• USD: Higher, jobless claims fall more than expected, stocks turn mixed on liquidation ahead of Friday's nfp
  • JPY: Lower, pressured by increased risk of deflation in Japan, PBOC may cap lending
  • EUR: Lower, ECB holds rates policy steady, German industrial orders rise more than expected
  • GBP: Lower, BOE unexpectedly extends quantitative ease by £50 bln to £175 bln, BOE hold's policy steady
  • CAD and AUD: AUD & CAD lower, Australia's unemployment steady in July, Canadian building permits rise

 

Overview
GBP and JPY traded sharply lower in Thursday's trade with GBP pressured by BOE's unexpected decision to extend quantitative ease. The JPY was pressured by a Reuter's report which suggests that the BOJ may forecast that Japan faces three years of deflation. The BOE extended quantitative ease by £50 bln to £175bln and held rate policy steady at all 0.5%. Analysts were generally split over whether the BOE would elect to expand quantitative ease because recent UK economic data including today's report of a rise in RICS house prices suggests that the UK economy was stabilizing. Essentially the BOE has elected to print more money to try to boost the UK economy and GBP traded lower. If the Reuters report is correct and the Bank of Japan is prepared to acknowledge deflation risk in Japan it could discourage safe haven demand for the JPY. EUR drifted lower with downside limited by gains in cross trade GBP and JPY and report of stronger than expected German industrial orders. The ECB elected to hold rate policy steady as expected and signaled a wait-and-see approach to future monetary policy decisions. The ECB expects gradual recovery in the EU economy in 2010 and said that inflation expectations are well anchored. CHF traded lower pressured by report that Swiss Q3 consumer confidence fell to its lowest level in 16 years. The AUD traded higher supported by report of better than expected Australian employment report which showed that the unemployment rate in Australia unexpectedly held steady in July. The trade had expected a 0.2% rise in Australia's unemployment rate. The USD extended its gains against the JPY and drifted off its highs against the majors in reaction to report of a bigger than expected drop in US jobless claims. Focus turns to Friday's release of US unemployment and on farm payroll for July. Today's better than expected US jobless claims report suggests that Friday's unemployment report will confirm a slower pace of job's destruction in the US.

Today's US data:
US jobless claims for week ending 8/1 fell 38k to 550k, a reading of 580k was expected. The jobless claims report suggests that US labor market is stabilizing and the report may be confirmation that the US economy is also stabilizing. Manufacturing hiring is improving. Continuing jobless claims rose for the first time in three weeks which suggests that labor conditions remain weak.

Upcoming US data:On August 7th July unemployment and nonfarm payrolls will be released. The unemployment rate is expected to rise to 9.6% from 9.5% last month with nonfarm payrolls at -320k compared to -467k in June.

JPY
JPY traded sharply lower pressured by the increased fear of deflation risk in Japan and report that PBOC may take action to cap lending in China. According to a Reuters report, the Bank of Japan may forecast that Japan faces three years of deflation. Dow Jones reports that the central bank of China may fine-tune policies which was interpreted to mean that they could take action to slow lending in China. JPY traded to the day's lows after the release of better than expected US jobless claims. The improvement in jobless claims helped to boost equities and risk sentiment. The trade showed limited reaction to report that Japan's June leading indicators rose 2.9% and the coincident indicator was up 0.7%. JPY crosses were mixed with GBP/JPY trading lower in reaction to the BOE's decision to expand quantitative ease. AUD/JPY traded higher with AUD supported by report of better than expected Australian employment. EUR/JPY traded higher supported by firmer equity market trade and improving risk sentiment. If Friday's US July npf confirms continued improvement in US employment outlook JPY could experience additional selling pressure.

Key technical levels to watch in USD/JPY include support at 94.81 the August 6th low with resistance at 95.90 the July 30th high and 96.40.

 

EUR
EUR drifted lower mainly pressured by spillover from sharp declines in the GBP and JPY. The ECB elected to hold rate policy steady as expected at 1% and signaled that it will take a wait-and-see approach to the future monetary policy decisions. In the press conference following the ECB policy decision ECB President Trichet said that he sees the EU economy bottoming and inflation expectations well anchored. He expects gradual recovery of European economy in 2010. Trichet's comments suggest that further monetary ease by the ECB is unlikely as ECB expects the economy to recover in 2010 and inflation outlook to turn positive. EUR downside was limited by gains in cross trade GBP and JPY and by report of stronger-than expected German industrial orders. German June industrial orders rose 4.5%, a 0.8% rise was expected. EUR is experiencing selling interest above 1.4400 and sell stops are reported building around 1.4350. Further EUR gains will hinge on whether risk appetite continues to improve.

The technical outlook for the EUR is mixed as the EUR struggles to hold above 1.4400. Expect EUR support at 1.4300 with resistance at 1.4500.

