The US dollar sustained a sharp decline today following the release of a much weaker than expected Chicago PMI report, posting a 22.5% in August to 49.2 from 63.5 in July. With manufacturing in the Chicago area shrinking for first time since April 2003, there is concern that record high oil prices are finally starting to have a negative impact on the US economy.

Tomorrow’s release of the ISM Manufacturing Index will be an important indication of the state of manufacturing within the US as whole. Initially expected to increase slightly to 57.0 in August from 56.5 in July, there is now concern that the ISM index will track more closely to the disappointing Chicago data, instead of the rosier picture painted earlier this month by both the New York Fed’s Empire Survey and the Philadelphia Fed Survey. Any signs of contraction within the manufacturing sector nationwide will surely have a negative effect on the US dollar and could foreshadow further weakening as rising energy costs finally begin to make their presence felt.

Slowing US GDP growth, which was revised downward to 3.3% for the second quarter, also dragged the dollar lower this morning as consumer spending cooled more than at first estimated by the government due to rising energy costs – as indicated by the decrease in Personal Consumption Expenditures to 3.0% from 3.3%. Perhaps more important is the fact that core inflation was also revised down to 1.6% from 1.8%. With energy prices rising and core inflation contained, there is some debate now as to whether the Fed will need to keep raising interest rates towards the end of the year.

In the first public speech by a Fed official since the devastation of Hurricane Katrina, Philadelphia Fed President Santomero’s words carried added importance today as the market looked to glean what effect, if any, these latest developments to the oil and gas industry would have on the Fed’s economic outlook. Looking to calm market fears, Santomero stated that these latest developments would likely slow, but not stall the economy, indicating that the US economy was strong enough to withstand high oil prices and uncertainty in the housing market. With growth in the US still expected to come in at 3.5-4.0% for the year, Santomero confirmed his belief that the Fed’s current policy of “measured” increases was still appropriate.

Euro pierces through $1.2340s

Riding a wave of weaker than expected US data, the euro was the biggest beneficiary of today’s dollar drop, gaining more than a full cent and a half as it tests resistance at $1.2350. A fall in the US July ISM index figure tomorrow morning could provide enough impetus for EURUSD to target further resistance at 1.2375.

PMI data for Germany, France and the Eurozone is scheduled to be released tomorrow morning, with each index expected to show improvement. Any sign that Europe’s economic malaise is coming to end will no doubt prove positive for the euro.
The European Central Bank is also set to announce its current interest rate policy tomorrow and, although there is little doubt that it will keep rates at 2.0% for the 27th month in a row, the combination of inflation at 2.1% (above the ECB’s target) and the possibility of improved economic growth will only add ammunition to the ECB as it fights off criticism from various European politicians demanding that the ECB cut rates.

Euro’s 1.5 cent rally tapered off at the $1.2350 resistance which serves as the 61.8% retracement of the 1.2484-1.2124 decline. The 100 day MA at $1.2374 comes as the subsequent target. The pair could recapture the $1.24 figure in the event that an ISM figure les than 54-53 is reported tomorrow. We could see further upside in case of a disappointing US payrolls report on Friday. Support starts at $1.23 followed by the 38% retracement at $1.2260.

CAD hits new low for the year after GDP

The Canadian dollar dragged its southern namesake further south, pushing it to the lowest level since December at 1.1834. A higher than expected annual GDP figure in Canada, uncertainty with rising oil prices and general retreat in US growth prospects relative to the Canada have contributed to the deterioration in the USDCAD move. Annualized Q2 GDP rose 3.2% from 2.1%, breaching above the consensus estimates of 2.7%. The data further support expectations of a 25-bp rate hike in September despite the fact that month to month GDP figure slowed to 0.2% from 0.4%.

The downside support picture for USDCAD looks increasingly ominous as the pair falls along side a 6-month sliding support line. Support stands at 1.18, followed by 1.1765, which is the equivalent of US$ 0.85 cents to CAD$ 1.00. Resistance starts at 1.1920 followed by 1.1970.

Cable pushes 2 cents to $1.80

One day before a flurry of UK data, the pound clawed gains on the back of the dollar’s overall declines. Traders will be bracing for data on housing prices from Nationwide and manufacturing PMI, with the former expected to have shown another 2.6% annual increase in August and the latter up to 49.5 in August from 49.2 in July.

