• USD: Higher, recovery concerns, jobless claims rise, ISM declined and stocks fall
  • JPY: Higher, Tankan business sentiment improves, gains in cross trade
  • EUR: Lower, concern about EUR strength, unemployment rises to a 10 year high, German retail sales fall
  • GBP: Lower, manufacturing PMI falls for the second month in a row, IMF upgrades UK growth outlook
  • CAD and AUD: AUD & CAD lower, tracking weaker commodity and equity prices

Overview
Concern about the global recovery boosts the USD.USD traded higher Thursday supported by weaker equity market trade and report that the EU is concerned about EUR appreciation. Equity markets traded lower in reaction to disappointing economic data from Europe as the EU unemployment rate rises to a 10 year high, German retail sales are reported weaker than expected and UK PMI posts an unexpected decline. EU Monetary Affairs Commissioner Almunia said that the EU will be discussing EU strength ahead of the G-7 meeting this weekend and ECB President Trichet said that excessive FX moves have adverse implications. Last week French President Sarkozy said that European officials are becoming increasingly worried about the EUR rise. Commodity currencies were pressured by weaker equity market trade and a decline in metals and the price of crude. Today's data from Europe generates concern about the global recovery outlook. There is an emerging tension in Forex markets between recovery hopes and safe haven flows. The IMF says the world economy is recovering, but today's data from Europe generates concern that the recovery will be weak. USD may benefit from safe haven flows if concern about a weak global recovery sparks additional selling of global equity markets and commodities. Today's US economic data was mixed with jobless claims posting an unexpected rise and personal income rising the most since October 2001. USD traded to the day's highs immediately after the release of the disappointing jobless claims data. The rise stalled after the release of the stronger than expected rise in personal consumption spending. The ISM manufacturing index came in weaker than expected, construction spending rose more than expected and pending home sales rose to their highest level since March of 2007. US equities remained on the defensive after the release of today's data and USD and JPY traded higher. USD was also supported by   Bernanke's statement that there is no immediate risk to USD reserve status.

Focus turns to Friday's release of US September unemployment and nonfarm payrolls. The US employment report will be a key gauge for market sentiment about the outlook for the US recovery. Former Fed Chairman Greenspan says the US should begin to raise taxes and tighten credit as the economy recovers. Fed's Kohn said tightening of monetary policy will depend on economic and inflation forecasts not current conditions. Kohn said   that the Fed may raise rates while economy is still weak. Fed rate hike speculation may further dampen optimism about the US and global economic recovery. There is a major concern about how the US and global economy will perform as fiscal and monetary policy stimulus is withdrawn. According to the IMF the US economy is recovering faster than expected but consumers are unwilling to spend because of uncertainty about the labor market. 70% of the US economy is based on consumer demand and if the consumer does not increase spending the recovery will be at risk as stimulus is withdrawn. Today's data shows that US consumer spending has improved. Whether this improvement can be sustained will largely depend on labor market outlook.

Today's US data will:
Jobless claims for week ending 9/26 rose by 17k to 551k, a reading of -525k was expected. August construction spending rises 0.8%, a decline of 0.2%was expected. August personal income rose 0.2% and spending rose 1.3%. September ISM manufacturing index comes in at 52.6, a reading of 54 was expected. Pending home sales for August rose 6.4%.

Upcoming US data:
On October 2nd September unemployment will be released expected 9.8% compared to 9.7% with nonfarm payrolls at -188k compared to -216k last month. August factory orders will also be released on October 2nd expected at 1.1% compared to 1.3% last month.

JPY
JPY traded  higher supported by gains in cross trade as European currencies were pressured by report of EU concern about EUR appreciation and commodity currencies weakened in reaction to a decline in global equity markets. Japan's economic data was mixed with the Tankan big manufacturing diffusion index reported in line with expectations -33. CAPEX spending declined more than expected reported down 10.8%. August retail sales rose by 1%.EUR/JPY traded lower pressured by a statement from EU officials that the EU will discuss EUR appreciation, in reaction to report that the EU unemployment rate hit a 10 year high and German retail sales were weaker than expected. GBP/JPY traded lower with GBP pressured by report of an unexpected decline in UK September manufacturing index. AUD/JPY was pressured by weaker equity market trade as today's weak data from Europe generates concern about the global recovery outlook. JPY was also supported by safe haven flows as weaker equity market trade dampens risk appetite. JPY continues to benefit from diminished risk of BOJ intervention as the Japanese government plans to shift its focus to the domestic economy and rely less on exports for growth. JPY also benefits from speculation that the BOJ may soon let its corporate bond purchase plan expire and begin an exit strategy from quantitative ease. The OECD says that the BOJ should freeze interest rates until deflation ends and warned that price declines may choke off the nascent economic recovery in Japan.

On October 2nd August unemployment and household spending will be released. The unemployment rate is expected to rise to 5.8% from 5.7% and household spending is expected to rise by.3% compared to a 1.3% decline last month.

Key technical levels to watch in USD/JPY include support at 88.24 the September 28th low with resistance at 91.63 the September 24th high.



