• USD: Lower, trade deficit widens less than expected, Chinese officials downplay credit tightening fears
  • JPY: Lower, wholesale goods prices fall at a record annual rate of 8.5%, tracking risk sentiment
  • EUR: Higher, EU industrial output falls, supported by gains in cross trade to the RUB and GBP
  • GBP: Higher, dovish BOE inflation report, unemployment rises to 14 year high, tracking equities
  • CAD and AUD: AUD lower & CAD higher, recoup overnight losses, Chinese overcapacity, crude prices rise

 

Overview     
The markets were faced with a lot of negative news this morning and FX price action was volatile in pre-FOMC trade. USD and JPY started the session higher then turned lower as US equity markets rally and risk aversion swings back to risk appetite. The shift in risk appetite and improvement in US equity market trade was attributed to comments from Chinese policymakers trying to downplay the risk of credit tightening in China. The USD and JPY opened higher supported by a spike in risk aversion sparked by a 3% decline in the Shanghai index. The Shanghai index was pressured by concern about overcapacity in China and a report in the Daily Telegraph warning that credit tightening in China threatens the Chinese economy. The spike in risk aversion was also attributed to report that CIT was nearing bankruptcy and Atticus Capital closed two large funds. GBP was initially pressured by the BOE's quarterly inflation report which was seen as dovish. The BOE expects inflation to fall below 1% and that the UK recovery will be slow. UK unemployment rose to a 14 year high. GBP turned higher in US session tracking a rebound in US equities. GBP downside was also limited as the BOE upgrade of its GDP forecast. EUR traded firm despite report of weak EU industrial output with downside limited by gains in cross trade to the GBP and the Russian ruble. The Russian ruble declined to a six month low versus the EUR pressured by concern about the Russian economy. Russian Q2 GDP the fell the most on record. The commodity currencies opened sharply lower pressured by concern about global growth outlook. The commodity currencies rebounded in US trade tracking a sharp rally in the price of crude and recovery in US equities.

The FOMC policy statement will be announced at 1:15 CST. 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 USD would likely fall if the FOMC unexpectedly follows last week's BOE action to expand quantitative ease. The key issue is whether the Fed views the recent improvement in US economy nearing a sustainable recovery which would open the door for the Fed to consider a rate hike. The Fed is widely expected to dampen rate hike speculation.

Today's US data:
June trade deficit was 27.01 bln, the trade was expecting the trade balance to widen to 28.4 bln. Exports rose 2% and imports were up 2.3%. The May trade deficit was 25.9 bln.

Upcoming US data:
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
JPY traded mixed initially supported by a spike in risk aversion sparked by declining Asian equity markets and concern about the outlook for China's economy. The Shanghai index declined 3% and the Nikkei closed 155 lower. The Daily Telegraph reports that credit tightening and overcapacity in China threatens the Chinese economy. Reuters reports that China faces overcapacity in a number of industrial sectors. Tuesday China reported that exports and lending fell in July and industrial production rose less than expected. JPY upside was limited by report that Japans wholesale goods prices fell at a record 8.5% annual pace in July and a rebound in US equities. The drop in Japan's wholesale prices reflects weak demand and falling energy prices and increases the risk of deflation in Japan. The growing risk of deflation in Japan will likely prevent the BOJ from ending quantitative ease any time soon and force the BOJ to maintain steady monetary policy. Tuesday the BOJ elected to hold rate policy steady as expected and left its economic assessment unchanged. 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 outlook for the Japanese economy is mixed but may be improving. BOJ Governor Shirakawa said that the Japanese economy has stopped worsening. Shirakawa went on to say that exports and industrial production have improved but warned that the recovery will be weak. JPY price continues to maintain a close correlation to the direction of equity markets and risk sentiment. Today's report on China's economy and news from Russia suggests that the outlook for equity markets and the global economy remains uncertain. Risk sentiment quickly improved in the US session as the Dow posts triple digit gains.

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 97.15 the August 11th high.

