The euro depreciated vis-à-vis the U.S. dollar last week as the single currency tested bids around the $1.3970 level and was capped around the $1.4425 level. The pair lost about 55 pips last week. The U.S. government nationalized Fannie Mae and Freddie Mac. San Francisco Fed’s Yellen sees higher mortgage defaults, tighter credit, and weaker activity and employment. Rumours abound that U.S. investment banking giant Lehman Brothers is facing funding problems and a sale could be effected this weekend. Markets are pricing in less than a 5% chance the FOMC will hike rates by the end of the year. Germany’s IfW reduced its 2008 German GDP forecast to 1.9%. U.S. commercial banks are tapping the Fed’s discount window at record levels.

ECB’s Stark acknowledged “more declines” in oil and commodities prices. ECB’s Gonzalez-Paramo said “serious efforts” are needed to improve financial markets. ECB’s Noyer said EMU-15 banks are “robust and well equipped to withstand shocks.” ECB’s Papademos saw second-round inflation effects materializing while ECB’s Mersch refused to rule out a “wage-price spiral.” Eurogroup’s Juncker warned of a “technical recession.” EMU-15 finance ministers and central bankers discussed the slowing economy this weekend in Nice. The European Commission slashed its 2008 GDP growth forecast to 1.3%. EMU-15 finance ministers and central bankers are meeting in Nice this weekend.

Data released in the U.S. last week saw July wholesale inventories up 1.4% with sales off 0.3%; July pending homes sales were off 3.2%; the July trade balance ballooned to US$ 62.2 billion; the August import price index was off 3.7% m/m and up 16% y/y; weekly initial jobless claims climbed 122,000 to 3.525 million; August retail sales were off 0.3% with ex-autos off 0.7%; August PPI was off 0.9%; August business inventories were up 1.1%; and the University of Michigan consumer sentiment indicator rose to 73.1.
Data released in the eurozone last week saw Sentix EMU-15 sentiment decline to a new five-year low; Germany’s trade surplus narrowed to €13.9 billion; French July industrial production climbed 1.2% m/m; and EMU-15 industrial output fell 0.3% m/m and 1.7% y/y; and EMU-15 employment expanded was up 0.2% q/q in Q2.

The yen depreciated vis-à-vis the U.S. dollar last week as the greenback tested offers around the ¥109.05 level and was supported around the ¥106.65 level. The pair gained about 20 pips last week. The Nikkei 225 stock index climbed 0.93% on Friday to close at ¥12,214.76. BoJ’s Shirakawa welcomed Fannie’s and Freddie’s nationalization as did finance chief Ibuki because the U.S. dollar “is a key international currency.” A 50bps RBNZ cut led to yen gains on Thursday.

Data released in Japan last week saw August bank lending up 2.0%; August service sector sentiment weakened to a seven-year low; August corporate failures were off 10.0% m/m; August machine tool orders were off 14.2% y/y; July core private sector machinery orders fell 3.9% m/m; August wholesale inflation was at a 27-year high at 7.2% m/m with core up 2.4% y/y; the July current account surplus fell 17.3% y/y; the July coincident index gained +0.9 points; the economy shrank 0.7% q/q in the April – June period; and July industrial production was upwardly revised to 1.3% m/m.

In Chinese news, the Chinese yuan depreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8465 in the over-the-counter market, up from CNY 6.8422. PBoC’s Zhou saw the U.S. GSEs’ bailout as “positive.”

Data released in China last week saw August CPI up 4.9% y/y; August PPI was up 10.1% y/y; actual FDI was up 41.6% y/y between January and August; the August trade surplus was a record US$ 28.69 billion in August; August retail sales were up 23.2% y/y; and industrial value-added output was up 15.7% between January and August.

The British pound appreciated vis-à-vis the U.S. dollar last week as cable tested offers around the US$ 1.7975 level and was supported around the $1.7440 level. The pair gained about 270 pips last week. BoE’s King called for fiscal prudence. BoE MPC’s Blanchflower sees 60,000+ job losses per month and a worsening of the economy. MPC’s Gieve said inflation “hasn’t peaked yet.” MPC’s Tucker said sterling’s decline has raised inflation expectations and offset declines in growth.

Data released in the U.K. last week saw August factory gates prices fall 0.6% m/m and climb 9.7% y/y; July manufacturing output was off 0.4% m/m and 1.4% y/y; BRC August retail sales were off 1.0% y/y; BoE’s public twelve-month inflation forecast moved to 4.4%; NIESR reported the economy contracted 0.2% in the three months to August; and the U.K.’s global goods deficit shrank to -₤7.7 billion in July.

The Swiss franc depreciated vis-à-vis the U.S. dollar last week as the greenback tested offers around the CHF 1.1400 level and was supported around the CHF 1.1130 level. The pair gained about 120 pips last week. SNB’s Jordan said Swiss banks are handling the credit crisis well. SNB is likely to keep its LIBOR target unchanged at 2.75% on Thursday.

Data released in Switzerland last week saw August unemployment move higher to 2.4% from 2.3% in July; and Manpower reported Swiss companies will increase their staffs in Q4.

The Canadian dollar appreciated vis-à-vis the U.S. dollar last week as the greenback tested bids around the C$ 1.0550 level and was capped around the C$ 1.0820 level. The pair lost about 25 pips last week.

Data released in Canada last week saw July building permits rise 1.8%; August housing starts were up 13%; the July trade surplus narrowed to C$ 4.85 billion; the July new housing price index rose 2.7% y/y; and Q2 labour productivity was off 0.2%.

The Australian dollar appreciated vis-à-vis the U.S. dollar last week as the Aussie tested offers around the US$ 0.8350 level and was supported around the US$ 0.7895 level. The pair gained about 65 pips last week. RBA boss Stevens said all of the central bank’s tightening doesn’t need to be unwound.

Data released in Australia last week saw August job ads fall at their biggest pace in seven years; July retail sales rose 1.4%; July housing finance was off 0.2%; the August jobless rate fell to 4.1% with employment up 14,600; the Melbourne Institute’s consumer inflation expectations survey fell to 4.4% in September; and the September consumer sentiment index climbed +7.0% m/m.