US GDP Wilts, Yen and Swissie End July Strong

Debt ceiling drama was compounded by a dreadful report on US GDP leading to risk off moves in the forex market. JPY and CHF were major gainers with CAD lagging. Fridays CFTC report showed growing USD shorts in everything but CHF. See the link to our latest Friday Premium Trades ahead of Asia's Monday Open.

US GDP was abysmal, one of the worst GDP reports in recent memory and it showed in markets. Growth in the second quarter was +1.3% compared to the +1.8% expected. A portion of this may have been priced in after Thursdays weak durable goods orders but the bigger story was a huge downward revision to Q1 (from +1.9% to +0.4%). Combined, the reports showed the US economy grew just 0.4% in the first half of the year (not annualized).

Other details were also poor including personal consumption which inched up 0.1% compared to the +0.8% expected. Note that government spending cuts have subtracted an average of 0.7 percentage points from GDP over the past three quarters. Given the debt ceiling debate in Washington, we expect this to continue.

Trading was volatile on Friday as debt ceiling rumours and news swayed sentiment. The S&P 500 declined to as low as 1282 at the open the rebounded into positive territory at 1303 before closing down 0.6% to 1292. TECHNICALS PLAYED A HUGE PART of Fridays trading as the S&P 500 bounced off the 200-day moving average for the third time in the past six weeks. Stock market losses would have been much deeper If not for the technicals, traders trying to front-run equity flows into the start of August and short-term trades betting on a resolution to the debt ceiling.

The Chicago PMI also missed expectations and the employment component fell to 51 from 58. U of Mich consumer sentiment was a touch soft and remains at the lowest since March 2009.

CAD took a double whammy from the soft US report and a domestic GDP report that showed a 0.3% contraction in May compared to the +0.1% expected. Much of the miss appears to be due to temporary shutdowns in the energy and mining sectors that will be reversed. Still, its looking like Q2 GDP will be flattish in Canada after 3.5% growth in Q1 and Q42010 but thats no surprise given the numbers we saw today from the US.

Ashraf offered six new trades late on Friday, including renewing his longstanding bearish case for USDJPY & the overlay charts. Subscribers can see them here: http://ashraflaidi.com/products/sub01/access/?a=465

To get a FREE 1-WEEK TRIAL, http://ashraflaidi.com/products/sub01/

LOOKING BACK AT THE MONTH OF JULY, the top currencies were easily NZD, CHF and JPY. The euro was the laggard, followed closely by USD.

Some other thoughts on the monthly charts:

- USD/JPY fell to within 3 pips of the all-time (post tsunami) low on Friday and closed very close to that level.

- USD/CHF declined more than 500 pips on the month and closed at the monthly low (which is an all-time low). The pair has declined in 11 of the past 13 months with the two increases averaging just 150 pips.

- AUD/USD printed all time high weekly and monthly CLOSES in as the pair finished up just below 1.10. The monthly candlestick pattern is also bullish.

- EUR/USD was flattish for the second month.

Fridays CFTC commitment of traders report showed aversion to USD with net shorts increasing 20%. With a large gain in GBP longs, every currency is now held net long against USD. The yen was the leading pick of speculative traders in the week followed by EUR and CAD. The Swiss franc was the only currency to see its position trimmed against USD as it fell by 3.6K to +7.8K (were guessing there are some people who wish they held the USD/CHF shorts a bit longer). The data covers through Tues, July 26.