Sterling’s rally could extend to the 100 day MA at $1.8174 followed by $1.8250—the 50% retracement of the 1.7308-1.9214 rise. Support limited at 1.7920 and 1.7880.

1:00 JPN July Housing Starts (exp. -1.3%, prev. 2.4%), 2:00 GER July Retail Sales (exp. 0.5%, prev. -0.7%), 3:55 GER Aug Unemployment Rate (exp. 11.6%, prev. 11.6%), 3:55 GER Aug Change in Unemployment (exp. -20k, prev. -42k), 5:00 E-12 European Commission publishes 3rd and 4th Quarter GDP Forecast, 5:00 E-12 Aug CPI (exp. 2.2%, prev. 2.2%), 5:00 E-12 Q2 Real GDP (exp. 0.3%, prev. 0.3%), 8:30 CAN Q2 Real GDP (exp. 2.8%, prev. 2.3%), 8:30 US Q2 Personal Consumption (exp. N/A, prev. 3.3%), 8:30 US Q2 Real GDP (prelim) (exp. 3.4%, prev. 3.4%), 8:30 CAN June Real GDP at Basic Prices (exp. 0.4%, prev. 0.3%), 10:00 US Sept Chicago Purchasing Managers Index (exp. 61.0, prev. 63.5), 12:45 US Philadelphia Fed President Santomero speaks on the economic outlook.

The FX market remains relatively rangebound this morning with the US dollar higher against the major currency pairs, with the exception of the Canadian dollar, which continues to outpace the greenback, benefiting from the increase in crude oil prices.

As damage from Hurricane Katrina begins to be assessed, it is becoming increasingly clear that this may have been one of the most destructive natural disasters in US history, with hundreds of lives lost and upwards of $25 billion in damages. The price of oil continues to linger near yesterday’s record high of $70.85/barrel and should remain supported at this level – if not higher – as the overall effects of Katrina on the oil and gas industry begin to unfold.

Perhaps most troubling for US consumers is the effect that Katrina will have on the price of gasoline. With many refineries shut down (for what could be several weeks due to extensive damage) and supplies running dry at terminals throughout the country, it is only a matter of time before retail prices at the pump increase from their already record high average of $2.619 – especially considering the fact that wholesale gasoline prices have surged in the past few days across the country, ranging from $2.9497 in Chicago to $3.1245 at Gulf coast terminals. As prices rise, economic growth in the US could be severely impacted as US consumers – whose consumption makes up 70% of GDP – may be forced to scale back their spending in order to pay for higher gasoline prices.

In fact, second quarter data for GDP growth and personal consumption in the US are both due out this morning at 8:30 am, with both indicators expected to increase by 3.4% (Y/Y). Although these figures would be in line with previous estimates, they may have little impact on the market as concerns about future consumption (and thus, consequently, growth) continue to mount as oil climbs higher.

Also due out today is the Chicago PMI index, which is expected to fall back to 61.0 in August, after jumping 18.5% in July – the largest increase in 22 years – to 63.5. Given the fact that both the New York Empire Survey and the Philadelphia Fed Survey surprised on the upside earlier this month, there may be a tendency for the market to have lofty expectations for today’s data. If that is the case, it may take much better than expected data from the Chicago PMI to move the dollar higher.


Damage from Katrina weakens euro

The euro is back near $1.22 this morning as it eyes support at 1.2161 – its 55 day MA. Labor statistics out of Germany and France showed a decrease in the level of unemployment in both countries, with the number of unemployed falling by 12K in Germany (as was rumored yesterday) and by 30K in France, which was not only more than expected, but it was also the biggest decline since January 2001. Accordingly, the unemployment rate in France dropped to 9.9% - its lowest level in almost two years – while Germany’s rate remained firm at 11.6%.

Although this data may suggest that economic growth in the Eurozone may begin to recover in the third quarter, growth in the second quarter remained consistent with previous estimates of 0.3%(Q/Q), while Q1 growth was actually revised down to 0.4% (Q/Q) and 1.3% (Y/Y) from 0.5% (Q/Q) and 1.4% (Y/Y). Additionally, The European Commission kept their forecast for Q3 and Q4 unchanged at 0.2-0.6% and 0.4-0.8%, respectively.

