• USD: Lower, pares losses as jobless claims rise and retail sales unexpectedly fall dampening risk appetite
  • JPY: Higher, DJP may tolerate a stronger JPY, tracking risk sentiment rallies after US retail sales report
  • EUR: Higher, GDP rises in Germany and France signaling the end of recession, EU GDP falls 0.1%
  • GBP: Higher, supported by improving risk sentiment as equity markets rally
  • CAD and AUD: AUD & CAD higher, stocks and commodity prices surge supported by EU GDP & FOMC


USD opened sharply lower Thursday pressured by a spike in risk appetite and a surge in global equities and commodity markets sparked by report that economic growth has returned to Germany and France. USD was also pressured by an upbeat economic assessment from the FOMC policy statement released Thursday which added to optimism about the US economic outlook and today's improvement in risk appetite. German and French Q2 GDP posted a surprise 0.3% rise. The surprise rise in German and French Q2 GDP suggests that the EU recession has ended. Despite today's improvement in French and German GDP the ECB warned that they see more downside risk to the EU economy. EU Q2 GDP declined by just 0.1%. In its policy statement released Thursday afternoon the FOMC indicated that it will gradually end it's purchases of US debt and said that US economic activity is leveling out and financial conditions are improving further. The FOMC statement contributed to optimism that the worst for the US economy has passed and helped fuel sharp gains in global equity markets and commodities. Crude prices rallied above $71 a barrel and commodity prices were higher with copper prices surging. The surge in commodity prices reflects speculation that the return to growth in Europe and the end of US recession will help to boost global demand. JPY traded mixed with initial support from weaker Asian equity market trade and a Wall Street Journal report which says that the opposition DJP in Japan may tolerate a stronger JPY if elected. JPY upside was limited by aggressive selling in cross trade sparked by improving risk sentiment. JPY re-rallied after the release of weak US retail sales and jobless claims data. Today's US economic data took away some of the optimism that had emerged in reaction to the release of European GDP data with jobless claims rising and retail sales posting an unexpected decline. In addition US home foreclosures rose to another record high reported up by 7% in July. Risk sentiment remains the main driver for FX trade. After the release of weak retail sales equities reversed early gains and USD sell-off stalled.

Today's US data:
Jobless claims for the week ending 08/08 rise 4k to 558k, a reading of 535k was expected. July retail sales declines 0.1%, a 0.7% rise was expected. The decline in retail sales reflects a sharp drop in gasoline sales. The government's cash for clunkers plan was the main reason that retail sales did not decline more as auto sales were strong last month. Ex. autos July retail sales fell 0.6%. July import prices fell by 0.7%, a 0.4% decline was expected. Stocks turned lower and the USD rallied after the release of worse than expected US retail sales. June business inventories fell by 1.1% and sales rose 0.9%.

Upcoming US data:
On August 14th July CPI will be released expected at 0.1% compared to 0.7% last month along with July industrial production, capacity utilization and August Michigan consumer sentiment. Industrial production is expected flat compared to -0.4% last month. Capacity utilization is expected to improve to 68.1 from 68 last month. University of Michigan consumer confidence is expected to improve to 68 from 66 last month.

JPY traded mixed initially supported by a spike in risk aversion sparked by declining Asian equity markets and report that Japan's opposition DJP party would tolerate a stronger JPY. Equity markets surged in Europe post-release of above expectation GDP from Germany and France and JPY turned lower pressured by improving risk sentiment. The WSJ reports that Japan's opposition DJP party may be willing to tolerate a stronger JPY. Japan will hold national elections on August 30 and the ruling LDP party is at risk of losing its control of Japan for the first time in 50 years with polls showing the DJP party expanding its lead. DJP officials have also suggested that they may be less inclined to buy US treasuries and today's WSJ report suggests that the DJP would not likely intervene to try and weaken the JPY. Japan's national elections may emerge as a short-term positive for the JPY should the DJP win the election. The current ruling LDP party is a major proponent and supporter of the USD as the primary global reserve currency and have been faithful buyers of US treasuries. A victory by the DJP party may change that. JPY traded higher in US session after the release of weaker than expected US jobless claims and retail sales as the data put a dent in optimism about the US recovery and took risk appetite down a notch. JPY crosses were volatile giving back large post EU GDP gains after the release of disappointing US economic data. JPY price continues to maintain a close correlation to the direction of equity markets and risk sentiment.

On August 14th June tertiary activity will be released expected at -0.3% compared to -0.1% last month.

Key technical levels to watch in USD/JPY include support at 95.05 the August 7th low with resistance at 97.15 the August 11th high.


