• USD: Mixed, PPI, housing starts and building permits fall, stocks rebound limiting USD gains
  • JPY: Lower, tracking rebound in global equity markets and Japanese election polls
  • EUR: Higher, German investor confidence rises to a three-year high, German central bank signals caution
  • GBP: Higher, CPI rises more than expected dampening deflation fears
  • CAD and AUD: AUD & CAD higher, hawkish RBA policy minutes, Canada's net investment flows rise

 

Overview     
Tuesday finds USD and JPY reversing part of Monday's gains as equity markets and the price of crude re-bound and analysts at Goldman Sachs says the US recession is ending. GBP was supported by report of higher-than-expected UK inflation. UK inflation was unchanged from last month. The UK inflation report reduces the risk of deflation and suggests that the UK recession may be ending. EUR edged higher supported by report that German investor confidence rose to three year high. EUR gains were limited by statement from a ZEW official that there is no reason for euphoria and the German recovery will likely to be gradual. Commodity currencies opened higher with equities and crude then revered as crude and equities gave back early gains. AUD posted limited reaction to RBA minutes for the August 4th meeting which signaled a moderately hawkish bias. JPY traded lower pressured by the rebound in equities. US economic data was disappointing with housing starts coming in below forecast and PPI falling more than expected. USD rebounded from overseas decline after release of weaker than expected PPI and housing data as the reports dampen risk appetite.

Today's US data:
July housing starts fall 1% to 581k from an upwardly revised 587k rise in June. Building permits fall 1.8% compared to 10% rise in June. July PPI falls 0.9%, a decline of 0.2% was expected. Core PPI rose 0.1% as expected.

Upcoming US data:
On August 20th initial claims for August 15th 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 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 lower pressured by a rebound in global equities and selling in cross trade. Equity markets were supported by report that Goldman Sachs sees the US recession ending and Home Depot earnings beat expectations. EUR/JPY traded higher with the EUR supported by report that German investor confidence rose to three year high. GBP/JPY traded higher with GBP supported by report of higher than forecast UK CPI. AUD/JPY traded higher with AUD supported by the rebound in equity markets and the release of hawkish RBA policy minutes for the August 4th meeting. Japanese election jitters may also be influencing JPY price direction. Japan's national elections will be held on August 30th. The LDP has ruled Japan for most of the last 54 years. Japanese election polls indicate that the opposition Democratic Party has a good chance of ousting the LDP in this month's election. Monday, Japan reported that its economy grew in the second quarter confirming that the recession was ending. Political analysts in Japan suggest that this positive economic news is coming too late to bring the LDP party election victory. Reuters reports that a victory for the Democratic Party would create a deadlock in Parliament. According to the Reuters report the Democratic Party promises to put more money in the hands of consumers to boost domestic demand and a may focus more on developing relations with Asian nations than the US. There have been reports that if elected the Democratic Party will be less inclined to buy US bonds or be as supportive of US reserve currency status. JPY price continues to maintain a close correlation to the direction of equity markets and risk sentiment.

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 and 93.50 the July 23rd low with resistance at 96.50 the August 13th high.

 

EUR
EUR traded modestly higher in overseas trade supported by report of above expectation of German investor confidence. German investor confidence rose to a three-year high reported at 56.1 compared to 39.5 last month. EUR gains were limited as ZEW officials downplay the report stating there is no reason for euphoria and the German recovery will be gradual. EUR turned lower in US session as stocks pare early gains in reaction to report of weaker than expected US PPI and housing starts. Today's rise in the German ZEW may increase the risk of an earlier than expected ECB tightening of monetary policy. ECB officials expect the EU economy to post gradual recovery and inflation to turn positive in 2010. Rhetoric from ZEW officials dampened the impact of today's report but based on the size of the rise in the ZEW index the outlook for growth in the EU appears to be improving. Last week Germany and France reported that second-quarter growth rose 0.3% signaling that these economies were emerging from recession. Monday the EU reported an improvement in its trade balance sparked by rising export sales. Economists suggest that although the EU economy is emerging from recession the strength of the recovery remains uncertain as unemployment continues to rise. ECB'S Weber said Monday it's too early to declare the financial crisis has ended. The direction of equity markets and risk appetite will be key to the direction of the EUR.

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 improved to 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 negative as the EUR breaks below 1.4100. Expect EUR support at 1.3965 the July 15th low with resistance at 1.4330 the August 17th high.