Inflation within the Eurozone came in at 2.1% in August – still above the ECB’s target of 2.0%, indicating that the possibility of a rate cut remains remote.

Despite the myriad indicators released this morning from Europe, the after shocks from Hurricane Katrina may be what’s causing the recent slide in the euro, not through higher oil prices, but rather as a result of European reinsurance firms purchasing dollars to cover the numerous claims that will surely be filed as a result of the storm’s devastating impact on the Gulf coast region.

Support for EURUSD remains at 1.2161, followed by 1.2125. Resistance for the pair starts at 1.2230-40, followed by 1.2280.


Drop in production drags yen lower

Down 1.4% against the dollar this week, the yen is in the midst of a four-day slide as oil continues to dampen the yen’s prospects. Last night’s release of Japanese industrial production data was also negative for the yen, as production fell 1.1% (M/M) in July – more than twice the expected value and well off the 1.6% increase in June.

Although the yen hit a high today of 111.77 following the disappointing production data, it quickly pared its losses as resistance remains well entrenched at 111.60. Further resistance occurs at 112.25. Support is occurring at 111, followed by 110.83.


Loonie looks to GDP for added strength

In the past month, the Canadian dollar has strengthened by 3.3% against the US dollar as the price of oil has risen 17%. Today’s release of Q2 GDP data for Canada should help underpin the loonie’s recent gains as growth is expected to increase 2.8% (Y/Y) compared with 2.3% during the first quarter. Continued growth should also strengthen the market’s expectation that the Bank of Canada will raise interest rates by 25 basis points to 2.75% at its next meeting on September 7.

USDCAD remains supported at 1.1890-94, with further support occurring at 1.1863. Resistance for the pair is holding at 1.2024, followed by 1.2085.

The US dollar continues to trade higher this afternoon following the release of better than expected consumer confidence data from the Conference Board, whose headline index unexpectedly rose to 105.6 in August from an upwardly revised 103.6 in July. Market consensus was anticipating a decline in confidence to 101.5. Despite higher energy costs, confidence among US consumers was buoyed by the perceived strength in the job market, with the “jobs plentiful” sub-index rising to 23.5 from 22.9 in July.

Oil and the aftermath of Hurricane Katrina are also grabbing headlines as concerns about the long-term damage to oil production in the Gulf caused by this year’s most powerful storm have pushed oil to yet another record high of $70.85/barrel. Although the full extent of the damages will not be known for some time, a comparison of previous destruction caused by Hurricane Ivan last year indicates that it is not inconceivable for oil to top $80/barrel within a month.

Following Ivan’s devastation of the region last September, in which three-fourths of the manned platforms were evacuated as well as almost two-thirds of the drilling rigs – not to mention extensive damage to pipes located on the seabed – the price of oil rose more than 28% to a then-record high of $55.17/barrel. Although early assessments are indicating that Hurricane Katrina was not as destructive as Ivan, there is still a very real possibility that the price of crude will rise by at least 20%, which means we could top $80/barrel by late September. Higher prices of crude oil would more than likely have a negative impact on economic growth in the US, thus putting downward pressure on the dollar.

US factory orders for July were also released today and, as expected, they showed a decrease of 1.9% (M/M). Due to the fact that orders actually decreased by marginally less than the -2.0% value that was expected, the softness in this data did little to stop the dollar’s rise following better than expected confidence figures.

Today’s release of the minutes from the August 9 FOMC meeting, offered little insight as to future Fed monetary policy, except to confirm that it would remain accommodative at a measured pace. The board members did acknowledge that the increasing cost of oil was likely adding to inflationary pressure, citing the fact that current price increases were “running at a pace around the upper end of the range.” Even though the risk of inflation may have ticked up, longer term expectations remained “well-contained.” As for the extent of future policy moves going forward, these would “depend importantly on economic developments.” With little insight to go on, it is no wonder that the dollar’s response has been muted for now.


Euro remains soft ahead of growth, labor data

The euro remains weaker against the dollar this afternoon ahead of tomorrow morning’s release of French and German unemployment data, as well as GDP and CPI data for the Eurozone. Estimates for tomorrow’s data out of Europe do not look positive for the euro as the unemployment rate for both France and Germany is projected to hold at historically high levels of 10.1% and 11.6%, respectively. Rumors about the unemployment change in Germany, which have often been quite accurate in the past, are also offering little help as a decrease of 12K in August is being talked about – well below July’s drop of 42K and off current market expectations of a 20K fall.

