• USD: Lower, UN calls for replacement of USD with a new global currency, risk sentiment improves
  • JPY: Higher, Japanese government sees economy improving, rising unemployment clouds the outlook
  • EUR: Higher, Trichet says economic indicators have been better than expected, global economy stabilizing
  • GBP: Higher, industrial output rises above forecast, FTSE rallies to 11 month high
  • CAD and AUD: AUD & CAD higher, Australia's business confidence rises, gold and crude prices surge

Overview     
USD traded sharply lower Tuesday with the dollar index trading at its lowest level since September 2008. The USD was pressured by a confluence of factors which included a UN report calling for the replacement of the USD with a new global currency to protect emerging markets, improving risk sentiment as equity markets rallied to the year's high in Asia and emerging equity markets trade above pre-Leman highs and positive economic data from Australia, the UK and Germany. Australia's business confidence rose to a six-year high. UK manufacturing output rose more than three times than expected and German exports posted a strong rise in July. The USD was also pressured by a surge in crude prices and the price of gold trading above $1000 an ounce. The G-20 pledge to continue to support the financial markets and maintain expansionary monetary and fiscal policies until recovery is secured adds to today's USD sell off and commodity price rise. Economist Roubini says the USD will weaken and is at risk of a crash if deficits are not controlled and reduced. The trade looked beyond mixed economic data from Japan and Switzerland with Japan's service sector index falling in August and Swiss unemployment rising to a six-year high. Diversification out of USD will likely continue until the G-20 signal an exit strategy from fiscal and monetary policy stimulus and the US addresses it's fiscal outlook.

Today's US data:
Consumer credit will be released after this report is published expected at -4 bln.

Upcoming US data:
On September 10th initial jobless claims for week ending 09/05 will be released expected at 960k compared to 970k last month along with July trade balance expected at -27.5 bln compared to -27.1 bln last month. On September 11th August import prices will be released expected at 0.9% compared to -0.7% last month along with preliminary University of Michigan consumer sentiment expected 65.3 compared to 65.7 last month. July wholesale inventories and the Treasury budget for August will be released on September 11th as well. Wholesale inventories are expected to fall by 1% compared to -1.7 last month the Treasury budget is expected to -161.50 bln compared to -111.9 1bln last month.

JPY
JPY traded higher supported by broad based USD selling inspired by improving risk appetite and the UN call for the USD to be replaced by a new global currency. JPY was also supported by a Japanese government report which states that the economy is improving. The report goes on to say that rising unemployment clouds the economic outlook in Japan. JPY was also supported by report that Japans corporate bankruptcies dropped for the first time in three months. There was little reaction to mixed Japanese economic data which included report that Japan's August service sector sentiment declined to 41.7 from 42.4 in July, August money supply rose 0.3%, bank lending fell 0.1% and the current account widened to 1.27 trln JPY. The trade also ignored a UK Times report that warns that DPJ policies could lead to fiscal collapse in Japan as focus remains on broad USD weakness. The DPJ party has pledged to increase spending to boost domestic growth. This could lead to larger and possibly unsustainable budget deficits in Japan. The DPJ party is expected to focus on promoting domestic growth and to move the Japanese economy away from dependence on export led growth. Optimism about improving domestic economic outlook in Japan has encouraged demand for the JPY and stocks. The inverse correlation of JPY to the direction of equity markets appears to be breaking down with optimism about the global economic recovery rising.

On September 10th August corporate good prices will be released along with leading indicators for July. Corporate good prices are expected to rise 0.5% compared to 0.4% last month and leading indicators are expected unchanged at 3.9%. On September 11th July machinery orders will be released along with July industrial output. Machinery orders are expected to fall 31% compared to -29.7 last month.

Key technical levels to watch in USD/JPY include support at 91.75 the July 13th low with resistance at 93.30 the September 7th high.

EUR
EUR traded sharply higher rallying above 1.4500 supported by report of rising German exports, positive statements from ECB President Trichet and broad USD weakness in reaction to UN call for replacement of the USD with a new global currency. G-20 pledge to maintain expansionary fiscal and monetary policies adds to the EUR rally. German exports rose 2.3% in July and imports were unchanged. The rise in exports suggests that the global economic outlook is improving generating demand for German exports. ECB President Trichet said that recent EU economic indicators have been better than anticipated and the global economy appears to be stabilizing. Monday Germany reported that factory orders rose 3.5% and German Sentix Investor Index improved. Not all the news was positive from EU with German industrial production falling 0.9% in July and Swiss unemployment rising to a six-year high as 4%. The UN issued a report which calls for a diminished role of the USD as the global reserve currency. The UN report said that the USD should be replaced with the new currency to protect emerging markets. According to the report emerging market countries are under represented at the IMF. The UN report suggests something equivalent to the Bretton Woods or European Monetary System is needed to replace the current world currency system.

