• USD: Higher, durable goods rise, new home sales improve, stocks trim early losses
  • JPY: Lower, trade surplus improves less than expected, Democratic Party downplays borrowing plans
  • EUR: Lower, German IFO rises to one year high, concern as to whether the recovery is sustainable
  • GBP: Lower, pressured by selling in cross trade and concern UK recovery will lag the EU and US
  • CAD and AUD: AUD & CAD lower, China plans to curb overcapacity, crude prices weaken, intervention risk

Overview     
USD continues to range trade with a firmer bias Wednesday. USD was initially supported by report that China plans to take steps to curb excess capacity, and that Colonial Bankgroup filed for Chapter 11 bankruptcy. These reports may revive concern about the global recovery outlook and spark safe haven for the USD. USD extended its gains after the release of better than expected US durable goods and new home sales data. Investors are not sure how to trade in improving US economic data. Today good US economic news was good for the USD but the data failed to break the USD out of its range.

It's not clear if the USD will be supported by the US economic recovery or pressured by improving risk appetite. Despite recent improvement in US economic data the strength of the recovery remains uncertain and there is a risk of a double dip recession as US consumer spending is likely to remain weak. US recovery speculation may encourage short-term demand for the USD but it's unlikely to take the USD much higher. GBP traded lower pressured by selling in cross trade to the EUR after the release of better than expected German IFO. GBP was pressured by speculation that the UK recovery will lag the EU. EUR/GBP rallied to 2 1/2 month after the release of the German IFO. German IFO rose to one year. GBP extended its losses after the release of US durable goods orders with downside pressure attributed to sell stops. The IFO report sparked an initial demand for the EUR but the EUR failed to sustain gains as IFO officials downplay the recovery outlook in the EU. Commodity currencies were pressured by concern about the outlook for China's economy with CAD pressured by threat of intervention. BOC's Lane expressed concern about the strength of the CAD and said that the Canadian recovery will be muted. Commodity currencies were also pressured by weaker oil prices as crude inventories rise sharply. Key question for FX trade is whether speculation that the US recovery may outpace Europe will boost demand for the USD? Bloomberg reports that number of currency strategists expect the USD to weaken as the global economy recovers from recession and investors seek currencies linked to growth.

Today's US data:
July durable goods rose 4.9%, to 1.7% rise was expected. The rise in durable goods was the largest since July 2007 and reflects the largest increase in transportation equipment orders since September 2006. Ex-transportation the durable goods rose less than expected 0.8%. July new home sales rose 9.6% to 433k compared to 395k last month.

Upcoming US data:
On August 27th jobless claims for week ending August 22nd will be released expected at 550k compared to 576k last week. Q2 GDP will also be released on August 27th expected at -1.4% compared to -1% last quarter. On August 28th July personal income and personal consumption will be released with both reports expected to rise by 0.2%. Final University of Michigan consumer confidence will also be released on the 28th expected 64.5 compared to 63.2 last month.

JPY
JPY traded lower pressured by improving US economic outlook and rising US bond yields as US durable goods and new home sales rise above forecasts. JPY traded mixed in cross trade weakening versus the EUR and gaining versus the GBP with EUR supported by report of above forecast German IFO an GBP pressured by falling UK bond yields. AUD/JPY traded mixed torn in different directions by commodity prices, concern about China's growth outlook and improving economic outlook in the US. There was limited reaction to a Wall Street Journal report which says that the opposition Democratic Party in Japan is talking down plans for borrowing. Tuesday, Japan's Finance Minister Yasano warned that the current fiscal conditions in Japan will not allow the Democratic Party to carry out its spending plans. Japan's national elections will be held on August 30th. The latest election polls indicate that the opposition Democratic Party will win the election. One of the numerous platforms of the Democratic Party is a pledge to increase spending to boost the domestic economy. Japan's economic data was mixed with July corporate service price index falling 0.2%, Japan's trade surplus quadrupled rising 364% as the pace of export decline slowed and August small business confidence index rose to 41.8. Asian equity markets traded higher with the Nikkei closing 142 points up. European and US equity markets traded mixed. The mixed price direction of global equity markets contributed uncertain outlook for risk sentiment and to narrow range trade for JPY.

On August 27th Japan's unemployment rate will be released expected at 5.4% along with household spending expected to rise to 0.2% along with July CPI expected to fall 1.8%. On August 28th July CPI will be released along with July retail sales and industrial output. CPI is expected to fall 0.2%, retail sales are expected to rise 0.3% and industrial output is expected at 0.5%.

Key technical levels to watch in USD/JPY include support at 92.70 the July 14th low with resistance at 95.30 the August 18th high.

