•  USD: Lower, Asian Development Bank says China and developing Asia to expand faster than expected
  • JPY: Higher, pressured by central bank diversification and broad USD weakness
  • EUR: Higher, ECB's Weber says interest rates are appropriate and FX not out of line with EU data
  • GBP: Higher, PM Brown says continued stimulus needed, drops to five month low versus EUR
  • CAD and AUD: AUD & CAD higher, New Zealand's current account improves, Can. retail sales decline

Overview     
USD traded sharply lower Tuesday in reaction to report that the Asian Development Bank (ADB) raised China's and developing Asia's growth forecast. ADB expects China's 2009 GDP to grow by 8.2% and by 8.9% in 2010 and raised developing Asia's growth forecast to 6.4% from 6%. The USD selloff is also attributed to speculation that the FOMC will confirm that it will maintain ultra easy monetary policy well into 2010 and that the G-20 will call for a reduction in global trade imbalances that may require further USD weakness. Reuters reports that 24 years ago today major nations called for deprecation of the USD to help rebalance the global economy. President Obama is expected to call on the G-20 to help the US reduce its trade and budget deficits. The FOMC will conclude a two-day policy meeting Wednesday and are widely expected to hold policy steady and maintain the current level of quantitative ease. The FOMC is expected to turn upbeat about the US economy but hold off on tightening of monetary policy for some time to come. The G-20 meets on September 24th and 25th and are expected to focus on new global financial market regulation and global trade imbalances. According to UK PM Brown the G-20 will likely endorse maintaining fiscal and monetary stimulus and avoid an early withdrawal of stimulus. The ADB warned that withdrawing stimulus too early could lead to a double dip recession. Equities, crude and gold prices surged reflecting improving risk sentiment and speculation that G-20 nations will not withdraw stimulus anytime soon. The New Zealand dollar traded at a 13 month high versus the USD and led the assault against the USD supported by report of the sharp improvement in New Zealand's current account deficit. New Zealand's GDP debt ratio fell to 5.9%, the trade had expected a reading of -7.2%. The New Zealand dollar was also supported by report that dairy giant Fonterra raised its pay out to farmers by 12%. EUR traded at a one-year high versus the USD supported by improving risk sentiment and a statement from the ECB Weber that interest rates are appropriate and FX is not out of line with stronger EU data. CHF was supported by report of improving Swiss trade balance with exports reported up 2% in July and an upgrade of the Swiss 2010 GDP forecast. The Swiss government expects the Swiss GDP to expand in 2010. CAD traded higher despite report of much weaker than expected July retail sales. Optimism about the global recovery and speculation a weaker USD will be needed to reduce global imbalances are the driving factors for FX markets.

Today's US data:
No major US economic data was released in today's trade. Richmond Fed manufacturing index was unchanged at 14 in September.

Upcoming US data:
FOMC meeting ends on September 23rd. On September 24th initial jobless claims for week of 9/19 will be released expected at 540k compared to 545k last month. On September 24th August existing home sales will be released expected at 5300k compared to 5240k last month. On September 25th August durable goods will be released expected at 1.1% compared to 5.1% last month along with final University of Michigan sentiment for expected unchanged at 70.2%. August new home sales will also be released on September 25th expected 450k compared to 433k last month.

JPY
JPY traded higher supported by broad USD weakness sparked by the Asian development Bank upgrade of China's and developing Asia's growth outlook. JPY was also supported by report of central bank diversification flows out of the USD. The trade continues to debate whether the new Japanese government has shifted its intervention policy. Last week Japan's new Finance Minister Fujii said he supports a strong JPY and that a strong JPY would be beneficial for the Japanese economy in the long run. Fuji also said that he was against intervention to weaken the JPY to support Japan's exporters. After these statements the JPY firm to its best level in seven months versus the USD and Fujii reversed his statements in favor of a strong JPY and said that he did not want to be labeled as a proponent of strong JPY. Fujii went on to say that the JPY should reflect Japanese economic fundamentals. The BOJ recently upgraded its outlook for Japan's economy but the recovery outlook remains fragile. A Bloomberg survey released Monday suggests that many analysts expect the JPY weaken because the economy is too weak to support a stronger JPY. Focus turns to Wednesday's conclusion of the FOMC policy meeting. If the Fed signals that it will continue to maintain low yields for an extended period the USD may continue to weaken.

This week's Japanese economic calendar includes the September 24th release of August trade balance expected at 125 bln compared to 380 bln last month. Also on September 24th July all industry activity will be released expected at 0.6% compared to 0.8% last month.

Key technical levels to watch in USD/JPY include support at 91.00 the September 18th low and 90.10 the September 10th low with resistance at 92.55 the September 21st high and 93.30 the September 7th high.

EUR
EUR traded as a new one-year high versus the USD breaking above 1.4800 and a five month high versus the GBP with EUR/GBP trading above 90.80. EUR gains are attributed to broad USD weakness inspired by improving risk sentiment and rising equity markets sparked by the Asian Development Bank upgrade of China and developing Asia's growth outlook. EUR was also supported by comments from the ECB's Weber. Weber said that current interest rates are appropriate and that FX is not out of line with stronger EU data. Weber's comments suggest that the ECB is comfortable with stronger EUR. There are more signs that he EU economy is improving with today's release of Swiss government growth forecasts and improving trade balance. The Swiss government upgraded its 2009 GDP forecast to -1.7% from the original forecast of -2.7% and said that it expects GDP to expand in 2010. Swiss July exports rose 2% which is an indication of improving demand from the EU for Swiss exports. Speculation that the FOMC will maintain its current level of stimulus for an extended period coupled with speculation that the G-20 will be in no hurry to remove fiscal stimulus contributes to improving risk appetite and firmer equity markets and commodity prices. Focus turns to this week's release of EU manufacturing and services PMI and German IFO. The trade will be looking at these reports for clues to whether the EU economic recovery is sustainable.

