• USD: Higher, ADP job cuts higher than expected, stocks & commodities trade lower after weak services ISM
  • JPY: Higher, PBOC pledges to maintain accommodative monetary policy and a more flexible Yuan
  • EUR: Lower, EU retail sales fall, pressured in cross trade to GBP by contrasting UK and EU economic data
  • GBP: Lower, UK house prices, construction PMI and industrial production beat forecasts
  • CAD and AUD: AUD & CAD lower, Australia's exports rise, Canada's Flaherty warns of intervention


USD traded higher Wednesday as equity markets decline in reaction to report of larger ADP job cuts in July and weaker than expected US non-manufacturing ISM. The July ADP private sector employment report came in worse than expected at -371k. The ADP report suggests that US July nonfarm payroll will fall by 356k and US labor sector remains weak. The USD edged higher after release of the ADP report which shows that US companies cut more jobs in July than forecast, supported by concern that continued US job losses will limit the US economic recovery. Despite the weak US labor market outlook today's Wall Street Journal reports that a number of economists have raised their forecasts for the second half of 2009 and now expect GDP growth near 3%. The ADP report may inject some caution in recent optimism about economic recovery in the second half of the year. USD extended early gains after the release of weaker than expected non-manufacturing ISM as equities extend earlier losses. The direction of equities, commodities and risk sentiment are the main drivers for FX trade. Friday's release of US July unemployment will be a key test for the recovery in risk sentiment.

The main feature of Wednesday's trade was a strong early rally in the GBP supported by upbeat UK economic data and weaker CAD as Canada's finance minister warns of possible intervention to slow the CAD's rally. The UK reported improvement in construction PMI, above forecast industrial production and higher house prices. Today's UK economic data will encourage the BOE to maintain steady rate policy and the current size of its asset purchase program at Thursday's BOE policy meeting. Canada's Finance Minister Flaherty warned that steps can be taken to slow the CAD's rise. Canadian officials are concerned that strengthening CAD may choke the nascent recovery in the Canadian economy. EUR traded lower pressured by report of weaker EU retail sales and selling cross trade to the GBP. AUD traded lower pressured by report that Australia's service sector contracted in July. AUD downside was limited by report of improving export sales in June. 

Today's US data:
ADP July private sector employment declined by 371k compared to -463K in June, a reading of -345k was expected. June factory orders rose 0.4%, a 1% decline was expected. July non-manufacturing ISM falls to 46.4 from 47 in July, a reading of 48 was expected. The weaker than expected ADP report and non-manufacturing ISM took some of the shine off of risk appetite and sparked demand for the USD.

Upcoming US data:
On August 6th initial jobless claims for the week ending 08/01 will be released expected at 580k compared to 584k last week. 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 traded higher supported by weaker Asian equity market trade as the Nikkei closed 122 points lower and US equities traded lower in reaction to weak ADP employment and below forecast US nonmanufacturing ISM data. JPY price direction remains closely correlated to the direction of equities and risk sentiment. The weaker Nikkei trade sparked light demand for the JPY and a dip in risk appetite. JPY crosses were mixed with GBP/JPY trading higher in reaction to improving UK economic data. EUR/JPY and AUD/JPY traded lower with the EUR pressured by report of weak EU retail sales and AUD pressured by report of contraction in the Australian service sector during the month of July. GBP/JPY cross turned lower in US session with GBP pressured by weaker US equity market trade. There was little fresh news to encourage price direction of the JPY apart from a report that China's PBOC will maintain accommodative monetary policy and plans to encourage a more flexible Yuan. China's economic growth and recovery are key to the global recovery. Over the past few weeks there has been concern that China may tighten policy to try to slow the sharp rise in China's equity prices and the rapid rise in money supply growth. In the RBA monetary policy statement released Tuesday, the RBA said that the Chinese economy is strong again. The outlook for China's economy is a key factor for risk sentiment. Risk sentiment is the dominant factor driving short-term price direction and JPY.

This week's Japanese economic calendar includes the August 6th release of June leading indicators expected at 1.1% compared to 0.9% last month. On August 7th June machinery orders will be released.

Key technical levels to watch in USD/JPY include support at 93.50 the July 23rd low with resistance at 95.90 the July 30th high.

