• USD: Higher, jobless claims unexpectedly rise, LEI and Philly Fed beat expectation
  • JPY: Lower, BOJ officials warn that the export recovery may slow in the fall
  • EUR: Lower, German Finance Ministry questions whether the growth rebound is sustainable
  • GBP: Lower, UK budget deficit rises to a record in July, retail sales weaker than expected
  • CAD and AUD: AUD & CAD lower, RBA confirms intervention in July, Canadian wholesale sales rise

Overview     
USD traded mixed to higher Thursday as an unexpected rise in US jobless claims generates concern about the outlook for US economic recovery. The impact of the jobless claims rise was offset by report of a better than expected US leading economic indicators and a rise in the Philly Fed. The Conference Board says US recession is over. In overseas trade, USD maintained a relatively positive tone with GBP pressured by report that UK budget deficit hit a record high in July and retail sales were weaker than expected. JPY and the EUR were pressured by warnings from BOJ and German officials about the outlook for sustained growth in Europe and Japan. The Shanghai Index rallied and European equities traded higher but the equity market rally failed to spark any significant change in risk appetite. There was limited reaction to report that Swiss August ZEW index rose to its highest level in three years and Swiss exports rose 4.1% in July. The commodity currencies were mixed with AUD gains attributed to firmer equity market trade and upside limited by report that the RBA had intervened for the second month in a row selling AUD. Canada's wholesale sales beat expectation.

There is a great deal of uncertainty about the outlook for the global recovery. A Bank of America - Merrill Lynch survey shows that fund manager optimism is a six-year high and 75% of those surveyed expect the world economy to firm in the next 12 months. US money market funds declined by 22.6 bln last week. The decline in the money market funds may be an additional sign of improving risk appetite and as investors are willing to put money to work. It's interesting to note the strong correlation of USD to risk sentiment may be starting to break down as the USD traded higher despite rallies in global equity markets. It is unclear whether USD strength is related to pricing of improving US economic fundamentals or investor caution and concern that the recent rally in equity markets and commodities is well ahead of the fundamental news. The direction of China's equity market and investor balance of risk versus safety will continue to be the main drivers for FX trade.

Today's US data:
Jobless claims for week ending August 15th rose 15k to 576k, a fall to 550k was expected. July leading indicators rose 0.6%, a 0.4% rise was expected. August Philly Fed survey rises to 4.2, a reading of -3 was expected.

Upcoming US data:
On August 21st July existing home sales will be released expected at 4990k compared to 4890k last month.

JPY
JPY traded mixed initially weakening in overseas trade in reaction to firmer Asian equity markets. JPY firmed  in US trade in reaction to report of an unexpected rise in US jobless claims then turned lower after the release of better than expected US LEI and Philly Fed survey. The rebound in the Shanghai Index up (4.3%) and higher European equity market trade supported risk appetite but the equity market rally generated limited selling of the JPY. The unexpected rise in US jobless claims put a dent in risk appetite as the report raises concern about US economic recovery. If US unemployment continues to rise and remains elevated the US economic recovery will likely remain anemic. JPY downside was also limited by comments from BOJ's Mizuno that the recovery in Japan's exports may slow in the fall and that the recovery would require support from governments and central banks. These comments are seen as dovish and generate concern about the strength of the global recovery. Mizuno's comments suggest that he may favor an extension of the BOJ's quantitative ease and purchase of commercial paper and bonds. JPY price continues to maintain a close correlation to the direction of equity markets and risk sentiment.

Key technical levels to watch in USD/JPY include support at 93.50 the July 23rd low and 92.70 the July14th low with resistance at 95.30 the August 18th high.

 

EUR
EUR drifted lower despite stronger equity market trade with selling attributed to concern about the strength of the US and EU recovery. Report of an unexpected rise in US jobless claims during the week of August 15th generates concern about the US economic recovery. The German Finance Ministry warned that it remains to be seen whether the recovery in EU growth is sustainable. Last week Germany and France reported Q2 growth and that these economies are emerging from recession. There is a great deal of uncertainty about the potential strength of economic recovery in the US and EU. A statement from a BBK official that he sees no deflation risk in the EU had limited impact on EUR trade. Wednesday, Germany reported that producer prices fell the most on record in July. ECB officials however expect inflation to turn positive as the EU economy recovers into 2010. Report that Swiss July exports rose 4.1% is another sign that the EU economy may be picking up. The Swiss  export rise suggests improving demand. Swiss investor confidence also rose sharply in August reported at 18.6% from flat last month. The most significant aspect of today's EUR traded is that the EUR failed to gain much support from rising equity markets. It's too early to tell if the close correlation to equity markets and risk sentiment is breaking down but FX markets seem to be more selective about following equities. Focus turns to Friday's release of EU manufacturing and services PMI.