Tomorrow’s release of both GDP growth and consumer price increases within the Eurozone are expected to confirm earlier estimates – with Q2 GDP growth expected to remain at 0.3% (Q/Q) and 1.2% (Y/Y) and CPI coming in at 2.2% (Y/Y) for August. If accurate, these indicators will probably not have much of an impact on the euro, especially considering the fact that the ECB is largely expected to keep rates steady at 2.0%. More importantly, however, will be the European Commission’s forecast for GDP growth in the Q3 and Q4. A marked slowdown in future growth – possibly as a result of higher energy costs – could drag the euro lower, causing it to test support at $1.2161.

Further support for EURUSD occurs at 1.2125. Upside is capped 1.2230-40, followed by 1.2280.


Yen declines steadily as oil bubbles higher

Resistance at 111.60 continues to hold firm as the increasing price of oil weighs on the yen. With USDJPY trading currently confined to a narrow range of 111.30-50, further pressure on the yen could come later this evening, following the release of Japanese industrial production data, which is expected to decline by 0.5% (M/M) in July, down significantly from the 1.6% increase in June.

Any downward surprise in the data this evening could be enough to propel USDJPY above 111.60 on its way to the key resistance level of 112.25. Support is occurring at 111, followed by 110.83.


Oil continues to fuel loonie strength

The loonie – or “petro-loonie” as many are now found of calling it – is the only major currency to strengthen against the US dollar today due to the fact that its fortunes are becoming increasingly tied to those of oil. With oil hitting yet another record high, the Canadian dollar has benefited, reaching an intra-day high of 1.1894. A sustained break below this level should see USDCAD test further support at 1.1863. Resistance for the pair remains firm at 1.2024, followed by 1.2085.

6:00 UK CBI Distributive Trades Report, 8:30 CAN Q2 Current Account (Balance of Payments) (exp. C$5.0 bln, prev. C$4.0 bln), 8:30 CAN July Raw Materials Price Index (exp. 2.0%, prev. 5.4%), 8:30 CAN July Industrial Product Price Index (exp. 0.3%, prev. 0.0%), 10:00 US July Factory Orders (exp. -2.0%, prev. 1.4%), 10:00 US Aug Consumer Confidence (exp. 101.5, prev. 103.2), 14:00 US Minutes of the August 9 FOMC meeting released, 19:50 JPN July Industrial Production (exp. -0.5%, prev. 1.6%).

The dollar is higher against the major currency pairs as the worst of Hurricane Katrina has passed, leaving behind severe damage and flooding throughout the Gulf Coast region and killing at least 54 people, while leaving a further 1 million without power.

Katrina’s impact on the myriad oil production facilities in the region is still being assessed and will require several more days before a thorough evaluation can be completed. However, it does appear that many platforms and ports sustained extensive damage, with Royal Dutch Shell Plc reporting that its Mars platform – capable of producing 220,000 barrels a day – was damaged by the hurricane. Indeed, 92% of crude oil production in the Gulf, including eight refineries, was shut down due to the storm. Given the fact that the Gulf of Mexico supplies almost one-third of all US oil production, crude oil prices are once again on the rise as damage reports begin to come in and fears mount that it may be quite some time before capacity is back to normal.

Although the market will still be paying close attention to the aftermath of Hurricane Katrina, several key US economic indicators are due out this week with consumer confidence and factory orders scheduled to be released this morning. The Conference Board’s consumer confidence index for August is expected to come in at 101.5, which would be the second straight month of falling confidence among US consumers.

Of course, with Friday’s University of Michigan index showing weaker than expected consumer confidence, there is a strong possibility that today’s index could also come in softer than expected – especially as record high prices at the pump negatively impact the spending habits of US shoppers.

Factory orders in the US are also due out at 10:00 am this morning and are expected to show a drop of 2.0% in July, compared to a 1.4% increase in June.

