• USD: Mixed, CIT will get no more government aid could file for bankruptcy as soon as Friday
  • JPY: Higher, supported by CIT concerns, IMF says Japan's economic outlook remains uncertain
  • EUR: Higher, gains limited by selling in cross trade to JPY
  • GBP: Lower, BOE's Barker says she does not expect to see improvement yet in bank lending
  • CAD and AUD: AUD & CAD lower, RBA sells AUD in June, Fitch downgrades New Zealand's debt

 

Overview
USD traded mixed and JPY surged Thursday as investors digest significant crosscurrents impacting risk appetite. Improving US second quarter corporate earnings and an upbeat FOMC economic outlook helped fuel equity market gains and improving risk appetite. J.P. Morgan's second quarter earnings came in well above market expectations adding to a string of recent positive US corporate earnings surprises. Better than expected US earnings reports support risk appetite. The FOMC upgraded its forecast for US GDP at the June policy meeting and projects higher unemployment and inflation. Stronger than expected Chinese Q2 GDP fuels optimism about the global recovery. China's Q2 GDP rose 7.9%. Report that CIT will not get more government help and could file for bankruptcy as soon as Friday and that US mortgage foreclosures rose to a record 1.5 million in the first half of 2009 took some of the shine off improving risk appetite. This sparked safe haven demand for the USD and JPY. U.S. Treasury officials said that CIT bankruptcy is not a foregone conclusion and this suggests that the Treasury believes the US financial system is stable enough to absorb fallout from CIT. In addition, Fitch downgraded New Zealand's debt rating to negative from neutral. US economic data was mixed with jobless claims falling more than expected and the Philly Fed weakening more than expected. These reports paint a mixed picture about the outlook for the US economy and whether the US recession is ending. USD edged higher after the release of weaker than expected Philly Fed as the report clouds the outlook for US recovery and equity markets trade sideways. USD rallies are limited with the majors well supported on breaks. FX direction will continue to track risk sentiment and equity markets. This week's strong equity market rally and better than expected US earnings reports tip the scales in favor of improving risk appetite. If this trend continues, the USD could experience additional selling pressure. Bank of America and Citi report earnings Friday.

Today's US data:
Jobless claims for week ending 7/11 dropped 47k to 522k, a reading of 584k was expected. The Philly Fed falls to -7.5 from -2.2 last month, a reading of -5 was expected.

Upcoming US data:
Friday, June housing starts will be released expected at 530k compared to 532k last month.

JPY
JPY traded sharply higher supported by report that CIT will not receive an additional bailout from the US government and Fitch downgrade of  New Zealand's debt rating to negative from  neutral. The CIT news and New Zealand downgrade sparked a slight dip in risk appetite which encouraged safe haven demand for JPY and JPY gains in cross trade. Every time there's a drop in risk appetite investors sell higher yielding assets in favor of the JPY. There was little reaction to today's Japanese economic data or the IMF's outlook for Japan's economy. Japan's May tertiary index declined 0.1% to 96.4 .The July Reuters tankan manufacturing index improved to -43 from -50 last month and the non-manufacturing index weakened to -38 from -31 in June. The IMF says that Japan's economic outlook remains uncertain despite recent stabilization of the economy. The IMF expects inflation in Japan to remain negative until 2011 and warned that improved risk appetite may reignite JPY carry trades. JPY continues to exhibit independent strength with dips in risk appetite becoming more of an excuse to buy the JPY as signs of stabilization in Japan's economy and growing optimism about the end of the global recession keeps the JPY well supported on breaks. 

On July 17th May leading indicators will be released expected unchanged at 0.9%.

Key technical levels to watch in USD/JPY include support at 92.70 the July 14th low with resistance at 94.95 the July 8th high.

EUR
EUR traded higher extending Wednesday's gains which were inspired by better than expected US corporate earnings reports. A surprise drop in US jobless claims, stronger Q2 GDP growth in China and better than expected earnings at J.P. Morgan helped offset report that CIT may file for bankruptcy. US earnings reports and risk appetite remain the main market driver for FX trade. There was limited fresh economic news from the EU or official comments from the ECB in Thursday's trade. EUR maintained its bid after the release of the May US Treasury flows data. The Treasury flows data showed USD66 bln outflow in May. Report that Swiss July investor sentiment was flat compared to 9.7% last month had little impact on the EUR/CHF cross as strong earnings results from J.P. Morgan supported the EUR in cross trade. EUR is well supported on breaks by improving risk sentiment and rising global equity markets.