  

GBP
GBP traded sharply lower Thursday pressured by the Bank of England's surprise decision to expand quantitative ease. The BOE elected to extend quantitative ease by £50 bln to a total of £175 bln and hold rate policy steady at 0.5%. The BOE decision to extend quantitative ease was directed at trying to boost the UK economy. The action suggests that the BOE is not yet confident that the recent uptick in the number of UK economic releases confirms that the UK economy has turned. A majority of analysts had concluded prior to the BOE meeting that the BOE was likely to limit expansion of quantitative ease because of improving UK economic data. Today the UK reported that RICS's house prices rose 1 to 2% last month. The RICS report is another sign that the UK housing market is stabilizing. The Sunday Times noted in its weekend edition  that the BOE was under pressure to extend quantitative ease and the British Chambers of commerce has called on the BOE to aggressively expand quantitative ease. The shadow MPC committee however has called on the BOE to consider exit strategies from quantitative ease. The BOE's decision to expand quantitative ease should have limited negative impact for the GBP if future UK economic data confirms that the BOE's actions are helping to boost the UK economy. Analysts at Barclay have forecast that GBP will trade at 1.8000 by year end. The key question is how much further is the BOE willing to go on quantitative ease? The trade will begin debating what level the BOE will stop its expansion of quantitative ease, £200 bln? £300 bln? GBP price direction remains the most sensitive to risk sentiment and should regain a bid if equities extend the recent rally. GBP downside was limited by report of better than expected US jobless claims and a modest new high in US equities for 2009. Because the BOE's extension of quantitative ease is essentially printing new money and could increase the risk of inflation, UK inflation data may emerge as an important guidepost for future BOE policy decisions. UK PPI is due for release Friday.

On August 7th, July PPI will be released expected at 0.2% compared to -0.8% last month.

The technical outlook for GBP is positive as GBP holds above 1.6800. Expect near-term support at 1.6696 the August 3rd low with resistance at 1.7043 the August 4th high.

 

CAD
CAD traded lower with downside limited by report of better than expected Canadian building permits report. Canada's June building permits rose 1%, a 4.2% decline was expected. Report of better than expected decline in US jobless claims initially boosted demand for equities and supported risk appetite. The threat of intervention remains the near-term focus for CAD trade. Late Tuesday, Canada's Finance Minister Flaherty said he is concerned with rapid changes in the CAD rate and that there are steps that can be taken to dampen the CAD's rapid appreciation. Flaherty's comments raise the risk of intervention to try to weaken the CAD. In late July, BOC Governor Carney said that stronger CAD versus the USD is an important brake on growth. CAD rallied 7.9% versus the USD in July supported by improving risk sentiment, rising equity and commodity markets and BOC's decision to refrain from implementing quantitative ease. The BOC is expected to increase its verbal intervention in the coming days. If the CAD continues to rally physical intervention may follow. The impact of BOC intervention will be limited if risk appetite continues to improve. Investors will likely use intervention inspired breaks in the CAD as an opportunity to buy the CAD at better levels. Focus turns to Friday's release of Canada's July unemployment. The unemployment rate is expected to rise to 8.8% from 8.6% in June. This would be the highest level for Canada's unemployment in eleven years. The net change in job creation is expected at -20k compared to -7.14k last month. A weak Canadian unemployment report could limit short-term gains for the CAD generating concern that the Canadian economic recovery will be moderate because of continuing loss of jobs.

On August 6th to building permits will be released expected -4.2% compared to a 14.8% rise last month.

The technical outlook for CAD is mixed as USD/CAD rises back above low 1.0700. Look for near-term support at 1.0550 the October 1st low with resistance at 1.0795 the August 3rd high.

 

AUD
AUD opened higher supported by report of better than expected Australian employment and the sharp gains in cross trade to the JPY. Australia's July unemployment rate was unchanged at 5.8%, the trade had expected a rise to 6%. Australia also created 32k jobs in July, the trade had expected 20k loss of jobs. The Australian employment rate suggests that Australian economy may be on the verge of recovery and data justifies the RBA's decision Tuesday to hold rate policy steady 3% and drop its easing bias. AUD/JPY traded over 1% higher with the AUD supported by today's Australian employment data and the JPY pressured by concern about deflation risk in Japan. AUD gains were partly limited by report that the PBOC may take action to cap lending. Asian markets traded lower reaction to the threat of a tightening by the PBOC but equity markets recovered and rallied in Japan, Europe and the US. AUD turned lower midsession tracking weaker US equities and by profit taking ahead of Friday US unemployment report. The main risks for further AUD gains are the possibility of intervention and overbought RSI. The RBA aggressively intervened selling AUD in June. RBA officials have expressed concern that strengthening AUD could hurt the recovery. Unemployment data is due for release from the US and Canada Friday. These reports will be an important for risk sentiment. AUD price direction will continue to track equities and commodity prices.

The technical outlook for the AUD is positive as AUD holds above 8400. Short-term AUD gains may be limited by overbought RSI's. Expect AUD support at 8235 the July 31st low with resistance at 8525 the September 22nd high.