EUR
EUR traded mixed initially supported by report of better than expected German IFO and by gains in cross trade to GBP. German IFO for August rose to 90.5 from 87.4 last month, current conditions rose to 86.1 from 84.4 expectations rose to 95 from 90.4. The IFO is at its highest level in a year and the report confirms that the EU economy has stabilized. EUR turned lower pressured by statements from IFO and ECB officials downplaying today's IFO report and warning that the EU economic recovery may not be sustainable. EUR/GBP traded at a two and a half month high supported by speculation that the EU recovery will outpace the UK. There remains a great deal of uncertainty about the potential strength and sustainability of the EU and global recovery. Concern that governments and central banks will withdraw stimulus too soon and the recent rise in bond yields generates risk for the global recovery tempering demand for the EUR. Today's early USD strength was attributed to report that China may take additional action to curb industrial over capacity. EUR traded to the day's lows after the release of stronger than expected US durable goods and new home sales. Positive US data is beginning to support the USD despite improving risk sentiment. Just a note of caution about today's US economic reports the durable goods numbers were mainly supported a sharp rise in transportation and new home sales by 8k home purchase tax credit which expires next month. Questions remain about the scope and sustainable of US and EU recovery.

On August 27th German of the CPI and EU M3 will be released. German CPI is expected flat and EU M3 is expected to rise 3.5% y/y. On August 28th EU business and economic sentiment is due for release. The business climate index is expected -2.71 and economic confidence index expected 76.

The technical outlook for the EUR is mixed as the EUR rally stalls above 1.4300. Expect EUR support at 1.4209 the August 21st low and 1.4045 the August 17th low with resistance at 1.4375 the August 21st high.

GBP
GBP traded lower pressured by disappointing gilt auction, selling in cross trade and speculation that the UK recovery will lag behind the EU and US. Tuesday the UK reported that consumer lending remains weak. Weak UK consumer demand may limit the strength of the UK recovery. GBP continues to weaken in cross trade to the EUR with selling pressure attributed to the BOE's recent decision to expand quantitative ease and from concern about expanding UK budget deficit. The BOE expanded quantitative ease by £50 bln earlier in the month UK reported a record budget deficit in July. The UK government plans to raise a record 220 bln GBP this year and may have to increase debt issuance to cover the budget gap. GBP traded at a two and half month low versus the EUR after the release of stronger than expected German IFO. Positive US durable goods and housing data failed to boost demand for GBP. The close correlation of GBP price direction to improving the sentiment has been breaking down. Focus turns to this week's release of UK GDP for further clues to whether the UK economy is emerging from recession along with the rest of Europe.

This week's UK economic calendar includes the August 27th release of GFK consumer confidence expected at -25. On August 28th UK GDP will be released expected at -0.8% for the quarter.

The technical outlook for GBP is negative as GBP trades below support at 1.6275. Expect near-term support at 1.6025 the July 10th low with resistance at 1.6356 the August 26th high.

CAD
CAD traded sharply lower pressured by weaker equity markets, lower crude prices and threat of intervention. US equities traded lower despite report of stronger than expected US durable goods and rising home sales. Crude prices traded sharply lower pressured by report of rising crude inventories and concern about global demand. BOC's Lane sees end of Canada's recession but he expressed concern about strength of the CAD, according to Lane Canada's economy is expected to start to grow this quarter along with the global economy but the recovery will be muted. CAD direction will remain closely correlated to speculation about the global recovery and risk sentiment. Report that China plans to curb overcapacity injects fresh risk aversion and concern about China's economic recovery. The Canadian economic recovery will be dependent on global demand. Global demand is its highly dependent on China. Global equity markets are struggling to maintain the current rally and this may limit demand for the CAD.

On August 28th the current account balance will be released expected at -9.1 bln along with industrial products price expected at 0.7% and the raw materials price index at 6.2%.

The technical outlook for CAD has turned mixed as USD/CAD rises back above 1.0900. Look for near-term support at 1.0831 the August 26th low with resistance at 1.1125 the August 17th high.

AUD
AUD traded lower pressured by fresh concern about the outlook for China's economy and weaker commodity prices. According to Chinese press China will take steps to curb excess capacity and wasteful investment in certain sectors. Every time a report emerges about China trying to slow the economy Chinese officials soon downplay the reports. Tuesday the PBOC said that China will keep monetary policy accommodative. This statement from the PBOC appeared to be directed at reducing fear that China will continue training credit. Fear that China would continue to limit lending generates uncertainty about the Chinese economic outlook and global recovery. China's economy is key the global recovery. AUD traded lower despite report that Australia's Q2 construction work done fell by less than expected 0.1%, the traded expected a 4% decline. AUD price direction is the most sensitive to developments in the China as China is a major export destination for Australian goods. The trade is closely monitoring the Shanghai Index and is wary of the threat of intervention. AUD price action is also closely monitoring commodities in particular the price of crude. Crude oil prices fell more than 4% over the last two days contributing to concern about the global economic outlook.

Thursday the Conference Board leading index survey will be released along with private capital expenditures for Q2. The leading index is expected to improve to -1 from -1.7% last month. Capital expenditures are expected to improve to -5% from -8.9% last month.

The technical outlook for the AUD is mixed as AUD rallies fails above 8400. Expect AUD support at 8217 the August 21st low with resistance at 8388 the August 26th high.