There is no escaping the fact that the US housing market and financial sector are still hurting. Data released yesterday showed inventory levels of existing homes for sale rose to 11.2 months, suggesting continued downward pressure on prices. Median prices of existing homes were down 7.1% y/y after falling 6.1% y/y in June. This continues to hurt the financial sector, which saw another regional bank failure over the weekend, this time in Kansas - the ninth such closure this year. There was some relief from the successful debt auctions of Fannie Mae and Freddie Mac, but fears of further writedowns sector-wide remain real. The S&P 500 slid 2% on Monday, crude oil price closed 0.87 cents higher at $115.26, while the US dollar was largely unchanged in small ranges. EURUSD traded overnight within 1.4746 and 1.4809 range, while USDJPY was between 109.02 and 109.94.

Despite its own macroeconomic woes, we think the dollar is being driven by current market concerns over a re-coupling world, which should take the shine off other major currencies and make the dollar look relatively less grim. On this note, watch today's German Ifo for broader USD direction. The market will also keep an eye on the August 5 FOMC minutes today for more policy guidance though we do not expect to gather much new information from that. We established a trade recommendation on Friday to go short EURUSD at 1.4858 and targeting 1.4350.

Ahead today, we get more data for the US housing sector with the S&P/Case Shiller composite-20 index (consensus: -16.2%y/y, UBSe: -16.3%y/y, after -15.8%y/y in May) due out at 1300GMT and July new home sales (consensus: 515k, UBSe: 525k after 530k in June) due for release at 1400GMT. Equally important is the Conference Board confidence index for August (consensus: 53.0, UBSe: 53.5, after 51.9 in July and 51.0 in June), which is due at 1400GMT. Also due on Tuesday are the Richmond Fed manufacturing survey, ABC consumer confidence and the weekly store sales indexes.

The German Ifo Business climate for August index will be released today. A below-consensus reading will support worries of a deeper than expected slowdown in the Eurozone's growth engine. The combination of incremental weakness in the European economy and moderating oil prices should keep pressure on EURUSD in our view. Although last week's ZEW came in better than expected, German PMIs were considerably below market expectations, actually supporting the case for a weaker Ifo outcome given its high correlation to the latter. Besides the ifo release, both labour data and the first estimate on consumer prices for August are scheduled to be released on Friday, and our economists expect price pressure to abate slightly as compared to the July reading. Going forward, we expect growth conditions to continue to deteriorate, and we remain of the view that inflation has likely peaked around current levels. This unfavourable growth-inflation dynamic is likely to keep the EUR on the defensive, and as such we regard the currency to remain a sell on rallies. We recommended going short EURUSD at 1.4858 on Friday, targeting 1.4350.

BoJ Governor Shirakawa spoke on Monday to reassure markets over an increasingly shaky Japanese economy. Despite the 0.6% q/q drop in real GDP growth in Q2, Shirakawa said a deep adjustment in Japan's economy is unlikely, and that financial conditions remain accommodative, probably in response to market speculation that a BoJ cut would be needed in future to stimulate economic growth. With inflation numbers due on Thursday, Shirakawa also warned that Japan needed to be mindful of the negative effects from prolonged monetary easing. This is consistent with previous comments by BoJ members that higher inflation would not be tolerated indefinitely. The carry trade continues to find interest despite moderate risk appetite at best and the yen will find it difficult to rebound under such circumstances, despite the long liquidation we have witnessed recently, which has mostly favoured the greenback. We continue to target USDJPY at 110 in 1m.