On July 17th, EU May trade balance will be released expected to 3.1 bln compared to 2.7 bln last month.

The technical outlook for the EUR has improved as the EUR rises above 1.4100. Expect EUR support at 1.4056 the July 16th low with resistance at 1.4200 the July 1st high.

GBP
GBP edged higher supported by improving risk sentiment with gains limited by BOE policy uncertainty. A statement from the BOE's Barker that she does not expect to see improvement in bank lending yet opens the door to speculation that the Bank of England may consider extending quantitative ease. Yesterday, the Bank of England's Bean expressed concern about UK banks and the economy. Bean suggested that the BOE can expand quantitative ease if necessary and that Bank of England would decide whether quantitative ease needs to be extended at the next monetary policy meeting. The trade showed limited reaction to a statement from the UK PM Brown that his priority is to promote growth and restore jobs to the economy. Wednesday, the UK reported that unemployment hits highest level since 1995 rising to 7.6%. The IMF states that UK economic outlook is highly uncertain and expects UK growth to fall 4.2% in 2009 and rise by just 0.2% in 2010. The IMF also reiterated its concern about rising UK government debt. The IMF says that UK fiscal debt could reach a peak of 100% of GDP. GBP direction will remain closely tied to equity markets and risk sentiment.

The technical outlook for GBP has improved as GBP rises above 1.6400. Expect near-term support at 1.6300 the July 15th low with resistance at 1.6545 the July 1st high.

CAD
CAD drifted lower pressured by weaker crude prices and uncertain risk sentiment as the US equity market rally slows. This is the first day the CAD traded lower this week. CAD traded at its highest level in a month Wednesday supported by rising equity markets and improving risk sentiment. Today's report that CIT may file for bankruptcy as soon as Friday, injected some caution to the recent improvement in investor risk sentiment. There were no major Canadian economic reports released in today's trade. A bigger than expected drop in US jobless claims for the week ending 7/11 and better than expected second-quarter earnings at J.P. Morgan helped limit CAD downside. In addition China reported stronger-than-expected second-quarter growth. China's second-quarter growth suggests that China's fiscal stimulus is beginning to work and this could be a positive for the outlook of the global economy and Canadian exports. CAD upside was capped by report of weaker then expected Philly Fed survey for July. The direction of the CAD remains closely correlated to the outlook for the global economy and the direction of equities and commodity prices.  Focus turns to Friday's release of Canadian inflation and leading indicators.

On July 17th June CPI will be released expected unchanged at 0.1%.May leading index will also be released on July 17th expected 0.1% compared to -0.1% last month.

The technical outlook for CAD has improved as USD/CAD falls decisively below 1.1600. Look for near-term support at 1.1005 the June 12th low with resistance at 1.1350 the July 15th high.

AUD
AUD traded mixed initially supported by improving risk sentiment as global equity markets consolidate recent gains and US second-quarter corporate earnings continue to beat expectations. AUD upside was limited by report that the RBA sold a record A$1.94 bln in June intervening to try to stop the rapid appreciation of the AUD. RBA officials have indicated concern that continued strength in AUD could hurt Australia's exports and recovery. The AUD experienced a significant break during the month of June which partly reflected falling equity and commodity prices and a spike in risk aversion. Today's RBA intervention news suggests that the RBA was also responsible for the AUD decline in June. AUD upside was also limited by weaker commodity prices and report that Fitch downgraded New Zealand's debt rating to negative or neutral. The downgrade of New Zealand's debt rating by Fitch may reduce optimism about the global recovery and reduce risk appetite. AUD downside was limited by report of stronger than expected Q2 GDP in China. China's Q2 GDP rose 7.9%, a 7.7% rise was expected. China's Q2 GDP suggests that China's stimulus plan is working to boost growth. There is hope that Chinese growth will help lead global recovery. China is major export destination for Australian goods and stronger growth from China is a positive for the Australian economy. AUD price direction will closely track risk sentiment and commodity markets. Focus turns to Friday's release of Australia's import and export prices.

This week's Australian economic calendar includes the July 17th release of Q2 export and import prices. Export prices are expected at -9% compared to -4.5% last quarter. Import prices are expected at -8% compared to -2.8% last quarter.

The technical outlook for the AUD has improved as AUD rallies above 8000. Expect AUD support at 7814 the July 14th low with resistance at 8130 the July 3rd high.