• USD: Mixed, IMF says the recession is not yet over, Fed awaited
  • JPY: Lower, pressured by selling in cross trade to be GBP and EUR, threat of rising US bond yields
  • EUR: Lower, Weber says ECB will maintain special policy measures for sometime
  • GBP: Higher, BOE voted unanimously to hold the current level of bond purchases, no remuneration rate cut
  • CAD and AUD: AUD & CAD lower, BOC officials express concern about CAD strength

Overview    
USD edged higher ahead of today's FOMC meeting supported by profit taking and a modest drop in risk appetite as the IMF says that the global recession is not yet over. IMF official's said that the impact of the recession will be felt for a long time after it's technically over. USD traded at a new low for 2009 Tuesday supported by optimism about the global recovery and improving risk appetite as US equity markets closed at a new high for 2009 and Asian equities closed at 13 month high. GBP rallied supported by the release of the BOE policy minutes for the September policy meeting which showed that the BOE policy board voted unanimously to hold interest-rate policy steady and maintain the current level of bond purchases. In August the BOE policy board was split with some members including BOE Governor King calling for an additional expansion of bond purchases. There was limited reaction to report that EU manufacturing and services PMI posted modest improvement last month. ECB's Weber said that the ECB will likely maintain unconventional monetary policy measures for sometime to come. CAD drifted lower as BOC officials expressed concern about CAD strength and Canada's Finance Minister Flaherty warns that the Canadian recovery is fragile with most of the growth tied to stimulus. The trade awaits the FOMC policy decision at 215 ET. The Fed is expected to note the improvement in the US economy, confirm that interest rates will stay low for an extended period and the Fed the may hint at possible timeframe for exit from quantitative ease. USD remains vulnerable to improving optimism about the global recovery and speculation that G-20 effort to try and correct global imbalances may require further weakening of the USD. The G-20 meeting will be held on September 24th and 25th.

Today's US data:
No major US economic data was released in today's trade.

Upcoming US data:
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
Markets were closed for a holiday in Japan and the JPY traded lower pressured by an IMF warning that the global recession is not yet ended and selling in cross trade to Europe. GBP/JPY rallied with the GBP supported by release of the BOE policy minutes for September which showed that the BOE unanimously voted to hold rate policy steady and maintain the current level of bond purchases. EUR/JPY traded higher with the EUR supported by report of improving EU manufacturing and services PMI. There is an interesting report on Marketwatch which discusses the possibility that China's trade surplus will soon turn to deficit and that this could lead to higher U.S. Treasury yields and that China will likely reduce their purchase of US bonds. US bond yields have remained low despite improving global economic outlook partly because a significant demand from China and the Fed's bond purchase plan. The Fed's bond purchase plan is expected to expire in October and this will eliminate a major source of support for the US bond market. If China's demand for US bonds also begins to decline US bond yields may move higher. Higher US bond yields could threaten the US global recovery. The trade awaits the FOMC policy announcement later today. 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 125bln compared to 380bln 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 drifted lower as the trade books profits ahead of today's FOMC meeting and the ECB's Weber indicates that the ECB will maintain unconventional policy measures for sometime to come. Weber said that there was no need for the ECB to unwind its unconventional policy measures to support the economy at this time. Weber went on to say that easy policy cannot be maintained too long because of the risk that it may fuel inflation. EUR traded at a new high of 2009 Tuesday with gains attributed to improving risk appetite. There was limited reaction to the report of improving EU manufacturing and services PMI. EU September flash manufacturing PMI improved to 49 from 48.2 and services PMI improved to 50.6 from 49.9 in August. EU industrial orders for July rose more than expected reported up 2.6%. The trade had expected a 2% rise for the July industrial orders ECB officials continue to urge caution about the outlook for you recovery. ECB's Nowotny said he expects an L shaped recovery for the EU economy and as noted above IMF officials indicated that the global recession has not yet ended. Weber said he expects the EU recovery to be muted. EUR was also pressured by a rebound of the GBP and cross trade with GBP supported by report that the encoding when unanimously voted to maintain its current level of bond purchases at the September policy meeting. EUR/GBP traded at a five-month high Tuesday. Focus turns to today's FOMC policy statement and Thursday's release of German IFO.