EUR
EUR traded mixed to higher in pre-FOMC trade with gains limited by report of a sharp drop in EU industrial output. EU June industrial output declined 0.6%, a 0.3% rise was expected. The decline in EU industrial output raises concern about the EU economy. Tuesday, Germany reported that its annual inflation rate fell the most since 1995. The decline in German CPI suggests that the EU economy may be vulnerable to the risk of deflation. The ECB's Liikaken said the next two months will show whether the worst has passed for the EU economic crisis. 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. EUR downside was limited by gains in cross trade to the GBP and versus the Russian ruble and a triple digit rise in the Dow. GBP was pressured by the release of a dovish BOE inflation report and report that UK unemployment rose to 14 year high. The Russian ruble traded at its lowest level in six months versus EUR pressured by concern about weakening growth in Russia. Russia reported its biggest quarterly GDP loss on record. The Russian central bank was reported to be intervening selling the EUR to support the Russian ruble. Focus turns to Thursday's release of EU GDP. EU GDP is expected to confirm that the EU economy contracted at a slower pace than in Q1. EU Q2 GDP is expected to have contracted by 0.5% compared to -2.5% in Q1. The GDP report will be important to the debate over whether the ECB is correct in its optimism that the EU economy will gradually recover into 2010.

On August 13th EU Q2 flash GDP is due for release expected at -0.5%. 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 to hold above 1.4200. Expect EUR support at 1.4065 July 31st low with resistance at 1.4330.

GBP
GBP opened lower pressured by a dovish BOE inflation report and report that UK unemployment rose to 14 year high. In its quarterly inflation report the BOE said that inflation may fall below 1%. The BOE went on to say that they expect a slow UK recovery. UK June unemployment rate rose to 7.8%. The combination of continued job losses in the UK and risk of falling inflation opens the door to possible further extension of the BOE's quantitative ease. 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 £175 bln and elected to hold rates steady at 0.5%. The Telegraph carried a report Tuesday which says that UK may be facing a Japanese style decade of deflation. 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 with the key to the direction of the GBP. GDP downside was limited as the BOE is more optimistic about GDP outlook for the UK. The BOE expects GDP to rise to 2.9% over the next two years. GBP turned higher US session tracking the rally in US equity markets.

The technical outlook for GBP is mixed as GBP rebounds to trade above 1.6500. Expect near-term support at 1.6340 the July 30th low with resistance at 1.6610.

 

CAD
CAD continued to weaken to start the day trading at a three-week low versus the USD pressured by a spike in risk aversion and uncertainty about the global economic outlook. CAD turned higher tracking a rally in US equities and crude. Chinese officials warn about overcapacity in the industrial sector and analysts fear that credit tightening in China could pop the latest growth bubble. Tuesday, 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. Chinese economic data generates concern that the global economic recovery will be weak.  CAD was also pressured by report of weaker than expected new home price index. Canada's new home price index declined 0.2% in June. The trade had expected a reading of unchanged. Tuesday, Canada reported that Canadian housing starts declined 4.1% CAD downside was partly limited by report of better than expected Canadian trade balance and a recovery in US equities. CAD turned higher for the day supported by rally in crude prices above $71 a barrel. Canada's trade deficit was C$55 mln in June, the trade had expected a deficit of C$800 mln. Exports rose 2.3% and imports declined 1.3%. CAD direction will remain closely correlated to speculation about the global recovery and risk sentiment. Trade awaits the FOMC announcement later today to see whether the Fed extends quantitative ease.

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
AUD traded lower as China's Commerce Ministry warned that overcapacity in Chinese industry is pronounced. Concern about overcapacity in China sent Asian equity markets lower with the Shanghai index closing down 3%. AUD was pressured by concern about China's growth outlook. China is a major export destination for Australia and the Chinese economy is key to the potential for strength of the global economic recovery. Tuesday 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. Uncertainty about the growth outlook in China is 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 traded lower despite report that Australia is August consumer confidence rose to a two-year high up 3.7% and that wage price index rose 0.8%. The wage increase was in line with market expectations. AUD was also pressured by continued liquidation of AUDJPY cross as investors seek safety in the JPY. AUD/JPY turned higher US session tracking the rebound in US equities. AUD selloff appears to be overextended and reaching oversold on the RSI. Last week the RBA elected to hold monetary policy steady at 3% and dropped its easing bias. When the slide in Asian equity markets stocks the AUD should regain its rally with support from steady RBA policy outlook. AUD price direction remains closely correlated to risk sentiment and the direction of equity markets.

The technical outlook for the AUD is mixed as AUD falls below 8300. Expect AUD support at 8181 the August 12th low with resistance at 8390 the August 11th high.