• USD: Mixed, USD pares equity market inspired gains, Chicago PMI stronger than expected
  • JPY: Higher, Democratic Party wins in landslide, risk aversion spikes as the Shanghai Index plunges
  • EUR: Higher, EU CPI falls less than expected but remains in negative territory
  • CHF: Higher, KOF index rises more than expected, Jordan threatens to intervene if CHF rises
  • GBP: Higher, Hometrack prices rise for the first time in two years, concern about rising UK debt
  • CAD and AUD: AUD higher & CAD lower, RBA rate hike speculation, Canada GDP less than expected


As the month comes to an end the USD and JPY trade higher. USD and JPY gains are attributed to Japan's election and falling equity markets. Japan's opposition Democratic Party won Japan's national election by a landslide and will take power for the first time in 50 years. The Democratic Party is expected to increase spending to boost the economy and the election fuels hope for stronger economic outlook for Japan. The Shanghai Index declined 6% and this sparked selling of crude oil and commodity prices and a spike in risk aversion boosting safe haven demand for the USD and JPY. Commodity currencies were pressured by declining commodity prices and the re-emergence of doubt about the global recovery sparked by the drop in the Shanghai Index. CAD was pressured by report of weaker than expected to GDP.  UK markets were closed for holiday and GBP traded lower despite report that UK house prices rose for the first time in two years in August. Concern about rising UK budget deficit limits demand for the GBP. EUR traded lower pressured by declining risk appetite with downside limited by report of less than expected drop in EU August CPI. USD turned lower and JPY extended its rally after the release of better than expected Chicago PMI.

The USD may be supported by declining risk appetite if this weeks US economic disappoints. This week the US will release reports on manufacturing, pending home sales and employment. These reports may revive concern about the strength of US recovery. The growth linked currencies are most vulnerable to uncertainty about the global economy. The direction of equity markets will be key to the direction of the USD. September has historically been one of the worst months for US equities. Monday the equity market FX correlation broke down but this probably reflects month end flows. Focus turns to Tuesday's RBA policy meeting.

Today's US data:
Chicago August PMI rose to 50 from 43.4 in July, a reading of 46 was expected. USD edged lower after the release of the Chicago PMI. The report failed to boost demand for equities but is another indication the US economy is recovering.

Upcoming US data:
On September 1st July construction spending will be released expected at -0.1% compared to 0.3% last month along with August ISM, July pending home sales in August domestic auto sales. The ISM is expected at 50.1 compared to 48.9 in July. Pending home sales Index expected at 94.1 compared to 94.6 last month. Domestic auto sales are expected at 8.70%. On August ADP employment will be released expected -263k compared to -371k last month. Q2 final productivity and unit labor costs will be released along with July factory orders. Productivity is expected at 5.9% compared to 6.4% in the preliminary report. ULC is expected at -5.3% compared to the original report 5.8%. Factory orders are expected to rise 1% compared to 0.4% last month. On September 3rd initial jobless claims for the week ending 8/29 will be released expected 656k compared to 570k last month along with August manufacturing PMI expected 48 compared to 46.4 in July. On September 4th August unemployment rate would be released expected at 9.5% compared to 9.4 last month with nonfarm payrolls -220k compared to -247k in July.

JPY traded higher supported by the DPJ's landslide victory, positive Japanese economic data and safe haven demand as the Shanghai Index plunges. The DPJ's election victory may be a modest positive for the JPY as the DPJ party is expected to increase spending to boost the economy and are less likely to intervene in FX markets. The DPJ party is expected to focus on the domestic economy and move away from reliance on export led growth. The DPJ also won two thirds of the lower house of parliament. The big risk is that JPY may be vulnerable to concern about expanding budget deficit in Japan as the DPJ controls a majority of the parliament and could pass major new spending legislation with little opposition. The DPJ majority control in the lower house of Japan's parliament may also pave the way for reform in Japan. Japan's economic data released Monday was on balance positive with July industrial production rising 1.5%, August manufacturing rising to a three-year high and retail sales in July rising 0.4%. BOJ Governor Shirakawa says that he sees recovery in Japan but the recovery will likely be moderate. Shirakawa expects the BOJ to maintain accommodative policy. The sharp decline in the Shanghai Index generates fears about global recovery and sparked a spike in risk appetite generating safe haven demand for the JPY and USD. JPY was also supported by strong gains in cross trade with support from the Japanese election and the spike in risk aversion. On balance JPY gains appear more related to risk aversion than the election.

