• USD: Higher, stronger than expected retail sales, Empire Manufacturing and higher inflation
  • JPY: Lower, new Finance Minister rejects weak JPY policy, US recovery hope
  • EUR: Lower, German economic sentiment weaker than expected
  • GBP: Lower, BOE may cut bank reserve rate, CPI posts smallest rise in four years, housing prices rise
  • CAD and AUD: AUD lower & CAD mixed, weaker Australian housing data, Canadian productivity slips

Overview     
USD traded higher Tuesday with the GBP pressured by report that the BOE is considering cutting the rate it pays on commercial bank reserves, EUR pressured by report of weaker than expected German investor confidence for September, CHF pressured by report of weaker than expected Q2 IP and AUD pressured by report of weaker housing data. JPY edged lower despite a statement from Japan's new Finance Minister Fujii that the Japanese government should not take action to weaken the JPY to benefit exporters. Equity market traded lower and it was not clear if the USD was also benefiting from upbeat comments from President Obama and the CEO of the Bank of America about US economic outlook or risk aversion as stocks struggle. President Obama said that the US job losses are bottoming out in the US economy looks to be growing again. CEO of Bank of America says US recovery may be stronger than expected. US economic data came in better than expected with the Empire Manufacturing survey arising, retail sales surging by 2.7% and PPI well above expectations. Business inventories continue to decline. The USD extended early gains as today's US economic data encourages speculation that the US economic recovery may be stronger than expected. These reports may fuel Fed rate hike speculation and encourage an earlier withdrawal of stimulus.  It appears that the FX focus is shifting to speculation that the US economy will experience a stronger than expected rebound. US yields may begin to rise and boost demand for the USD as stimulus is withdrawn. Investors will continue to try and balance optimism about economic recovery with the potential risk of a double to recession. Continued uncertainty about US global economic recovery will keep FX markets range bound.

Today's US data:
September Empire State Manufacturing survey rises to 18.8 from 12.08 in August, a reading of 14 was expected, August PPI rises by 1.7%, a reading of 0.8% was expected. Core PPI rose 0.2%, a 0.1% rise was expected. August retail sales rose 2.7%, a 2% rise was expected. July business inventories declined by 1%, a 0.9% decline was expected.

Upcoming US data:
On September 16th, August CPI will be released expected at 0.3% compared to flat last month along with Q2 current account expected it -91.5 bln compared to -101.5 bln in Q1. August capacity utilization industrial production and September NAHB will be released as well on September 16th. Capacity utilization is expected to improve to 69 from 68.5 last month and industrial production is expected 0.6% compared to 0.5% last month. NAHB is expected at 19 compared 18 last month. On September 17th initial jobless claims for week ending 9/12 will be released expected at 645k compared to 650k last week. August housing starts and building permits along with the September Philly Fed will also be released on September 17th. Housing starts are expected at 590k compared to 581k last month, building permits are expected at 580k compared to 560k last month and the Philly Fed is expected to improve to 6 from 4.2 in August.

JPY
JPY traded lower with downside pressure intensifying after the release of strong US retail sales, Empire Manufacturing and PPI inflation data. These reports may increase pressure on the Fed to move up the timetable for future rate hikes as the US recovery takes hold. Yield outlook may begin to move in favor of the USD. Stronger US recovery outlook increases the odds of an earlier than expected Fed rate hike while the BOJ is expected to continue unconventional monetary policy measures. According to former deputy BOJ Governor Yamaguchi, the BOJ is expected to maintain its current 0.1% mutan target into next year. Yamaguchi went on to say that the BOJ could re-examine unconventional measures ahead of the next calendar year and that policy will depend on economic and inflation outlook. The trade is also monitoring political developments in Japan as the new government is being formed. Japan's new PM is putting together his cabinet and announced that Hirohisa Fujii will be the new Finance Minister for Japan. Fujii says that the Japanese government should not take action to weaken the JPY to benefit exporters. The new Japanese government is expected to focus on boosting Japan's domestic economy and to try and reduce Japan's reliance on exports. Fujii's comments are consistent with the election platform of the DPJ party and come as no surprise.

On September 18th revised July leading indicators will be released expected at -8.3% compared to -10.7% at the first release.

Key technical levels to watch in USD/JPY include support at 90.60 the September 14th low with resistance at 93.30 the September 7th high.

EUR
EUR traded lower pressured by weaker than expected German economic sentiment and stronger than expected US retail sales, manufacturing and inflation data. German September ZEW economic sentiment index rose to 57.7 from 56.1 last month, a reading of 60 was expected. The current conditions indicator fell to -74 from -77.2 last month, a reading of -68 was expected. In addition, Swiss Q2 industrial orders rose by just 2.7%, the trade had expected a 7.3% rise. The annual rate of Swiss  industrial production fell by 14.9%.The German ZEW and Swiss industrial output data a generate concern about the potential strength of the EU economic and Swiss recovery. These reports may dampen ECB rate hike fears and increase pressure on the SNB to ease monetary policy and intervene to weaken the CHF. Based on today's data from Europe and the US, yield and growth differential may begin to move in favor of the USD. US economic data could force the Fed to move up the timetable for future rate hikes. EU and Swiss data will keep the ECB and SNB on hold. There was limited reaction to report that EU Q2 labor costs rose 4%.Focus turns to Wednesday's release of EU inflation report. EU inflation outlook is key to ECB policy as ECB officials have linked the removal of nonconventional monetary policy measures to inflation risk. Despite today's disappointing ZEW report a ZEW economist said he sees no need for the ECB to take further policy action

On September 16th EU August HICP will be released expected at 0.3% compared to -0.7% last month.