EUR
EUR traded lower pressured by a report that EU officials are concerned about EUR appreciation and in reaction to weaker than expected EU economic data. EU's Almunia says that the EU will be discussing EUR appreciation ahead of this weekend's G-7 meeting. ECB President Trichet warned that excessive FX moves have adverse implications. Monday Trichet said that he favors a strong USD.EU officials are expected to continue to try and talk the USD higher. The G-7 will meet in Istanbul this weekend and it appears that currency issues will be on the agenda. The EU unemployment rate rose to its highest level in 10 years at 9.6% and German August retail sales declined by 1.5%. These reports generate concern that the EU economic outlook remains uncertain. The IMF raised its outlook for next year's economic rebound but also warned that global rebalancing will be difficult at current Forex levels. It will be interesting to see how tensions develop within the G-7 about FX levels as EU officials express concern about the EUR rise versus the USD, Japanese officials appear to be moving in favor support a stronger JPY, BOE's King suggests that we GBP is positive for the UK economy, BOC officials express concern about CAD strength and Yuan appreciation is generally thought to be needed to help rebalance the global economy. There was limited reaction to reports that EU manufacturing PMI rose to 49.3 from 48.2 last month. EUR remained under pressure after the release of US jobless claims posted an unexpected rise.

 On October 2nd EU PPI will be released expected at -0.6% compared to -0.8% last month.

 The technical outlook for the EUR is mixed as EUR fails to hold last weeks rally above 1.4700. Expect EUR support at 1.4515 the September 14th low and 1.4465 the September 9th low with resistance at 1.4668 the    October 1st high.

 

GBP
GBP  traded lower pressured by report of an unexpected decline in UK manufacturing PMI with downside limited by gains in cross to the EUR as EU officials express concern about EUR appreciation. UK September manufacturing PMI declined to 49.5 from 49.7 last month. This was the second consecutive monthly decline in UK manufacturing .The PMI report generates concern about the outlook for UK economic recovery. Most of this week's UK economic data encouraged speculation that the UK economy is improving with report that house prices rose at the fastest pace in two years and consumer confidence reached its highest level 19 months. In addition the IMF raised its UK 2010 and GBP forecast to 0.9% from 0.2%. The IMF also says that the UK is facing a 2009 financing gap of £215bln which is 15% of UK GDP. GBP has been underperforming partly because of concern about rising UK government debt along with speculation that the BOE may soon reduce its remuneration rated pays on commercial bank holdings.  As noted above, EU officials are becoming increasingly concerned about the strength of the EUR. EU concern about EUR strength sparked selling of the EUR/GBP crosses and limited GBP downside.

The technical outlook for GBP is negative as GBP trades below 1.6000. Expect near-term support at 1.5825 the September 29th low with resistance at 1.6127 September 30th high.



CAD
CAD traded lower pressured by a spike in risk aversion as equity markets decline and weak economic data from Europe generates concern about the global recovery. CAD downside was limited by the IMF forecast that 2010 global growth will be stronger than originally forecast. CAD has remained well supported despite Wednesday's report that Canadian GDP for July was flat. The flat Canadian GDP reading suggests that the Canadian recovery may be stalling. CAD traded mixed erasing earlier losses after the report of stronger than expected US consumer spending. US consumer spending in August rose at its fastest pace since 2001. The report helps balance concern about the US recovery that was generated by an earlier report of an unexpected rise in US jobless claims. CAD remains vulnerable to comments from Canadian officials expressing concern that strong CAD is a threat to the Canadian economic recovery. In a speech Tuesday, BOC Governor Carney said that strong CAD is a major risk for the Canadian economy and outlook for inflation. Carney refused to answer a question about what level he thought was appropriate for the CAD. Carney went on to say that the Bank of Canada expects the economy to grow by 1.3% in Q3 and that growth may be faster because of gains in automobile production and lower inventories. Carney noted that part of the CAD rise is related to positive fundamentals and there is a growing sense that BOC officials are unlikely to implement physical intervention as long as the CAD rise is gradual.

The technical outlook for CAD is mixed as USD/CAD trades back below 1.0800. Look for near-term support at 1.0660 the September 23rd low with resistance at 1.10925 the September 29th high.

 

AUD
After rising to a fresh 13 month high Wednesday supported by strong Australian retail sales and improved optimism about the global recovery, AUD traded lower Thursday in reaction to weaker equity market trade and report of weaker than expected economic data from Europe. An unexpected drop in UK manufacturing PMI, weaker German retail sales and report that EU unemployment rate rose to a ten year high generates fresh concern about the global recovery. Today's US economic data was mixed but also contributed to concern about US recovery as jobless claims rise more than expected and manufacturing PMI rises less than expected. There were pockets of better than expected US data with pending home sales and construction spending reported higher than expected and consumer spending rising at its fastest pace in eight years. US equity markets traded with a triple digit loss after the release of today's US data and the decline in US equities pressured the AUD. AUD downside should be limited by RBA rate hike speculation. Earlier in the week RBA Governor Stevens said that interest rates will eventually need to rise and RBA watcher in the McCrann aid he expects the RBA hike rates in November or December. Australia's September PMI rose by 0.3%. The PMI rise is another indication that the Australian economy is improving.

The technical outlook for the AUD is positive as AUD trades at a new high for 2009. Expect AUD support at 8734 the September 30th low with resistance at 8950 the August 11th high.