• USD: Mixed, supported by profit taking and UK banking fears resurface
  • JPY: Lower, Japan's Finance Minister Fujii reverses his support for strong JPY
  • EUR: Lower, German producer prices rise and EU current account surplus widens
  • GBP: Lower, Lloyds Bank fails FSA stress test, UK public-sector borrowing widened
  • CAD and AUD: AUD & CAD lower, tracking stocks and commodities, Canada's wholesale sales rise

Overview     
After weakening for most of the week and trading at a new low versus the EUR for 2009, the USD rebounded Friday. The rebound in the USD is attributed to fresh banking concern as UK's Lloyds Banking Group fails to pass the FSA stress test. Failure to pass the stress test may hinder the UK recovery. GBP traded at a four-month low versus the EUR and weakened versus the USD. There was limited impact from report that UK August public-sector borrowing widened by slightly less than expected. German producer prices rose last month and the EU current account surplus widened. EUR drifted lower. Japan's new Finance Minister Fujii downplayed his recent statements favoring stronger JPY. Fujii said he did not want to be labeled as favoring a strong JPY and JPY should reflect economic conditions in Japan. JPY traded lower pressured by Fujii's JPY comments. Commodity currencies weakened as stocks, oil and gold traded lower in overseas trade with downside limited by a reversal of overseas looses in commodities and equities in the US session. Canada's wholesale sales for July came in stronger than expected. The wholesales sales report limited CAD downside. No major US economic data was released in today's trade but there was a report that US household wealth increased by $2 trln in Q2 mainly reflecting the rebound in equity markets. The gain in household wealth may boost consumer spending and optimism about the US recovery.

Focus turns to next week's FOMC meeting. The trade will look to the FOMC meeting for clues to when the Fed may hike interest rates and exit from quantitative ease. According to the a Washington-based think tank Medley Global Advisors the Fed is divided over how quickly to raise interest rates once the economy show sustainable recovery. Medley suggests that two Fed members would support raising rates next week and some members are calling for an early exit from the Feds extraordinary accommodative policy measures. The FOMC meet on September 22nd. Fed rate hike speculation may help limit USD downside but majority consensus is that at FOMC rate hike is a long way off.

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

Upcoming US data:
Next week's US economic calendar includes the September 21st release of August leading indicators expected 0.7% compared to 0.6% last month. FOMC meeting will be held on September 22nd. 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 lower in reaction to comments from Japan's new Finance Minister Fujii that he does not want to be labeled as backing strong JPY. Fujii went on to say that JPY should reflect Japan's economy. For most of the week Fuji has suggested that a strong JPY would benefit Japan's economy and that he was against intervention to weaken the JPY to support Japan's exporters. The JPY has been strengthening during the week. As the new Japanese government tries to make the transition from an export led economy to focus on improving domestic demand a rapid strengthening of the JPY could derail the Japanese economic recovery. This may help explain the U-turn by Fujii in regard to his comments about a strong JPY and intervention. JPY was also pressured by comments from Japan's Deputy Governor Yamaguchi. Yamaguchi indicated that there still uncertainties to the outlook for the Japanese economy and he expressed concern about the BOJ maintaining nonconventional monetary policy for too long. Yamaguchi's comments may signal that the BOJ is nearing an exit from credit market support. We wrote a special report on this issue Thursday. JPY is trading near a seven-month high versus the USD and is expected to be well supported on breaks by the improving global economic outlook.

Next 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 89.70 the February 11th low with resistance at 91.80.

EUR
EUR traded lower Friday with downside limited by report of rising German producer prices, widening of EU current account surplus and gains in cross trade to the GBP and JPY. EUR rallied to its highest level for 2009 Thursday supported by improving risk sentiment and report of a sharp rise in EU exports. The sharp rise in EU exports confirms that the EU and global economy are showing signs of recovery. EU July current account surplus widened to 8.8 bln from 0.8 bln the last month. German producer prices rose 0.5% in August. The widening of the EU current account surplus and rising German producer prices confirm improving outlook for the EU economy. Germany's Merkel said she expects 5 to 6% growth in Q3 2009 for Germany. Today's EU economic data and Merkel's comments may contribute to increased speculation that the ECB will need to move up its timetable for a rate hike and exit from unconventional monetary policy measures. The IMF revised its forecast for the EU up by 0.5% for 2009 and 2010 but warned that there remain uncertainties about the global recovery and that now is not the time for the ECB to exit nonconventional monetary policy. EUR gains in cross trade to the GBP are attributed to fresh concerns about UK banking troubles as UK Lloyds Bank fails the FSA stress test. EUR cross gains versus the JPY are attributed to comments from Japan's Finance Minister Fujii reversing his earlier support for strong JPY. EUR will likely remain well supported on breaks by speculation about the global recovery and the possibility of an earlier than expected tightening by the ECB.