Additionally, Fed watchers will be paying close attention to today’s release of the minutes from the FOMC’s August 9 meeting. With the housing market continuing to hit record levels and inflation near the Fed’s upper limit, there is little doubt that the Fed will continue to raise interest rates by at least 25 basis points at its next two meetings. However, the market will be looking for any sign of a change to the Fed’s current “measured” pace. A fervent hawkish tone by members of the FOMC could provide support for the dollar.


Disappointing data drops yen lower

Despite a strong showing by the Nikkei 225, the yen has steadily weakened against the dollar this morning, shedding 1.5% in the past three days as the release of disappointing data out of Japan has pushed USDJPY higher, testing resistance at 111.55.

Household spending in Japan unexpectedly fell in July by 3.3% (Y/Y), far below expectations of a 0.8% increase. This marks the third month out of three that household spending has decreased, with a meager 0.1% rise in June the only improvement.

Retail sales also fell 2.2% in July from a 1.9% decrease in June and the jobless rate unexpectedly rose to 4.4% from 4.2% as job growth was unable to keep pace with the addition of 170,000 more people into the work force.

With this current data highlighting the fact that Japan still has a long way to go before it makes a full economic recovery, the yen has been pushed to its lowest level against both the dollar and the euro in almost three weeks.

Resistance for USDJPY is holding at 111.55, with further upside capped at 112 and 112.25. Support for the pair has been raised to 110.74, followed by 110.10 and 109.85.


Euro dips below $1.22

With anxiety over Hurricane Katrina subsiding, the dollar has made gains against the euro in early trading, with EURUSD just below $1.22. As the market turns its attention away from Katrina and towards US economic data due out this morning, there is a chance that the euro will improve due to the fact that both consumer confidence and factory orders in the US are projected to come in weaker.

Disappointing data out of the US could see the euro retest resistance at 1.2250, followed by 1.2280. Support occurs at 1.2161, followed by 1.2125.


Retail sales push pound below $1.79

Coming off yesterday’s holiday, in which the markets in Great Britain were closed, the sterling finds itself back below $1.79 as the CBI survey of retail sales showed a disappointing value of -18 in August, the same as July. With the 3-month MA falling to -22 and last week’s CBI survey on industrial trends dropping to -29 in August, the pound has come under pressure recently as the market once again ponders the possibility of a rate cut from the BoE.

Support for sterling initially occurs at 1.7831, followed by 1.7820. Resistance for GBPUSD has been lowered to 1.7926, followed by 1.7965.


Loonie lower ahead of current account data

Although the price of crude oil continues to hover near record high levels, the loonie is marginally weaker against the greenback this morning, trading just above 1.20. There is potential for the Canadian dollar to once again strengthen against the US dollar following the release of Canada’s Q2 current account balance, which is expected to increase to C$ 5.0 billion from C$ 4.0 billion in the first quarter. The loonie should continue to benefit from higher oil prices and may also get an added boost if US consumer confidence data surprises on the downside.

Resistance for USDCAD remains strong at 1.2024, followed by 1.2085. Higher oil prices and disappointing US data could see the loonie test support at 1.1950, with further support occurring at 1.1894.


Aussie falls to seven week low

The aussie has lost more than a full cent against the greenback and is currently trading near .7475, which is its lowest level in almost seven weeks. The current weakness in AUD comes on the heels of stagnant retail sales growth, which showed no improvement in July, following a 1.3% increase in June – the most in two years. The soaring cost of importing fuel widened Australia’s trade deficit more than forecasted to A$1.46 billion in July from a revised A$1.4 billion in June.

As growth down under shows signs of slowing, the market is expecting the Reserve Bank of Australia to refrain from increasing interest rates any more this year, thus putting downward pressure on the aussie.

AUDUSD is currently eyeing support at .7444, with further downside capped at .7419. Resistance for the pair continues to drop with initial levels occurring at .7524 and .7541. Key resistance is holding at .7577.

The US dollar has firmed up this afternoon across the board as Hurricane Katrina continues to be the top story of the day, slamming into the coast of Louisiana and Mississippi earlier this morning, causing severe flooding and even felling buildings in its path. The price of oil, however, has abated somewhat as it appears that much of the oil production located off the coast of Texas and Louisiana will avoid serious damage.

