US ICSC Chain Store Sales rose 4.3% YoY vs. 3.3% expected

MAJOR HEADLINES – PREVIOUS SESSION

*S ICSC Chain Store Sales rose 4.3% YoY vs. 3.3% expected
     
*New Zealand Jun. REINZ House Sales fell -42.4% YoY vs. -52.9% in May

*Japan Jun. Consumer Confidence fell to 32.9 vs. 33.0 expected and 34.1 in May
     
*Germany Jun. Wholesale Price Index rose 8.9% YoY as expected.

THEMES TO WATCH – UPCOMING SESSION

Key Risk Events (All times in GMT)

* Canada Jun. Employment Rate and Net Change in Employment (1100)
* Canada May International Merchandise Trade (1230)
* Canada May New Housing Price Index (1230)
* US May Trade Balance (1230)
* US Jun. Import Price Index (1230)
* US July Preliminary University of Michigan Confidence (1400)

Market Comments
An article from the New York Times is making the rounds this morning, explicitly describing how the US government might take over (effectively nationalize) the key mortgage lenders Fannie Mae and Freddie Mac, who together represent in the neighborhood of half of the US mortgage market. The market has been nervous about the financial health of these companies for some time as rumors have swirled, home price indexes have been falling relentlessly and their stock prices have dropped. If they were simply allowed to fail, we would have a 19th-century style liquidity crisis on our hands as the US housing market would effectively grind to a halt. But this is obviously not the 19th century and these institutions are truly too big to fail with activist governments ever at the ready to bail out almost any mess, particularly one with systemic implications.

The US government will step in if necessary, and it is likely that stepping in will be necessary soon. The only final question may be how much Fannie's and Freddie's "nationalization" will cost US taxpayers and the US economy. This story is inseparable from the fall in overall US house prices. After all, as Fannie and Freddie are going down the tubes, their credit costs are rising dramatically and creating a vicious circle for their balance sheet. A more explicit government backing sooner rather than later could reduce credit costs more quickly for the institutions, which could be passed on to qualified buyers and help stabilize home prices more quickly and shore up confidence. It's a sad state of affairs, but the final capitulation of these institutions into the government's arms could finally mark the climax of the fall in housing prices and the bottom for the US dollar. For now, the market has hardly reacted to this story, despite its huge long term implications. Stabilization of these institutions is eventually a USD bullish story, however.

Oil snapped higher on a series of stories playing on supply fears, though it seems that the market reacts less and less to the short term moves in energy prices, with NOK as a possible exception. Any move to new highs just tightens the inflation thumbscrews already cinching off growth around the globe. Oil has certainly shown little effect on CAD, which today sees employment and trade numbers releases. USDCAD is at the lower end of the range within the range with a small tipping point support down around 1.0050. In the bigger picture, we like buying USDCAD, but six months of range trading do not a compelling short term view make. We need to see the pair all the way back above 1.0300 before we can talk about an uptrend again.

Volatility in the major FX crosses is collapsing. While some say that this could continue for some time as we pass through the lower volume summer months of July and August, it feels like something needs to happen soon and something often does happen when volatility begin rising from low levels - a development we must keep an eye out for. Carry trades keep drifting higher and higher on apparent complacency and despite complete lack of support from fundamental inputs (risk spreads and interest rate differentials), so we view that phenomenon with suspicion and we're unwilling to chase it higher. Perhaps we should focus on a high momentum turnaround in these trades as a sign that a new cycle is beginning. And a new cycle would certainly be welcome as we are tiring of this morass of range-trading, which is certainly no fun from an analytical standpoint! Come on, market: throw us a bone already.

Chart: EURUSD
We set up 1.5800 as an important break level to the upside. This level was touched yesterday. The rally to get to this level has been so slow, however, and the bout of range trading so persistent, and overall volatility so low, that we are beginning to wonder whether break-outs of price levels are especially significant in this environment. Perhaps instead we should look for a pick up in volatility as a sign of which way things are headed. Still, enormously negative EUR news of late has failed to trigger a sell-off in the currency, so it's hard to be bearish EUR until we get a chunky sell-off. We raise the bar for the bulls and now would like to see a strong 1.5900 breakout to the upside before getting excited about potential for a new high. And a sharp move back to 1.5600 and break is needed for the bears to shows signs of asserting control. Note that the 20-period ATR is edging back toward the lows of the year.