• USD: Higher, Q2 productivity soars, unit labor costs drop sharply, equities lower
  • JPY: Higher, BOJ leaves rate policy unchanged, says the economy has stopped worsening
  • EUR: Lower, German CPI falls more than expected raising the risk of deflation
  • GBP: Mixed, retail sales and house price balance and proves, trade deficit widens
  • CAD and AUD: AUD & CAD lower, concern about China's Q3 growth outlook, Canadian housing starts fall

USD and JPY traded higher Tuesday supported by a spike in risk aversion and weaker equity markets as China's economic data disappoints. GBP was initially supported by report of better than expected UK house price balance and retail sales. EUR opened higher despite report of a sharp drop in German inflation and turned lower in US session tracking weaker equity market trade. Weaker than expected economic data from China sparked a slight uptick in risk aversion and supported the JPY and selling of commodity currencies. China reported a smaller than expected rise in industrial output, weaker exports and new loans declined in July. Today's Chinese economic data generates concern about China's Q3 growth outlook and raises questions about the potential strength of the global economic recovery. The CAD was pressured by report of weaker than expected Canadian housing starts and weaker crude prices. US economic data was mixed with Q2 productivity reported up sharply and unit labor costs dropping sharply. These reports suggest that those still employed in the US are picking up the slack for the smaller labor force and the costs of labor have fallen sharply for business owners. This also means there is little slack in the labor market and employers may need to begin to hire.

The trade awaits Wednesday's conclusion of the FOMC policy meeting and this week's US Treasury bond auctions. The FOMC is expected to hold monetary policy unchanged. The trade will be looking to see whether the Fed makes any decision on exiting quantitative ease and for the Fed's view of the US economic outlook. The US Treasury will auction a record amount of bonds this week. The trade will look to gauge the level of demand, in particular foreign demand for these auctions. The level of demand for these auctions is important to USD price direction. Because of rising US budget deficits and the US need to fund deficit spending the USD is vulnerable if demand slips for these auctions. The trade also awaits Wednesday BOE inflation report. If the BOE inflation report raises the risk of deflation in the UK the GBP could experience a deeper selloff. The trade will be monitoring BOE Governor King's press conference following the inflation report for clues to whether the BOE is considering expanding quantitative ease. GBP has been pressured by last week's surprise decision by the BOE to expand quantitative ease.

Today's US data:
Q2 productivity rises most since 2003 up 6.4%. Unit labor costs fall 5.8%. This the biggest drop in labor costs since Q2 2000. Q2 productivity was expected to rise by just 3.7%. Annual labor costs were expected to fall by 1.5%. June wholesale sales rose 0.4% and inventories fell 1.7%. Sales were expected at 0.2% and inventories were expected to fall 0.8%. NFIB small business optimism index declined 1.3 points to 86.5. This was the second consecutive month that the index has declined.

Upcoming US data:
On August 12th June trade balance will released expected at -28.45 bln compared to -25.96 bln last month. On August 13th initial jobless claims for week ending 08/08 will be released expected at 535k compared to 550k last week. July retail sales and June business inventories will also be released on August 13th. Retail sales are expected to rise 0.3% compared to 1% last month. On August 14th July CPI will be released expected at 0.1% compared to 0.7% last month along with July industrial production and capacity utilization and August Michigan consumer sentiment. Industrial production is expected flat compared to -0.4% last month. Capacity utilization is expected to improve to 68.1 from 68 last month. University of Michigan consumer confidence is expected to improve to 68 from 66 last month.

JPY traded higher Tuesday supported by a spike in risk aversion sparked by disappointing economic data from China and fading global equity market rally. China's July economic data came in weaker than expected with exports and new loans lower and industrial output rises less than expected. The Chinese economic data sparked selling in Asian equity markets but the Nikkei managed to close 66 points higher. JPY was supported by early weakness in Asian equity markets and fresh concerns about potential strength of the global economic recovery as China's data suggests that growth may be slowing. The BOJ elected to hold rate policy steady as expected and left its economic assessment unchanged. According to the BOJ the Japanese economy has stopped worsening. The BOJ expects price declines to slow as the economy improves into the second half of the year and said that public investment is increasing and exports and production are picking up. The BOJ said it would maintain its purchases of corporate bonds and commercial paper and gave no insight into when the BOJ will exit quantitative ease. The Japanese Cabinet office said that economic conditions remain severe in Japan, the job market is weak, corporate profits and spending continued to fall and personal consumption shows signs of improvement. Monday Japan reported that machinery orders rose more than expected and exports were also higher. These reports suggest that Japan's economy is stabilizing. JPY price continues to maintain a close correlation to the direction of equity markets and risk sentiment.

On August 12th July corporate goods orders will be released expected at -0.1% compared to -0.3% last month. Also on August 12th revised June industrial output is due for release expected at 2.6% compared to 5.7% last month. On August 14th June tertiary activity will be released expected at -0.3% compared to -0.1% last month.

Key technical levels to watch in USD/JPY include support at 95.05 the August 7th low with resistance at 97.80 the August 7th high and 98.60 the June15th high.

