• USD: Higher, CPI flat, industrial production and capacity use rise, consumer sentiment drops
  • JPY: Higher, BOJ concerned about exports and deflationary pressures, supported as stocks struggle
  • EUR: Lower, EU inflation falls more than expected
  • GBP: Lower, tracking equities and risk sentiment
  • CAD and AUD: AUD &CAD lower, RBA rate hike speculation, Canadian manufacturing shipments rise

 

Overview    
USD traded higher Friday as the trade attempts to balance risk appetite versus safety. The AUD rallied to 11 month high in overseas trade supported by comments from RBA Governor Stevens that normal the interest rate would be above the current 3% rate. Stevens's comments fueled RBA rate hike speculation and demand for the AUD. AUD has been one of the primary currencies benefiting from optimism about the outlook for global recovery and improving risk appetite. Improvement in risk appetite has been fueled by rising global equity markets, this week's FOMC policy statement which said that the US economy is leveling out, report that growth returned to Germany and France and Stevens comment that the global outlook is distinctly better. Despite these factors, concern about economic outlook in China emerged this week with a warning of overcapacity in China's industrial sector and today's report in the China Daily that China has banned expansion of steel production. The Shanghai index traded over 3% lower Friday in reaction to the news of the steel production ban. The drop in China's equity market took away some of the recent improvement in risk sentiment and sparked safe haven demand for JPY and AUD gave back all its early gains. In addition, Thursday's report of weaker than expected US retail sales and an unexpected rise in US jobless claims clouds the outlook for US recovery and the rally in US equity markets has stalled. Today's US economic data was mixed with July CPI flat and annual CPI falling the most in 59 years, industrial production and capacity utilization rising more than expected and Michigan consumer sentiment weaker than expected. The Fed is unlikely to rush to raise rates as the economy recovers because today's US CPI report shows there is little sign of inflation risk in the US and recovery is likely to be weak.

Today's US data:
July CPI was unchanged with core CPI up 0.1%, the trade had expected a rise of 0.1% for headline CPI and the core was as expected. July industrial production rose 0.5%, the trade was expecting a flat reading for industrial production. July capacity utilization rose to 68.5%, a reading of 68.3 was expected. August University of Michigan consumer confidence falls to 63.2, a reading of 68 was expected. USD rallied to the day's highs after the release of disappointing Michigan consumer confidence on concern about US recovery and a spike in risk aversion.

Upcoming US data:
Next week's US economic calendar includes the August 17th release of August Empire State manufacturing index and the August NAHB index. The Empire Manufacturing index is expected at 1 compared to 5.5 last month. The NAHB index is expected to improve to 18 from 17 last month. On August 18th July housing starts will be released expected to rise to 600k from 582k last month with July building permits expected to rise to 580k from 563k last month. Also on August 18th July PPI will be released expected to fall by 0.2% compared to a 1.8% rise last month. On August 20 initial claims for 08/15 will be released expected at 540k compared to the 558k last week. Also on August 20th July leading indicators will be released along with the August Philly Fed. Leading economic indicators are expected to rise 0.4% compared to 0.7% last month. The Philly Fed survey is expected to fall to -3 from -2 last month. On August 21st July existing home sales will be released expected at 4990k compared to 4890k last month.

JPY
JPY traded higher supported by safe haven demand as the Shanghai index traded sharply lower in reaction to reports that China has banned expansion of steel production. JPY was also supported in cross trade with gains attributed to a drop in risk appetite sparked by the declining Asian equity markets. Despite the drop in the Shanghai index the Nikkei managed to close 88 points higher. There was limited reaction to today's economic data from Japan or the release of BOJ policy minutes for the July 14/15th policy meeting. June tertiary index rose 0.1%, a 0.3% decline was expected. The BOJ policy minutes said that the Bank of Japan is extending its bond purchases until December. The BOJ also said they would consider expansion of bond purchases if warranted by market conditions. The minutes indicate that BOJ officials remain concerned about Japan's export outlook and continue deflationary pressures. JPY extended its early gains after the release of weaker than expected Michigan consumer sentiment as US equity markets trade to the day's lows. JPY price continues to maintain a close correlation to the direction of equity markets and risk sentiment.

Next week's Japanese economic calendar includes the August 17th release of preliminary Q2 GDP expected at 1% compared to -3.8% last quarter. On August 18th revised leading indicators will be released expected at 3.5% compared to 0.9% in the prior report. On August 19th June all industry activity will be released expected at 0.4% compared to 0.7% last month.

Key technical levels to watch in USD/JPY include support at 94.05 the July 28th low with resistance at 96.50 the August 13th high.