This week's EU economic calendar includes September 23rd release of September flash manufacturing and services PMI. The manufacturing PMI is expected at 49 compared to 48.2 last month and the services PMI is expected at 50.1 compared to 49.9 last month. Also on September 23 of July industrial orders will be released expected at 2.5% compared to 3.1% last month. On September 24th German September IFO index will be released expected 90.8 compared to 90.5 last month. On September 25th EU August M3 will be released expected 3.4% compared to 3% last month

The technical outlook for the EUR is positive as EUR rallies above 1.4800. Expect EUR support at 1.4682 the September 22nd low with resistance at 1.4865 September 8th high.

GBP
GBP traded higher but continued to underperform with gains limited by selling in cross to the EUR. EUR/GBP traded at a five-month high with GBP pressured by concern about rising UK government debt and speculation that the BOE may have to expand quantitative ease to boost the UK economy. It's generally believed that the BOE will be the last central bank to withdraw monetary stimulus. UK PM Brown said that continued stimulus is needed for the global recovery and he does not see a quick exit strategy from fiscal and monetary stimulus. Brown's comments are seen as negative for the USD and for the GBP. Monday the BOE quarterly bulletin stated that GBP weakness is attributed to concern about financing of UK debt. Last Friday the UK reported a sharp rise in net public-sector borrowing. The UK August public-sector borrowing rose to 10.27 bln from 5.09 bln last month reflecting lower tax receipts. There is concern that the UK may be forced to raise taxes to fund the debt and that the continued expansion of deficit spending could lead to higher interest rates. Higher interest rates would be an additional threat to the UK economic recovery. The GBP has been underperforming since the BOE's surprise decision in August to expand quantitative ease to £175 bln. There is an interesting article in Friday's Wall Street Journal which raises the question of whether the GBP will emerge as the new funding currency and vehicle for carry trades replacing the JPY. It is now cheaper to borrow in USD than JPY and this may soon be the case for the GBP. EUR/GBP traded above 90.50 for the first time in five months. Analysts at BNP Paribas look for EUR/GBP to trade at parity as investors look to borrow in low yield currencies like the GBP to finance the purchase of higher yielding assets. Apart from focus on this week's FOMC meeting the trade will be looking at Wednesday's release of BOE minutes for the September policy meeting for clues to whether the BOE may consider expanding quantitative ease.

BOE minutes for the September policy meeting will be released on September 23rd.

The technical outlook for GBP is mixed as GBP trades back above 1.6300. Expect near-term support at 1.6134 the September 21st low with resistance at 1.6454 the September 18th high.

 

CAD
CAD traded higher supported by rising equity, crude and gold prices and in reaction to the Asian Development Bank upgrade of China's and developing Asia's growth forecast. Canada is a major exporting nation and improving economic outlook is seen as positive for Canada's economy. CAD traded higher despite report of much weaker than expected Canadian retail sales. Canada's July retail sales declined 0.6% and 0.8 % ex. autos. The trade had expected Canada's retail sales to rise by 0.6% and 0.3% ex. autos. The disappointing Canadian retail sales data points to risks to the Canadian recovery and may generate speculation that the Canadian economic rebound remains weak. Monday, Canada reported a much smaller than expected net foreign inflows during July. Last Friday Canada's finance minister Flaherty warned that the recovery remains fragile and unemployment is likely to continue to rise. CAD price direction will continue to focus on commodity prices and the outlook for the global economy. Focus turns to the conclusion of the FOMC policy meeting Wednesday. Part of today's CAD rally is attributed to speculation that the FOMC will confirm that interest rates will remain low for an extended period and that the FOMC is in no hurry to remove monetary stimulus.

The technical outlook for CAD is positive as USD/CAD falls below 1.1070. Look for near-term support at 1.0678 the September 21st low with resistance at 1.10930 the September 15th high.

AUD
AUD traded sharply higher supported by spillover from a surge in the New Zealand dollar and report that the Asian Development Bank raised China' and developing Asia's growth forecast. China and Asia are major destinations for Australian exports. As noted above, the New Zealand dollar traded in a 13 month high versus the USD supported by report of the surprise narrowing of the New Zealand current account deficit and that Fonterra Dairy will raise its milk payout to farmers by 12%. AUD was also supported by a surge in commodity prices as gold rallies back above $1000 per ounce in crude oil trades above $70 a barrel. Today's rebound in global equity markets contributes to improving risk appetite encouraging demand for high yield currencies like the AUD. There is general consensus that the FOMC and G-20 nations are not prepared to withdraw stimulus anytime soon. This adds to improving risk appetite and demand for higher yielding assets. AUD traded a one year high last week of 8778 supported by RBA rate hike speculation improving optimism AUD has not taken out the 8778 level. Failure to take out this level could signal a technical divergence and lack of upside confirmation for the AUD rally. AUD price direction will continue to track commodities, equities and risk sentiment with further gains linked to speculation about global economic outlook and the continuation of fiscal and monetary stimulus from the G-20 nations.

On September 23rd Australia's skilled vacancies will be released expected at 1.2% compared to 1% last month. On September 24th new home sales for these expected at 0.3% compared to 0.1% last month.

The technical outlook for the AUD is positive as AUD trades back above 8700. Expect AUD support at 8545 the September 8th low with resistance at 8820 the August 22nd 2008 high.