On September 9th German August CPI will be released expected at 0.1% compared to flat last month.

The technical outlook for the EUR is positive as EUR breaks to upside of its recent range trade. Expect EUR support at 1.4329 the September 8th low with resistance at 1.4650.


GBP
GBP traded sharply higher supported by report of better then expected UK manufacturing output and improving risk sentiment as the FTSE trades at a 11 month high and equity markets in Asia trade at a new high for the year. UK July manufacturing output rose 0.9% and July industrial output rose 0.5%. UK manufacturing output was expected to rise 0.3%. There was little reaction to report that BRC retail sales declined 0.1% in August. The improvement in UK manufacturing output fuels expectations that the UK economy will emerge from recession in Q3. Today's manufacturing data from the UK follows Friday's report of a sharp jump in UK July auto sales. GBP had been underperforming pressured by rising UK debt and expansion of BOE quantitative ease. GBP played some catch-up Tuesday gaining in cross trade supported by improving risk appetite and G-20 pledge to maintain fiscal and monetary expansion until global recovery is secured. BOE meet on Thursday and no policy change is expected. Recent improvement in UK economic data will also make it less likely that the BOE will expand quantitative ease.

On September 9th trade July trade balance will be released expected -6.32 bln compared to -6.45 bln last month along with NIESR GDP estimate expected unchanged at -0.4%. BOE meet on September 10th, no policy changes is expected. On September 11th PPI will be released expected at 0.6% compared to 0.5% last month.

The technical outlook for GBP is improving as GBP rises back above 1.6500. Expect near-term support at 1.6320 the 8th low with resistance at 1.6670 the August 13th high.

CAD
CAD traded higher supported by rising equity and commodity prices and UN call for the USD to be replaced as the global reserve currency. Crude prices topped $70 a barrel and gold traded above $1000 an ounce partly reflecting broad USD weakness and G-20 pledge to maintain fiscal and monetary expansion. CAD gains were partly limited by report of weaker than expected Canadian building permits. Canadian July building permits fell 11.4%, the trade was looking for a 0.4% rise. The decline in the Canadian building permits generates concern about the outlook for Canada's economic rebound. Friday, Canada reported an unexpected improvement in jobs growth during August but the unemployment rate was also reported at an 11 1/2 year high. Most of the improvement in Canada's job growth was part-time work which may add to caution about the potential for Canadian economic recovery. Ivey manufacturing PMI rose above 50 which points to expansion of Canada's manufacturing sector.  CAD underperformed last week pressured by increased political uncertainty in Canada as the Canadian Liberal party said that they would no longer support the minority government threat of intervention. BOC meet on September 10th. The BOC is expected to hold rate policy steady at 0.25%.The trade will be looking for possible BOC comments on CAD strength.

On September 9th July building permits will be released expected at 0.6% compared to 1% last month. On September 10th July trade balance will be released expected at 0.9 bln compared to -0.06 bln last month. July New Housing Price Index will be released on September 11th expected at 0.1% compared to -0.2% last month.

The technical outlook for CAD is positive as USD/CAD falls below 1.1080. Look for near-term support at 1.0630 the August 4th low with resistance at 1.10975 the September 4th high.

AUD
AUD traded near a one year high supported by improving risk appetite, a surge in the price of gold and report of improving Australian business confidence. Asian equity markets traded near the highs for the year with the Shanghai Index up 1.7% supported by optimism about the global recovery. G-20 pledge to maintain expansionary fiscal and monetary policies supported commodity prices and global equity markets. Australia's August NAB business confidence rose to its highest level in six years up eight points to 18. AUD has been the best performing currency supported by RBA rate hike speculation and a sharp rise in the price of gold. The RBA is expected to be the first central bank to hike rates as the global economy recovers. Last week Australia reported much stronger than expected Q2 GDP. Stronger than expected GDP encourages speculation that the RBA will hike interest rates at the next policy meeting. Some analysts suggest that the RBA is actually falling behind the rate hike cycle and a number of analysts expect the RBA to raise rates before year end. The RBA elected to hold policy steady at 3% last Tuesday and failed to lay out a timeline for rate hikes. Australian press reports that a number of analysts expect the AUD to trade above 9000 in the months ahead. Today's AUD rally may encourage RBA being intervention.

This week's Australian economic calendar includes the September 9th release of July retail trade expected at 0.5% compared to -1.4% last month. On September 10th August employment will be released expected unchanged at 5.8% with employment change at -7k.

The technical outlook for the AUD is positive as AUD rises above 8600. Expect AUD support at 8528 the September 8th low with resistance at 8695 the August 28th high.