Historically, as the chart below illustrates, hurricanes have had a big impact on the price of oil. In the past year alone, no less than five hurricanes have markedly affected the price of West Texas Intermediate Crude. The first of which was Charley in August of 2004, which caused concern due to the fact that it was initially headed straight for the oil and gas fields doting the Gulf of Mexico. The price of crude was subsequently pushed up to a then-record high of $48.70/barrel on August 19, 2004. Charley, however, veered eastward, exiting the Gulf of Mexico and dragging the price of oil lower as it targeted the eastern seaboard of the US.



Less than a month later, unfortunately, Hurricane Ivan would strike the region, forcing the evacuation of three-fourths of the manned platforms in the Gulf as well as almost two-thirds of the drilling rigs ¨C thus earning Ivan the dubious honor of being the most expensive hurricane for the oil and gas industry in the Gulf and, consequently, pushing crude oil prices up to a new high of $55.17/barrel.

This hurricane season started off to an ominous start when, following on the heels of Tropical Storm Cindy, the development of Hurricane Dennis in the Gulf of Mexico pushed the price of oil higher, topping more than $61/barrel as 96% of oil production in the Gulf was shut down, including the production facilities of Royal Dutch/Shell Group, BP Plc, and Anadarko Petroleum Corp.

Although the worst of Dennis missed the rigs and platforms dotting the Gulf of Mexico, causing oil prices to dissipate, Hurricane Emily followed up immediately afterwards. As with Dennis, Emily missed the numerous oil production facilities, but her presence was enough to make the market nervous, and perhaps more importantly, raised questions about the reliability of refinery production within the US, subsequently pushing oil to yet another record high of over $67/barrel.

Currently battering the coast of Louisiana and Mississippi, Hurricane Katrina has brought massive amounts of flooding, power outages and has even managed to tear two gaping holes in the roof of the Louisiana Superdome, pouring rain down on refugees who are using the home of the New Orleans Saints football team as shelter from the storm. The full impact of the hurricane will not be known for quite some time, but there is no doubt that damages will run at least $10-20 billion and any set-back in oil production could see the price of crude target $75/barrel.

Any negative impact on US economic growth as a result of Hurricane Katrina, could weigh heavily on the dollar and such concerns by the market could see the greenback drift lower, especially if there is any perceived weakness in the economic data due out this week.

USDJPY near three week high

Concerns about further increases in the price of oil, coupled with slumping opinion poll data for PM Koizumi and his Liberal Democratic Party have pushed the yen to its highest level against the dollar in almost three weeks at 110.60.

Key Japanese economic data in the form of household spending, unemployment and retail sales are due out this evening. On the positive side for the yen is the fact that household spending in July is forecasted to increase 0.8% from 0.1% in June, while the jobless rate is expected to stay low at 4.2%. Negatively, however, retail sales are projected to fall 2.0% in July, down from a 1.9% decrease in June.

With USDJPY currently testing resistance at 110.55, further upside is capped at 110.83. Support for the pair remains at 109.41 and 109.05.

Aussie pushed lower ahead of retail sales, trade data

The Australian dollar is lower against the US dollar for the second day in a row as speculation continues to mount that July retail sales in Australia, due out later this evening, could be disappointing. The previous two releases both came in well above market expectations, with retail sales figures in June showing the most improvement in two years and more than double expectations of 0.5%. Given the fact that July data are projected to increase only 0.3%, there seems to be little chance of another interest rate hike this year, thus dragging the aussie lower.

July trade data for Australia is also released tonight with the market expecting a deficit of AUD 1,400 billion ¨C slightly more than the AUD 1,371 billion in June. Further widening of the trade deficit should add further downward pressure on the aussie.

Support for AUDUSD starts at .7510, followed by .7497 and .7468. Resistance for the pair occurs at .7605 ¨C the 55 day MA. Further resistance seen at .7626, followed by .7659.

19:30 JPN July Jobless Rate (exp. 4.2%, prev. 4.2%), 19:30 JPN July Workers' Household Spending (exp. 0.8%, prev. 0.1%), 19:50 JPN July Trade Balance (exp. -Y0.5 bln, prev. 0.0), 19:50 JPN July Large Retailers Sales (exp. -2.0%, prev. -1.9%), 21:30 AU July Retail Sales (exp. 0.3%, prev. 1.3%), 21:30 AU July Trade Balance (exp. AUD -1,400 bln, prev. AUD -1,371 bln).