GBP
GBP traded higher supported by report that UK annual CPI was unexpectedly flat last month. UK July CPI was reported unchanged at 1.8%, a 1.5% rise was expected. Today's UK inflation report diminishes the risk of UK deflation and may limit the chance that the BOE will elect to expand quantitative ease. UK annual CPI remains below the BOE's 2% target. The BOE expects the UK economy to improve later in the year. Today's CPI report may encourage the BOE to move towards a more neutral policy bias. GBP has experienced selling pressure sparked by last week's surprise decision from the BOE to expand quantitative ease and last week's dovish BOE quarterly inflation report. Last Thursday, the BOE elected to extend quantitative ease by £50bln 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. UK inflation outlook is a key factor that the BOE will look to for determining when to end quantitative ease.

On August 19th August CBI orders will be released expected at -57 compared to -59 last month. The minutes for the BOE August 5/6th 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 positive as GBP rallies back above at 1.6500. Expect near-term support at 1.6220 the July 14th low with resistance at 1.6610 the August 14th high.

 

CAD
CAD traded mixed tracking crude prices and equity market gains. A larger than expected drop in US PPI and weaker than expected US housing starts sparked an uptick in risk aversion and selling of equities and commodities. These reports generate concern about US recovery outlook. There was limited reaction to you report of better than expected net foreign investment flows to Canada in June. Canada's June net foreign investment rose to C$10.51 bln compared to market expectations of a C$8.58 bln inflow. This marks the sixth consecutive month of net foreign investment flows to Canada. In early trade CAD was higher tracking the rebound in equity markets and higher crude prices. CAD traded sharply lower Monday pressured by concern about the global economic recovery as China's equity market traded sharply lower pressured by fear China's action to cap lending and limit expansion of steel production will hurt China's growth outlook. The Chinese economy is seen as key driver for the global recovery. There is a fear of possible bubble emerging in China's economy. CAD direction will remain closely correlated to speculation about the global recovery and risk sentiment. Focus turns to Wednesday's release of Canadian CPI. The BOC has refrained from adopting quantitative ease anticipating that Canada's economy will recover in the second half of the year and the recovery will limit deflation risk. A weak Canadian CPI will likely be discounted as the BOC has anticipated near-term price pressures in Canada over the next few quarters.

On August 19th July CPI will be released expected unchanged at 0.3% with core inflation expected at 1.8% compared to 1.9% last month.

The technical outlook for CAD has turned negative as USD/CAD rises above 1.1100. Look for near-term support at 1.0985 the August 17th low with resistance at 1.1225 the July 16th high.

 

AUD
AUD opened lower extending Monday's decline pressured by weaker commodity prices and concern about the global recovery. AUD found little support from the release of what was considered hawkish RBA policy minutes for the August 4th meeting. At the August 4th RBA policy meeting the RBA elected to hold rate policy steady 3% and shift to a neutral bias. The policy minutes for the meeting state that further rate cuts are unlikely, current policy is appropriate and there is less need for accommodative action as the economy recovers. According to the minutes, the RBA does not expect inflation to fall as much as earlier forecast. The RBA also expects strong demand from China. AUD started the overseas session higher as the Shanghai stock index recovered. AUD price direction remains closely correlated to the direction of equities and the outlook for the Chinese and global economy. Some investors may fear that the more hawkish bias of the RBA will threaten the Australian economic recovery .There is much debate over whether central banks will tighten monetary policy before the global economic recovery is sustainable.

Report of overcapacity in China's industrial sector, China's plan to cap lending and China's ban on expansion of steel production all combined to generate fear that the Chinese recovery has run its course. The Australian economy is highly dependent on exports to China and the China's growth outlook is seen key to the global recovery. The fact that he RBA may be laying the foundation for future rate hikes adds to concern about the global growth outlook generating fear that central banks may raise rates too soon which could choke off nascent recoveries in the global economies. AUD should remain well supported on breaks by steady RBA policy. AUD price direction remains closely correlated to risk sentiment and the direction of equity markets. The trade is closely monitoring the Shanghai index. AUD turned higher mid session as equities rallied.

The technical outlook for the AUD is mixed as AUD fails to hold above 8300. Expect AUD support at 8125 the July 29th low with resistance at 8330 the August 17th high.