EUR traded higher supported by report of a surprise rise in German and French Q2 GDP and a surge in European equity markets. French and German Q2 GDP rose 0.3%. The trade had expected the data show modest contraction in growth. EU Q2 GDP fell by less than expected 0.1% and 4.6% year on year. The trade had expected a quarterly decline of 0.5% and annual decline of 5.1% for EU Q2 GDP. Today's GDP data from the EU suggests that the recession has ended. Despite the report of return to growth in Germany and France the ECB warned that they see more downside risk to the EU economy. Today's EU GDP data may have important implications for ECB monetary policy outlook. The ECB has indicated that they expect a gradual improvement in EU economy into 2010 and for inflation to turn positive. This has encouraged the ECB to maintain steady rate policy. The ECB has also signaled that interest rates would remain steady for some time and that policy bias is neutral. Today's EU GDP data may encourage speculation that the ECB will look to raise interest rates sooner than expected if the EU economy continues to show improvement. Based on the ECB warning about downside risk to the EU growth outlook, an ECB rate hike does not appear likely in the near term. After today's look at EU growth, focus turns to EU inflation outlook and Friday's release of EU HICP for July. The trade will be looking to the HICP data to see if the EU faces risk of deflation or if the data confirms that the EU inflation rate is likely to turn positive later in the year. It's interesting to note that Swiss producer and prices declined the most since 1975 reported falling 6.1% an annualized basis. This report will intensify fear of deflation risk in Switzerland and increase the risk of SNB intervention to weaken the CHF. EUR gains were pared after the release of weaker than expected US jobless claims and retail sales. These reports took some of the steam out of the US equity market rally and injected a note of caution to the optimism about US recovery. On August 14th EU July HICP will be released expected at 0.1% compared to flat last month.

The technical outlook for the EUR is mixed as the EUR trades above 1.4300. Expect EUR support at 1.4209 the August 13th low with resistance at 1.4330 and 1.4415 the August 7th high.


GBP traded higher supported by rising global equity markets and improving risk sentiment post release of better than forecast EU Q2 GDP. The GDP data from Germany and France generates hope that the worst of the European recession is over. GBP remains one of the currency's most sensitive to the direction of equities in risk sentiment. European equities surged after the release of a surprise rise in German and French Q2 GDP. There were no major economic reports released from the UK today. The trade showed limited reaction to a Daily Telegraph which carried an article discussing how weak GDP is the UK's secret weapon. BOE officials have indicated that prior deterioration of the GBP should be positive for UK export outlook. A number of analysts have concluded that part of the rationale for the BOE's decision to expand quantitative ease last week was related to trying to limit the recent gains in the GBP. The GBP rally could choke recovery in the UK and contribute to increased deflation risk. In its quarterly inflation report released Wednesday that the BOE warned that inflation may fall below 1% and the BOE expect the UK recovery to be slow. GDP had been weakening since last week's surprise announcement that the BOE has elected to expand quantitative ease. Last Thursday, the BOE elected to extend quantitative ease by £50 bln to a total of £175 bln and elected to hold rates steady at 0.5%. How UK inflation data influences BOE decisions on quantitative ease will be key to the direction of the GBP.

The technical outlook for GBP is mixed as GBP rebounds to trade above 1.6500. Expect near-term support at 1.6486 the August 13th low with resistance at 1.6720 the August 10th high.


CAD traded higher supported by today's rise in equity markets, commodities and improving risk sentiment post-release of better than expected GDP data from the EU. Crude prices rose above $71 a barrel and metals prices were strong supported by optimism about global recovery. CAD gains were partly limited by report weaker than expected US retail sales and an unexpected rise in US jobless claims. These reports took back some of the earlier improvement in risk appetite. The data raise concern that continuing high US unemployment will limit consumer spending and the US recovery will be weak. Two thirds of US domestic GDP is driven by consumer spending. Today's US retail sales decline may be a red flag indicating that the US consumer remains retrenched. CAD traded a three week low versus the USD Wednesday pressured by concern about the outlook for economic growth in China sparked by warning about overcapacity in China's and fear that credit tightening may choke off China's recovery. There were no major Canadian economic reports released in today's trade. Wednesday Canada reported a bigger than expected drop in housing starts and a modest improvement in its trade deficit. CAD direction will remain closely correlated to speculation about the global recovery and risk sentiment.

This week's Canadian economic calendar includes the August 14th release of June manufacturing shipments expected to rise 0.5% compared to -6% last month.

The technical outlook for CAD is negative as USD/CAD rises back above 1.1000. Look for near-term support at 1.0791 the August 11th low and 10635 the August 4th low with resistance at 1.1075 the August 12th high.


AUD traded sharply higher in volatile trade. AUD was supported by improving risk sentiment and optimism about the global recovery sparked by report of return to growth in Germany and France and an upbeat assessment of the US economy from the FOMC Thursday. In addition, Australia's May AWOTE rose1.2% and energy and commodity prices traded sharply higher. The improvement in the AWOTE wage data follows yesterday report that Australian consumer confidence rose to a two-year high. These reports suggest that Australia's domestic economy is improving. AUD gains were partly limited by report of weaker than expected US jobless claims and retail sales. These reports injected a note of caution about the US economic outlook dampening some of today's enthusiasm about the positive data from the EU. Wednesday the AUD traded lower pressured by concern about China's growth outlook sparked by reports of overcapacity in China and concern about the impact of China's credit tightening. Last week the RBA elected to hold monetary policy steady at 3% and dropped its easing bias. AUD should remain well supported on breaks by steady RBA policy. If AUD continues to rally above 8400 the price action may encourage the RBA to intervene. AUD price direction remains closely correlated to risk sentiment and the direction of equity markets.

The technical outlook for the AUD is positive as AUD rises above 8400. Expect AUD support at 8330 the August 13th low with resistance at 8525 the September 22nd high.