Next 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 23rd 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 trades above 1.4700. Expect EUR support at 1.4560 the September 15th low with resistance at 1.4800 and 1.4910 the August 22nd high.

GBP
GBP traded lower and weakened to a four-month low versus the EUR pressured by fresh concern about the UK banking system and widening of the UK public sector borrowing. Lloyds Banking Group failed the FSA stress test. This means that Lloyds will have to take more action to clean up its balance sheet and rid the bank of toxic assets. Lloyds will have to continue to receive support from the UK government. The continued trouble at Lloyds clouds the UK recovery outlook. The Lloyds news may have implications for BOE monetary policy. If the UK financial system remains under strain the BOE may be forced to expand quantitative ease once again. 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 today'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. We noted yesterday that it is now cheaper to borrow in USD than JPY and this may soon be the case for the GBP. The UK August public-sector borrowing rose to 10.27 bln from 5.09 bln last month reflecting lower tax receipts. Although today's UK public sector borrowing report was less than the 12 bln economists had expected the number still represents a significant widening of UK debt burden. GBP has underperformed partly because of concern about rising UK debt and the issue of how the UK will be able to finance the debt. 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. EUR/GBP traded above 90.00 for the first time in four 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.

The technical outlook for GBP is mixed as GBP falls below 1.6400. Expect near-term support at 1.6320 the September 8th low with resistance at 1.6570 the September 17th high.

 

CAD
CAD traded lower Friday pressured by a decline in the price of gold, oil and stocks. CAD downside was limited by report of much stronger than expected Canadian wholesale sales. Canadian wholesale sales for July rose 2.8%, well above an expected a 0.8% rise. The rise in wholesale sales reflects improved demand for auto parts and building materials. There was a drop in the inventory to sales ratio which suggests improving demand. The wholesale sales report contributes to optimism about the Canadian economic recovery. The wholesale sales report follows Thursday's report of a sharp rise in Canada's August leading economic indicators and report of strong manufacturing shipments from Canada in July reported earlier in the week. These data suggest that the Canadian economy is improving. At last week's BOC policy meeting the BOC reaffirmed its commitment to hold interest rates at 0.25% until mid-2010 provided inflation remains in check. Canada's August CPI rose 3% m/m, and 1.6% y/y. The core inflation rate rose by just 0.1%. BOC inflation target is 2%.  The CPI data is unlikely to change the outlook for steady BOC rate policy. CAD has benefited from rising gold prices and improving outlook for the US and global economy. Optimism about the US and global recovery fuels demand for growth linked currencies.

Next week's Canadian economic calendar includes September 21st release of international security transactions expected at 11bln compared to 10.51 bln last month. On September 22nd retail sales will be released expected at 1.4% compared to 1% last month.

The technical outlook for CAD is positive as USD/CAD falls below 1.1070. Look for near-term support at 1.0550 the October 1st low with resistance at 1.10805 the September 15th high.

AUD
AUD traded lower tracking weaker commodity prices and a 3% decline in the Shanghai Index. The rally global equity markets appears to be set to take a breather and this is being used as an excuse to book some profits in the AUD. There was limited reaction to a statement from Chinese officials reaffirming commitment to maintain stimulus. AUD price direction remains closely correlated to the outlook for China's economy and the Shanghai Index. AUD of society is also limited by threat of intervention. The RBA aggressively sold the AUD in August. The RBA sold A$576 mln in August. This compares to sales of A$705 mln in July and A$1.94 bln in June. The RBA has been less aggressive in intervening to try to weaken the AUD. The RBA selling of AUD is more of a smoothing operation than an effort to try to weaken the AUD. AUD has been one of the best-performing currencies supported by the global recovery theme and speculation that improving economic outlook will encourage the RBA to hike interest rates before year-end. The minutes for the September RBA policy meeting said that the RBA expects rates to rise if the recovery sustained. A number of analysts expect the AUD to trade above 9000 in the months ahead. Main risk to the AUD is the rally in equities and commodity markets may be stalling.

Next week's Australian economic calendar includes the September 21st release of August new car sales expected -1% compared to -6.9% last month. 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 rallies above 8700. Expect AUD support at 8640 and 8545 the September 10th low with resistance at 8820 the August 28th high.