The technical outlook for the EUR is positive as EUR holds above the upside of its recent range trade. Expect EUR support at 1.4465 the September 9th low with resistance at 1.4655 the September 14th high.

GBP
GBP traded lower pressured by report that US retail sales rose at the fastest pace in three years, and by report that the BOE may consider expanding quantitative ease. The stronger than expected US retail sales rise coupled with a sharp jump in Empire State Manufacturing and US PPI may generate Fed rate hike speculation. GBP was pressured by speculation that the BOE may cut its bank reserve rate. BOE Governor King said that the BOE may cut the interest rate it pays on banks holding reserves with the BOE to try to further boost lending activity and the UK recovery. This would be another expansion of the BOE's quantitative ease. King expressed concern about rising unemployment weighing on future UK economic growth and he sees continued downside risks for inflation. Last week the BOE elected to hold rate policy steady and maintain the current level of quantitative ease. King's comments sparked selling of the GBP.  The BOE's decision to hold policy steady last week boosted demand for the GBP. GBP underperformed Tuesday as the BOE may be considering a cut on its bank reserve rate. GBP was also pressured by report that UK August CPI rose by its smallest amount since January 2005 reported at just over 0.4%. GBP traded lower despite report that August RICS for house prices rose the most in two years reported up 10.7%. The housing data suggest that the UK housing market is stabilizing. BOE officials however continue to have concern about the outlook for the UK economy and GBP may be vulnerable to revived BOE ease speculation.

On August 16th July unemployment will be released expected at 7.9% compared to 7.8% last month along with average earnings and claimant count expected at 2.5% and 26.8k respectively. On September 17th August retail sales will be released expected at 0.6% compared to 0.4% last month along with September CBI orders expected at -52 compared to -54 last month. On September 18th August public sector borrowing will be released expected 8.602 bln compared to 8.016 bln last month.

The technical outlook for GBP is mixed as GBP falls below 1.6500. Expect near-term support at 1.6320 the September 8th low with resistance at 1.6660 the September 15th high.

CAD
CAD traded mixed to higher bucking today's general broad strength for the USD. CAD firmed despite report of weaker than expected Q2 labor productivity. Canada's Q2 labor productivity was flat the trade had expected a rise of 0.6%. Labor costs rose by 0.3%. CAD was supported by speculation that stronger than expected US retail sales and manufacturing data will boost demand for Canadian exports. Last week the BOC elected to hold policy steady, refrained from implementation of nonconventional monetary measures and expressed concern about the strength of the CAD. The BOC also sees the start of recovery in the major economies. Today's US economic data seems to support the BOC conclusion about recovery in the major economies and CAD erased early losses supported by recovery hopes.

On September 16th July manufacturing shipments will be released expected at 2.5% compared to 1.8% last month. On September 17th August CPI will be released along with the August leading economic indicator. CPI is expected at 0.1% compared to -0.3% last month. The leading index is expected unchanged at 0.4%.On September 18ht July wholesale sales will be released expected at 0.8% compared to 0.6% last month.

The technical outlook for CAD is positive as USD/CAD falls below 1.1080. Look for near-term support at 1.0675 the August 8th low with resistance at 1.10930 the September 14th high.

AUD
AUD traded lower pressured by report of weaker than expected Australian housing data mixed reaction to the RBA policy minutes for the September meeting and US China trade friction. Australia's Q2 dwelling unit starts declined by 3.7%. The minutes for the September RBA policy meeting said that the RBA expects rates to rise if the recovery sustained, the Army is waiting fresh economic data. The RBA went on to say that inflation remains relatively high. The RBA minutes failed to signal possible timing of the rate hike in this dampened demand for the AUD. Last week the AUD traded at a new high for 2009 supported by improving outlook for Australia's domestic economy speculation the RBA will be the first central bank to hike interest rates as the global economy recovers. AUD was also pressured by US and Chinese trade friction. The US raised the tariff on Chinese tires in China may raise tarrifs on US chicken imports.  A number of analysts expect the AUD to trade above 9000 in the months ahead but uncertainty about the strength of the may limit demand for AUD. There are no major Australian economic reports due for release the remainder of the week. AUD price direction will key on the direction of equities, commodities and speculation about the global recovery.

The technical outlook for the AUD is mixed as AUD struggles to hold above 8600. Expect AUD support at 8528 the September 8th low with resistance at 8680 the September 11th high.