 

EUR
EUR traded lower with upside limited by report of a slightly larger than expected decline in EU inflation and weaker US equity markets. EU July inflation was reported to have declined 0.7%. The trade had expected a 0.6% drop. Core annual inflation was in line with expectation rising 1.3%. Today's EU data suggests that the EU faces an increased risk of deflation. EUR downside was limited by continued support from Thursday's release of the surprise rise in French and German Q2 GDP. French and German GDP data generates hope that the EU recession has ended and the EU economy is returning growth. Improving EU growth outlook helps to offset the impact of today's EU inflation report and the ECB is expected to maintain steady monetary policy. ECB officials expect EU inflation to turn positive by year end. Improving growth in Germany and France may encourage speculation that the ECB will raise rates sooner than expected.

Next week's EU economic calendar includes the August 17th release of June foreign trade expected at 2.7 mln compared to 1.9 bln last month. On August 18th German ZEW index will be released expected at 41.5 to 39.5 last month. On August 19th German July PPI will be released expected flat compared to -0.1% last month. 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 struggles to hold above 1.4300. Expect EUR support at 1.4189 the August 12th low with resistance at 1.4330 and 1.4415 the August 7th high.

    

GBP
GBP traded lower pressured by weak equity markets. GBP remains one of the currencies most sensitive to the direction of equities and risk sentiment. GBP has experienced selling pressure sparked by last week's surprise decision from the BOE to expand quantitative ease and this week's dovish BOE quarterly inflation report. Last Thursday, the BOE elected to extend quantitative ease by £50 bln to a total of £175 bln and elected to hold rates steady at 0.5%. In its quarterly inflation report the BOE warned that inflation could fall below 1% and that UK economic recovery will be slow. Bloomberg carried a report today which says that a currency strategist at ING is moderately positive the GBP and expects GBP to rise to 8000 versus the EUR with GBP supported by speculation that the BOE will withdraw aggressive stimulus next year ahead of the ECB. GBP currently trades at 8600 versus the EUR. UK inflation data is due for release Tuesday. UK inflation outlook will be a key factor that the BOE will look to for determining when to and quantitative ease.

Next week's UK economic calendar includes the August 18th release of July CPI expected at 0.2% of percent compared to 0.3% last month. On August 19 August CBI orders will be released expected at -57 compared to -59 last month. The minutes for the BOE August 5/sixth policy meeting will also be released on Wednesday. On August 20th July M4 will be released along with July net public-sector borrowing and July retail sales. M4 is expected to rise 0.1%% compared to 0.2% last month. Public sector borrowing is expected to fall to -6.25 bln from 19.98 bln last month. Retail sales are expected to rise 0.2% compared to 1.2% last month.

The technical outlook for GBP is mixed as GBP struggles above 1.6600. Expect near-term support at 1.6390 the August 12th low with resistance at 1.6720 the August 10th high.

 

CAD
CAD opened higher supported by positive Canadian manufacturing shipments data. Canada's June manufacturing shipments rose 1.9%, the trade had expected a 0.5% rise. The new orders component of the manufacturing shipments rose 18.4%. The Canadian manufacturing shipments report generated speculation that the Canadian recession may be nearing an end. The CAD gains were partly limited by concerns about the outlook for growth in China. The Chinese government announced a ban on expansion of the Chinese steel industry. The ban sparked selling of the Shanghai index and raise concern about Chinese growth. CAD gave back early gains pressured by weaker equity markets which were hit by report of an unexpected drop in US consumer confidence and sharp drop in the price of crude. CAD direction will remain closely correlated to speculation about the global recovery and risk sentiment.

Next week's Canadian economic calendar includes the August 18th release of June net foreign investment expected at C$7 bln compared to C$18.8 9 bln last month. On August 19th July CPI will be released expected unchanged at .03% and core inflation expected at 1.8% compared to 1.9% last month.

The technical outlook for CAD has improved as USD/CAD falls back below 1.0900. Look for near-term support at 1.0791 the August 11th low and 1.0635 the August 4th low with resistance at 1.1020 the August 12th high.

 

AUD
AUD traded at a new high for the year in overseas trade supported by hawkish comments from RBA Governor Stevens. Stevens said that there will come a time when the exceptional monetary stimulus in place at present is no longer be needed. At that time it will be appropriate for the RBA to adjust interest rates back towards normal levels. Stevens would not say what the normal level for interest rates should be but he indicated it would be much higher than the present emergency rate of 3%. At the start of the month the RBA elected to hold monetary policy steady and shift to a neutral bias. Stevens went on to say that he global outlook is distinctly better and that Australian inflation would not fall as much as had thought. The RBA will likely be the first central bank to tighten as the global economy recovers. AUD reversed early gains pressured by a 3% decline in the Shanghai stock index and weaker US equity markets. The Shanghai index closed at six-week low pressured by report that the Chinese government has issued a ban on expansion of steel production in China. According to the China Daily the Chinese government will place a three year moratorium on expansion of steel production. AUD should remain well supported on breaks by steady RBA policy. If AUD continues to rally above 8400 the price action may encourage the RBA to intervene. AUD price direction remains closely correlated to risk sentiment and the direction of equity markets.

The technical outlook for the AUD is positive as AUD rises above 8400. Expect AUD support at 8330 the August 13th low with resistance at 8525 the September 22nd high.