On August 21st EU August manufacturing and services PMI's will be released. The manufacturing PMI is expected to approve the 46.6 from 45.7 last month and services PMI is expected to improve to 46 from 45.7 last month.

The technical outlook for the EUR is mixed as the EUR consolidates around 1.4200. Expect EUR support at 1.4070 the August 18th low with resistance at 1.4330 the August 17th high.

GBP
GBP traded lower pressured by report of a record UK budget deficit in July and weaker than expected retail sales. UK July budget deficit rose to a record of 13.2 bln. The July retail sales rose just 0.4% compared to 1.3% rise in June. The record UK budget deficit means that the UK may be forced to sell more debt and raise taxes to support government spending. The UK government plans to raise a record 220 bln GDP this year and may have to increase debt insurance to cover the budget gap. A smaller rise in retail sales generates concern about UK recovery. Wednesday, GBP was pressured by the recently set the MPC minutes for the August meeting which showed that the MPC was split over the expansion of quantitative ease. At the August meeting the BOE elected to expand quantitative ease by £50 bln. According to the MPC minutes BOE Governor King and two other board members argued for an expansion of quantitative ease by £75 bln. The MPC voted 6 to 3 in favor of expanding quantitative ease by £50 bln. It's not clear but the record UK budget deficit may make it more difficult for the BOE to obtain authority to expand quantitative ease as UK government finances are spiraling out of control. Tory leader Cameron warned Wednesday that the UK government debt level can get to a place where people will cease to lend to the government. There was little reaction to report that UK M4 rose 1%. The impact of today's UK budget and retail sales data appeared to be offset by rising equity markets.

The technical outlook for GBP is mixed as GBP fails to hold above at 1.6500. Expect near-term support at 1.6220 the July 14th low with resistance at 1.6610 the August 14th high.

 

CAD
CAD drifted lower pressured by uncertainty about global recovery and continued impact from Wednesday's release of weaker than expected Canadian CPI. CAD was also pressured as US equities struggle after the release of an unexpected rise in US jobless claims. The US jobless claims rise offset report of a better than expected Canadian wholesale data. Canada's May wholesale sales posted a better than expected 0.6% rise. The trade had expected the wholesale sales to rise by 0.2%. The rise in wholesale sales reflects improving auto product sales and sales of food and beverages. CAD the downside was limited by the wholesale sales report and stable crude prices. Canada's July CPI declined by 0.3% m/m and 0.9% y/y. The core inflation rate was flat. The trade had expected a 0.2% decline in CPI with a 0.1% rise in the core inflation rate. Canada's inflation rate sank to the 56 year low. The drop in Canada's CPI reflects lower energy prices. As noted in our special report Tuesday, the BOC says it will keep interest rates at record low 0.25% until June 2010 as long as inflation remains weak. BOC officials are not concerned about deflation but may have to address the fact that the core CPI is falling. Part of the drop in Canada's CPI can be attributed to the strength of the CAD. Canadian CPI report may increase the risk of intervention rhetoric. The CPI report is unlikely to encourage the BOC to adopt quantitative ease as they decline in gasoline prices is a major factor in the CPI decline. The BOC has refrained from adopting quantitative ease anticipating that Canada's economy will recover in the second half of the year and the recovery will limit deflation risk. CAD direction will remain closely correlated to speculation about the global recovery and risk sentiment.

The technical outlook for CAD has turned negative as USD/CAD rises above 1.1100. Look for near-term support at 1.0905 the August 4th low with resistance at 1.1170 the July 20th high.

 

AUD
AUD traded higher in overseas trade supported by a sharp rebound in the Shanghai index and report of a rise in Australia's merchandise imports. AUD turned lower in US session has been rallying in US equities stalled in reaction to report of an unexpected rise in US jobless claims. AUD gains for also limited by RBA confirmation of intervention in July. Australia's July merchandise imports rose by 6%. The rise in imports suggests approving domestic demand. The RBA confirmed that it sold A$705 mln in July after selling a record A$194 bln in June. The RBA intervention appears to be targeting AUD rallies above the 8400. RBA officials are concerned that continued strengthening of the AUD could hurt Australian exports and choke off Australia's recovery. The fact that the RBA sold less AUD in July than June may be assigned at the RBA is becoming less concerned about the AUD rally. AUD price direction is the most sensitive to developments in the Chinese equity market as China is a major export destination for Australian goods and China's recovery is seen to demand for commodity prices. Report of overcapacity in China's industrial sector, China's plan to cap lending and China's ban on expansion of steel production all combined to generate fear that the Chinese recovery has run its course. AUD price direction remains closely correlated to risk sentiment and the direction of equity markets. The trade is closely monitoring the Shanghai Index.

The technical outlook for the AUD is mixed as AUD struggles to hold above 8300. Expect AUD support at 8125 the July 29th low with resistance at 8330 the August 17th high.