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 versus USD and rebounded in cross trade supported by the release of the BOE minutes for the September policy meeting. The September BOE policy minutes show that the BOE unanimously voted to maintain its current level of bond purchases. At the August BOE policy meeting the BOE policy the board was divided over whether there should be a larger expansion of the BOE's bond purchases. In September the BOE voted 9-0 to maintain the current level of bond purchases which means that there is no immediate plan by the BOE expand its bond purchases beyond the current £175bln. GBP has been underperforming part because of concern that the BOE may expand quantitative ease. This seems to be less of a risk in light of today's release of the BOE policy minutes for September. GBP was also supported by the fact that the BOE minutes did not indicate that the BOE had considered reducing its remuneration rate on commercial bank deposits held at the BOE. The sustainability of the GBP recovery is questionable because the BOE will most likely be the last central bank to withdraw monetary stimulus. Tuesday, 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. GBP also remains vulnerable to concern about rising UK government debt. 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 10.27bln from 5.09bln 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. GBP showed little reaction a report in the Daily Telegraph that says weak GBP will deliver the UK a surplus.

The technical outlook for GBP is mixed as GBP trades back above 1.6300. Expect near-term support at 1.6212 the September 22nd low with resistance at 1.6569 the September 17th high.

 

CAD
CAD traded lower pressured by concern about Canada's recovery and a statement from the BOC warning on CAD strength. Canada's PM Harper said that Canada has a fragile recovery with most of the growth tied to stimulus .Harper said that he is not seeing the type of growth to improve the labor market. PM Harper went on to say that the government must make sure that the next wave of growth is built on a sustainable basis and that the global economy cannot hinge solely on the US consumer. BOC's Carney warns that Canada's jobless rate is likely to continue to rise and that it was too early to say if Canada is experiencing self-sustaining growth BOC officials warn that strong CAD is a risk to growth. BOC Deputy Governor Longworth said that persistent strength of the CAD remains a risk to growth and to the return of inflation to target. (Tuesday Canada reported weaker than expected retail sales for July.) The BOC affirmed that it will maintain current liquidity through mid-2010. CAD was also pressured by a slight uptick in risk aversion as the IMF warns that global recession is not yet over. 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 in the G-20 meeting on Thursday and Friday. The FOMC is expected to confirm the interest rates remain low for an extended period. The G-20 is expected to discuss global financial regulation, global imbalances and strategies for withdrawing economic stimulus measures

The technical outlook for CAD is positive as USD/CAD falls below 1.0700. Look for near-term support at 1.0550 the October 1st low with resistance at 1.10930 the September 15th high.

 

AUD
AUD traded lower pressured by profit-taking ahead of today's FOMC meeting and in reaction to a slight uptick in risk aversion as the IMF warns that the global recession has not yet ended. AUD was also pressured by a modest setback in the price of gold and crude. The IMF statement about the global recession appears to have generated concern about demand for commodities. AUD is a commodity-based currency with price direction closely linked to the outlook for the economy. Numerous officials including Canada's PM Harper, ECB's Nowotny and Weber expressed concern about the outlook for recovery with Harper saying the Canadian recovery is fragile and Nowotny suggesting that the EU economy will experience an L-shaped recovery and Weber says that the EU recovery would be muted. Tuesday the Asian Development Bank ADB raised China's and developing Asia's growth forecast. The ADB upgrade coupled with report of a sharp improvement in New Zealand's current account sparked a sharp rally in the AUD Tuesday. AUD downside was limited by report of better than expected Q2 GDP reported at 0.1%. Focus turns to today's conclusion of the FOMC policy meeting and the G- 20 meeting at the end of the week. 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 with today's high and 8774 at the time of this writing. Failure to take on 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 24th new home sales for  August will be released 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 8620 the September 22nd low with resistance at 8820 the August 22nd 2008 high.