up 1.5% in May from a year ago, the biggest gain in ten years. The September yen closed up .90 ticks on the week at .9455. This move got us out of the long futures and short 94 calls at a decent profit around $550 per strategy. We will look to reposition long again this week on a setback. If the dollar continues to move lower and the stock market continues to sell off, money should flow into the yen and we could see a move back to .9700. Investors will continue seeking shelter in the low yielding currencies as volatility in oil and stock markets continue. Look for the Tankan survey out this week to be a market mover.
Statistics Canada said that the industrial product price index was up .6% in May and up 2.4% from a year ago. The September Canadian dollar ended up .52 at 98.75. We have not changed our viewpoint that the Loonie should be sold around .9900 and bought around .9700 using stops just above and below your entries. We favor a move to the downside as prices above .9900 were rejected last week and on the daily chart the stochastic support a move south.
Looking at the interest rate differential alone, it is no wonder that the Australian dollar has been able to gain on the dollar recently. We have seen an advance of 300 points in the last 2 weeks and at this point it does not look tired. On Tuesday we will get a rate decision from the RBA and although we expect no action, we should get an indication of what their viewpoint is moving forward. We are now trading at .9500 on September and within 5% of our target of par, which we fully expect this year. Buy dips and stay long!
Last week the Swiss Franc gained 108 points to finish the week at .9782. First resistance is at .9850 followed by .9950. We should see prices supported at the 20 day moving average that comes in at .9650. We’ll most likely start looking for short opportunities but from modestly higher levels, for now we see nothing. We are truly at a pivot point here on the charts as we are anxiously waiting for an opportunity to get short, but being that the ECB has an interest rate decision this week and Trichet has hinted at an increase of 25 basis points, raising rates to 4.25% from 4.0%, we will stand aside for now. The last 2 occasions we have been at this price point; 1.5730, we sold off 4 cents relatively quickly but as you know, past performance is not indicative of future results. We will be looking for an entry to get short futures and the 150 September put is also on our radar, settled at $737.50 on Friday.
The dollar index was hit hard last week as the Fed indicated that they were not in a rush to raise interest rates as the market had previously anticipated, September was down 76 ticks and below our target from last week of 72.90 ending the week at 72.67. The fact that consumer confidence fell to a 28 yr. low also contributed to weakness. It looks as if the lows will be challenged in coming sessions which come in about 100 points from current levels. Continue to track action in the dollar index even if you are not trading it to guide you in entry and exit in other transactions as the direction of the dollar and oil seem to be influencing most commodities.
Grains
On Monday morning, the USDA will release its annual acreage report, but the figures will not fully reflect the effects of recent flooding. The USDA plans to conduct additional surveys and release updated estimates on August 12th
Corn: Weekly export sales showed 231 t.m.t. of corn was sold last week. There has been talk of weaker export numbers because of high prices and the fact that less corn is being used for feed, but I am under the opinion that a larger effect should be attributed to the fact that flooding in the Midwest has corn’s main shipping channel to ports closed to barge movement for 2 weeks. Monday’s report is usually the final planting report of the year but with recent rains and flooding causing late plantings and reseedings it leaves this report only with rougher estimates as the government will come out with final numbers in a couple weeks. We have estimates coming in for acreage estimates between 87 and 79 m.a. Furthermore, the yield number could shift 2-4 b.a. which could be a market mover as well. Expect volatility and have a plan before entering the market. Understand that although this report is important, we are still in the growing period where precipitation and temperature still plays a roll in crop conditions. December has support at 7.44 and we feel it is just a matter of time before we print above 8.00 and we see another leg up.
Beans: Weekly export sales showed minus 268 t.m.t.