Thursday Japan will release in Q2 capital spending expected at -23% compared to -25.3 and Q1.

Key technical levels to watch in USD/JPY include support at 9.185 the July 13th low with resistance at 94.06 the August 28th high.

EUR traded mixed initially pressured by rising risk aversion as global equity markets decline and by selling in cross trade to the JPY sparked by the DPJ's landslide victory in Sunday's national election. EUR/JPY traded lower with the JPY supported by speculation that the new Japanese government will take action to boost Japan's economy. EUR downside was limited by report better than expected EU inflation data and stronger Chicago PMI. EU August CPI declined by 0.2%, the trade expected a 0.4% decline. EU inflation remains in negative territory but the CPI report may dampen concern about deflation risk in the EU. The ECB meet Thursday and no policy change is expected. The ECB is likely to hold rates steady at 1%, repeat its expectation that the EU economy will recover in 2010 and restate that inflation will turn positive as the economy recovers. Investors will look for clues to the timing of when the ECB will elect to hike interest rates as recent EU economic data has exceeded expectations. EUR turned higher after the release of stronger than expected Chicago PMI. The Chicago PMI supports recovery hope. Trading volume in the EUR was limited by UK holiday and month-end.

On September 1st EU unemployment will be released expected at 9.5% along with manufacturing PMI expected 46.5. On September 2nd EU PPI will be released expected -5.9% y/y along with EU GDP expected at -2.5% q/q and 0.3% m/m. On September 3rd EU retail sales would be released expected at -0.1% along with services PMI expected at 47.2.

The technical outlook for the EUR is mixed as the EUR rally stalls above 1.4400. Expect EUR support at 1.4209 the August 21st low with resistance at 1.4405 the August 27th high.

CHF opened lower pressured by broad USD gains sparked by weaker global equity market trade and a spike in risk aversion. CHF turned higher after the release of stronger than expected Chicago PMI. The PMI report helped to boost risk sentiment despite weaker equity markets. CHF remains range bound despite last week's report of a sharp improvement in the Swiss KOF leading index with gains limited by threat of intervention and speculation that the Swiss recovery continues to trail the rest of Europe. Improving growth outlook in Europe will help to boost the outlook for Swiss exports and demand for CHF. SNB officials are likely to continue to express concern about CHF strength. SNB's Jordan warned that the central bank would not tolerate CHF appreciation. Jordan's comments heighten the risk of intervention. Trade turns focus to this week's release of Swiss GDP and CPI data. The Swiss economic calendar includes Tuesday's release of Q2 GDP expected at -0.9% compared to -0.8% last quarter. Swiss August Purchasing Managers Index will also be released on Tuesday expected to approve the 47 compared 44.3 last month. Friday CPI will be released expected at 0.2% compared to -0.7% last month. Weaker GDP and lower CPI could increase the risk of intervention. Expect USD/ CHF support at 1.0485 the December 30th low with resistance at 1.0680 the August 27th high.

GBP opened lower despite report of improving UK home price data with selling attributed to rising risk aversion as equity markets decline. GBP was also pressured by continued concern about UK budget outlook. Hometrack reported that UK house prices rose for the first time in two years. The Hometrack report suggests that the UK housing market has stabilized. The BOE meet on September 10th and there remain concerns that the BOE may elect to again expand quantitative ease to support the UK economy. GBP has been underperforming with selling pressure attributed to ongoing concern about the outlook for the UK economy and in response to the BOE's recent decision to expand quantitative ease. In addition, GBP has been pressured by report of a record budget deficit in July and concern that rising deficit spending will force the UK government to issue more debt and eventually raise taxes to cover the spending shortfall. Improving UK economic data has failed to offset concern about the outlook for UK public debt and BOE expansion of quantitative ease. If the BOE decides to again expand quantitative ease would increase the UK government debt burden. At the last BOE policy meeting the policy board was split with three members including BOE Governor King cling for a wider expansion of quantitative ease. UK markets were closed for holiday limiting price action. GBP turned higher post release of Chicago PMI. Focus turns to this week's release of UK manufacturing and services PMI.