EUR traded lower pressured by report of weak EU retail sales and selling in cross trade to the GBP. EU June retail sales declined 0.2% m/m, a 0.3% rise was expected. On an annualized basis, EU June retails sales declined 2.4% compared to -3% in May. The overall pace of contraction in EU retail sales slowed in Q1 and today's retail sales report is unlikely to have any significant impact on Thursday's ECB policy decision. EUR was pressured in cross trade to the GBP after the release of better than expected UK economic data. The contrast of weak EU retail sales and above forecast UK industrial production and higher UK house prices suggests that the UK government  and Bank of England's aggressive fiscal spending and quantitative ease has been more effective to boost growth then the less aggressive actions taken by EU governments and the ECB. The week's main focus will be Thursday's ECB policy meeting. The ECB is expected to hold interest rate policy steady and maintain the current level of covered bond purchases. Based on Monday's release of improving EU manufacturing PMI the ECB is unlikely to increase its covered bond purchases. There is a possibility that in the press conference following the ECB policy decision Thursday the ECB may begin to discuss potential exit strategies from quantitative ease and lay the foundation for future rate hikes as the EU global economy recovers. RBC Capital analysts have raised their year end forecast for the EUR to 138 from 133 because of improving corporate earnings and rising risk appetite.

On August 6th the ECB meet, no policy change is expected. Also on August 6th German June factory orders will be released expected to rise 0.6%

The technical outlook for the EUR is positive as the EUR rises above 1.4400. Expect EUR support at 1.4300 with resistance at 1.4500.


GBP traded at a fresh 10 month high versus the USD and rallied in cross trade supported by upbeat UK economic data. The UK reported improvement in construction PMI, above forecast industrial production, higher UK house prices and a modest uptick in consumer confidence. UK June services PMI rose to 53.2 from 51.6 last month, June industrial production rose 0.5%%, July Halifax house prices rose 1.1% and July nationwide consumer confidence index rose to 60 from 59 in June. Today's UK economic reports coupled with this week's report of better than expected UK manufacturing PMI and construction PMI will encourage the BOE to hold rate policy steady and maintain the current level of quantitative ease. UK July construction PMI rose to a 16 month high at 47 compared to 44.5 last month. UK Q2 money supply growth was faster than expected at 3.7% compared to 3.3% in Q1. Monday the UK reported that manufacturing PMI rose above 50. These reports suggest that the UK economy has stabilized and the recession is nearing an end. The better than expected UK economic data may also encourage the BOE to discuss a timeframe for an end of quantitative ease. This week's main focus will be Thursday's Bank of England policy meeting. GBP direction will remain closely tied to equity markets, risk sentiment and speculation about the outlook for the UK economy. GBP drifted off the day's highs after the release of bigger than expected ADP job cuts and turned lower for the day after the release of weaker than expected US nonmanufacturing ISM. US equity markets traded lower after the release of the ADP report and hit new lows for the day after the ISM services report. GBP price direction remains the most sensitive to risk sentiment.

On August 6th the BOE meet, no policy change is expected. 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 trades above 1.6900. Expect near-term support at 1.6825 the August 3rd low with resistance at 1.7043 the August 4th high.


CAD drifted lower pressured by threat of intervention and weaker US equity market 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. At the July BOC policy meeting the BOC elected not to implement quantitative ease. The Fed's decision to implement quantitative ease has been a major factor contributing to weaker USD trade. The contrast of BOC and Fed policy has been positive for the CAD. 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 June 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 traded lower pressured by mixed Australian economic data and continued profit taking as the global equity market rally stalls. Australia's June trade deficit posted an unexpected improvement narrowing to a A$441 mln deficit, the trade had expected an A$800 mln deficit. Exports rose 2% and imports were unchanged. Not all the news from Australia was positive with July new vehicle sales reported down 26.8% and Australia's service industry contracting in July. The AIG Performance of Service Index fell to 44.1 in July. Today's Australian economic data suggests that the Australian economic recovery faces a tough road ahead and that the impact of the Australian government's fiscal stimulus plans may be starting to fade. AUD downside will be limited by the RBA's decision Tuesday to hold rate policy steady at 3% and end its easing bias. The main risks to the for AUD is the possibility of intervention and potential that the global equity market rally and rebound in commodity prices is getting ahead of the fundamental news. 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, Canada and Australia this week. These reports will be an important for risk sentiment. AUD price direction will continue to track equities and commodity prices.

On August 6th July unemployment will be released expected at 5.9% compared to 5.8% last month with jobs growth expected at -15 k compared to -21.4 k last month.

The technical outlook for the AUD is positive as AUD rallies 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.