EUR traded mixed to lower with gains limited by report of a sharp drop in German CPI. German July CPI declined 0.5% y/y. This marks the first annual decline in German CPI since 1995. The decline in German CPI suggests that the EU economy may be vulnerable to the risk of deflation. As noted many times, ECB officials do not see deflation risk in the EU and expect inflation to turn positive as the EU economy recovers in 2010. If the trend in EU inflation continues on a downward path deflation risk may force the ECB to consider additional monetary policy measures to boost liquidity. The ECB elected to hold rate policy steady last week at 1% and maintain a neutral bias. Recent EU economic data suggests that the economy is stabilizing. Monday the EU reported that business confidence was at its best level in a year. Last week the EU reported that manufacturing PMI rose to its highest level in a year. Apart from focus on the FOMC meeting and the US economic calendar the trade will be looking at this week's release of EU Q2 GDP industrial production and CPI. GDP is expected to confirm continued contraction but at a slower rate. The industrial production report is expected to show a modest rise. EU CPI is expected to show a slight rise. These reports will be important to investor speculation about outlook for the EU economy and ECB policy. The GDP and CPI reports will likely encourage the ECB to maintain steady monetary policy and the current size of the ECB's asset purchase program. EUR is experiencing selling interest above 1.4200.

On August 12th EU industrial production will be released expected to rise 0.3% compared to 0.5% last month. On August 13th EU Q2 flash GDP is due for release expected at -1.1%. On August 14th EU July HICP will be released expected at 0.1% compared to flat last month.

The technical outlook for the EUR is turning negative as the EUR struggles hold will above 1.4200. Expect EUR support at 1.4065 July 31st low with resistance at 1.4330.

GBP traded mixed with early gains sparked by report of improving UK house price balance and retail sales. GBP gains were limited by report of widening of the UK trade deficit and weaker equities. The trade deficit was expected at 6.2 bln The July RICS house price balance improved to -8.1. July BRC retail sales rose 1.8%. UK June trade gap widened to 6.45 bln from 6.17 bln last month. GDP has weakened since last week's surprise announcement that the BOE has elected to expand quantitative ease. Last Thursday, the BOE elected to extend quantitative ease by £50 bln to a total of £75 bln and elected to hold rate steady at 0.5%. Monday the Daily Telegraph reported that the BOE is expected to downgrade its growth forecast and warn about risk of deflation in the UK. This week's key event risk will be Wednesday's release of the BOE's quarterly inflation report. In light of the BOE's decision to expand quantitative ease last week and the Telegraph report which says that UK may be facing a Japanese style decade of deflation, the UK inflation outlook will become very important to future BOE policy decisions. How UK inflation data influences BOE decisions on whether to begin expand quantitative ease will be key to the direction of the GBP. BOE Governor King will hold a press conference after the release of the quarterly inflation report.

On August 12th June unemployment will be released expected unchanged at 7.6% with claimant count expected to rise by 15k along with the BOE quarterly inflation report.

The technical outlook for GBP is mixed as GBP falls below 1.6600. Expect near-term support at 1.6340 the July 30th low with resistance at 1.6610.


CAD traded lower for the fifth day in a row pressured by weaker than expected economic data from China and report of a larger than expected decline in Canadian housing starts. China reported that imports and exports declined for the ninth straight month, that lending also declined in July and industrial output rose at a slower than expected pace. China's growth outlook is key for the global economic recovery. Today's Chinese economic data generates concern that the global economic recovery will be weak. Canadian housing starts declined to 132k in July, the trade was looking for rise to 145k. The 4.3% drop in Canadian housing starts follows recent economic data from Canada which suggests the Canadian economy remains weak. Friday, Canada reported that jobs growth was much weaker than expected in July. BOC officials have warned that the recent strength of the Canadian dollar may hinder the Canadian economic rebound. Today's Canadian housing data and last week's employment report appear to confirm BOC fears about the impact of the strong CAD for Canada's recovery prospects. The threat of intervention remains the near-term focus for CAD trade. Last 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.

This week's Canadian economic calendar includes the August 14th release of June manufacturing shipments expected to rise 0.5% compared to -6% last month.

The technical outlook for CAD is negative as USD/CAD rises back above 1.1000. Look for near-term support at 1.0791 the August 11th low with resistance at 1.1115 the July 21st high.


AUD traded lower despite report of improving business conditions in Australia. AUD was pressured by concern   about China's growth outlook. Australia's July NAB business conditions improved by three points to +1 and the confidence index rose 6 points to +10. China reported that bank lending fell 77% in July and industrial production expanded at a slower rate than had been expected. These reports generate concern that China's economic recovery is beginning to stall and there also are fears that the Chinese markets and economy are facing another bubble. China is a major export destination for Australia and the Chinese economy is key to the potential for strength of the global economic recovery. Today's Chinese economic reports sparked moderate selling of global equity markets and a slight uptick in risk aversion adding to today's selloff in the AUD. Uncertainty about the growth outlook in China may emerge as a key short-term driver for AUD price direction. Most analysts suggest that China's growth is moderating but the recovery remains on track. AUD ended last week little changed versus the USD but was generally supported by a shift in RBA monetary policy. Last week the RBA elected to hold monetary policy steady at 3% and dropped its easing bias. In its monetary policy statement for August the RBA said that it will look to move towards more normal interest rate policy and that there is less need for further rate cuts. The RBA went on to upgrade its inflation and growth forecasts. The main risk to further AUD gains is investor positioning, risk sentiment and concern about global growth outlook. Sentiment towards the AUD may be reaching extreme on bullish consensus and the trade is heavily long AUD. AUD may be ripe for a deeper technical selloff.

On August 12th, Q2 Labor cost index will be released expected unchanged at 0.8%.

The technical outlook for the AUD is mixed to negative as AUD fails to hold gains above 8400. Expect AUD support at 8235 the July 31st low with resistance at 8455 the August 7th high.