This week's UK economic calendar includes September 1st release of manufacturing PMI expected 50.8 and mortgage approvals expected 51.1k compared to 47.6 along with consumer credit expected at fall 0.1% and net lending expected at 0.3%. On September 2nd construction PMI will be released expected at 48 compared to 47 last month. On September 3rd services PMI will be released expected at 53.9 compared to 53.2.

The technical outlook for GBP is mixed as GBP falls below 1.6300. Expect near-term support at 1.6150 the August 27th low with resistance at 1.6446 the August 25th high.

CAD traded sharply lower pressured by falling crude prices weaker equities and report of weaker than expected Canadian GDP. A sharp drop in the Shanghai Index sparked selling of global equity markets and generates concern about the global growth outlook. Crude prices fell in reaction to weaker equity market trade and stronger USD. Canada's June GDP rose by 0.1%, to trade at expected a 0.2% rise. CAD was also pressured by Friday's report that Canada plans to sell its first global bond in a decade totaling $3 bln in US dollar bonds. According to the Canadian government the bond sales is to raise reserves and boost IMF lending. Some analysts have indicated that this could increase the risk of BOC intervention. CAD had been weakening since Tuesday's statement by the BOC's Lane expressing concern about the impact of CAD strength on the Canadian economy. Lane sees end of Canada's recession but he expressed concern about strength of the CAD. Lane's comments increase the risk that the BOC may take action to weaken the CAD. Last week Canada reported a record current account deficit in Q2 adding to selling interest in the CAD. There was little reaction to a statement from Canada's Finance Minister Flaherty that it is too early for Canada or other countries to reduce stimulus. CAD direction will remain closely correlated to speculation about the global recovery and risk sentiment. Risk of intervention is rising.

On September 4th August unemployment rate will be released expected at 8.6% and employment growth expected at -22.7. August IVEY manufacturing PMI will also be released on September 4th expected at 53 compared to 51.8 last month.

The technical outlook for CAD has turned negative as USD/CAD rises above 1.1100. Look for near-term support at 1.0894 the August 31st low with resistance at 1.1125 the August 17th high.

AUD traded lower start the session pressured by declining commodity prices and a sharp drop in the Shanghai Index. The Shanghai Index Is seen as the precursor of global growth outlook and AUD price direction has been closely correlated to the direction of the Shanghai Index. AUD was also pressured by mixed Australian economic data, with Q2 business inventories declined 3.4% q/q, Q2 operating profits declined by 7.8%, July new home sales rising by 0.1% and August inflation rising 1.7%. The RBA meet on Tuesday, September 1st. There has been speculation that the RBA would be the first major central bank hike rates as the global economy recovers. Last week, RBA watcher Mitchell said that the RBA may hike rates in October. J.P. Morgan analysts also suggest the RBA will hike rates in October. J.P. Morgan analysts cite recent Australian economic data which suggests that the Australian domestic economy has come out of the financial crisis with limited damage. Last week Australia reported a sharp increase in Q2 CAPEX. Increased CAPEX spending supports the J.P. Morgan analysis. The RBA is expected to hold rate policy steady at 3% Tuesday. The trade will be looking for clues to whether the RBA signals the next move will be a shift to a tighter policy bias. AUD edged higher for the day after the release of stronger than expected Chicago PMI.

On September 1st July building approvals will be released expected at 3.5% compared to 9.3% last month along with the Q2 current account expected -32.2 bln compared to -35.4 bln last quarter. On September 2nd Q2 GDP will be released expected at 0.6% compared to 0.4% last quarter. On September 3rd July trade balance will be released expected to improve 6.9 bln from 6 bln last month.

The technical outlook for the AUD is positive as AUD holds above 8300. Expect AUD support at 8239 the August 27th low with resistance at 8480 the August 15th high and 8525 the September 22nd high.