The US dollar is weaker this morning against the euro, sterling and loonie as the price of crude oil soared more than 7% to $70.80/barrel – a new record high – with Hurricane Katrina bearing down on the Gulf coast, forcing energy companies such as Exxon Mobil Corp. and Chevron Corp. to evacuate oil production facilities in the Gulf of Mexico.

Although it was recently downgraded to a Category 4 hurricane, Katrina is still one of the worst storms ever faced by the Gulf coast states of Louisiana and Mississippi in the last four decades. Devastating winds and the possibility of severe flood damage have prompted the evacuation of more than a million people from the area as the region’s worst storm since 1969 is about to make landfall.

Record-setting oil prices are causing some consternation within the market that US economic growth will begin to slow as higher energy prices finally start to take their toll on consumer spending and confidence within the US. This concern has caused the price of US 10-year Treasury bonds to increase, dropping the yield lower by 4 basis points to 4.15% this morning from 4.19%.

With no major economic data due out today, Hurricane Katrina will continue to capture the market’s attention ahead of this week’s release of key US data, including consumer confidence, GDP growth, ISM manufacturing index and non-farm payroll data. Given the fact that much of the data coming out of the US this week has the potential to disappoint, further increases in the price of oil will only serve to exasperate the current weakness of the dollar.


Renewed German confidence, record oil prices lift euro

The euro is higher against both the dollar and the yen this morning due, in part, to the record-high price of oil. An unexpected increase in consumer confidence in Germany also helped boost Europe’s single currency, which is currently trading around $1.23.

The GfK’s September release of consumer confidence rose to 3.4 from an upwardly revised 3.2 in August. Despite record oil prices and an unemployment rate of 11.6%, German citizens are growing more optimistic that the election on September 18 will bring with it a new government committed to reforming the German economy and getting people back to work.

EURUSD briefly tested resistance this morning at 1.2345-50 – the 61.8% retracement of the move from 1.2487 to 1.2125 – before falling back down to its current level around 1.23. Further upside is seen capped at 1.2374. Support for the pair is holding at 1.2280, followed by 1.2250


Yen falls as oil rises and voter support wanes

The record-high price of crude oil is finally beginning to impact the yen, dragging it lower against the dollar and the euro this morning. Even the political front, which has propped up the yen for the past few weeks, is now having a negative impact as voter support for Prime Minister Koizumi and his Liberal Democratic Party is being to wane.

There may be some relief in sight, however, for yen bulls as speculation surrounding a further revaluation of the Chinese yuan continues to build. In fact, an announcement came this morning that the Chinese central bank will hold a press briefing tomorrow concerning the yuan. Although it is highly unlikely that anything definitive will be announced, the possibility that the yuan will be allowed to appreciate against the dollar in the near term could help stem further yen losses from higher energy costs and political uncertainty.

Despite briefly touching 110.55 in early trading, resistance for USDJPY remains at 110.47, followed by 110.83. Support for the pair occurs at 109.41 and 109.05


Speculator interest returns to the dollar

Futures traders were decidedly more bullish on the dollar this week as there were some indications that the greenback might have been oversold in the past few weeks. With the exception of the pound sterling, the dollar gained ground against all the major currency pairs in the week ending August 23.

The euro was not able to hold on to its net long position against the dollar this week as total net short contracts came in at 5,766 from last week’s net long position of 584 contracts.

Sterling was the only major currency that improved against the dollar in the futures market this week with net long contracts more than doubling to 5,498 from 2,358 contracts last week. This represents the highest net long position since the week ending May 10, 2005.

Despite improved economic data and increased support for Prime Minister Koizumi, record oil prices may be responsible for the fact that the yen continues to lose favor among traders in futures market as the yen’s net short position increased almost 20% to 31,366 contracts from 26,385.

The Canadian dollar’s net long position vis-à-vis the US dollar dropped for the first time in three weeks, falling 6% to 24,543 contracts from 26,047.

Total net short contracts for the Swiss Franc decreased 36% to 37,544 from 27,622 as the desire of futures traders to go long the swissie plunged this week with total long contracts halving to 3,165 from 6,485.

A combination of total aussie long positions falling 46% and total short positions increasing almost four-fold conspired to drop the aussie’s total long position against the US dollar by 55% to 11,870 contracts from 26,304.