• USD: Lower, durable goods fall more than expected, consumer sentiment rises, new home sales rise
  • JPY: Higher, Finance Minister Fujii says he is opposed to intervention in foreign exchange markets
  • EUR: Higher, German consumer confidence rises to a 16 month high, threat of SNB intervention
  • GBP: Higher, Darling says the UK is not seeking a weaker GBP
  • CAD and AUD: AUD & CAD higher, tracking equity markets and risk sentiment

Overview
Very interesting and whippy price action in the foreign exchange markets Friday. The JPY traded at its highest level in seven months versus the USD, GBP declined to its weakest level in six months versus the EUR and a four month low versus the USD and, the USD was on the defensive. The JPY rally is attributed to a statement from Japan's Finance Minister Fujii that he is opposed to intervention in the foreign exchange markets and safe haven flows sparked by a 2.6% decline in Nikkei stock index. GBP decline is partly a reflection of heavy selling in cross trade to the JPY and EUR as BOE Governor King said Thursday that a weak GBP will help to rebalance the UK economy. GBP downside was limited by Darlings statement that the UK does not want a weaker GBP. A debate over the timing of the withdrawal of stimulus also impacted today's FX trade. Part of today's USD decline is attributed to the release of the draft G-20 communiqué which says G-20 countries will avoid premature withdrawal of stimulus. The G-20 draft communiqué helped to stabilize European and US equity market trade and boost risk appetite. The improvement in risk appetite was limited by a Wall Street journal article written by the Feds Warsh warning that the Fed may have to raise rates sooner than latter. Warsh went on to say that the Fed may have to be aggressive in reversing its accommodative policy actions. The continuation of fiscal and monetary stimulus by G-20 nations is a negative for the USD. If the Fed begins in early withdrawal of stimulus it could be a positive for the USD. The USD is emerging as the favored funding currency for carry trades because of low US yields and the Feds pledge to maintain low level for an extended period. Fed policy will be key to USD outlook. US economic data was mixed with durable goods orders down more than expected, final Michigan consumer sentiment revised to its highest level in 20 months, and new home sales for August at their best level since last September. USD initially firmed in reaction to the weaker than expected durable goods report and turned lower after the release of the improvement in consumer sentiment and new home sales as equity markets erase early losses. Focus turns to next week's release of US unemployment and nonfarm payrolls for September.

Today's US data:
August durable goods fall 2.4%, a 1.1% rise was expected. Ex-transportation durable goods orders were unchanged in August. Final Michigan consumer sentiment rose to 73.5 compared to 65.7 last month, a reading of 70.2 was expected. August new home sales rise by 0.7% to 429k, a reading of 450k was expected. This was the highest level for new home sales since September 2008.

Upcoming US data:
Next weeks US economic calendar includes the September 29th release of July Case Shiller House Price Index expected at -14.3 compared to-14.3 compared to -15.4 last month. September consumer confidence will also be released on September 29th expected at 56.5 compared to 54.1 last month. On September 30th September ADP employment will be released expected at -212k compared to -298k last month. Final Q2 GDP will also be released on September 30th expected at -1.1% along with September Chicago PMI expected 51.2 compared to 50 last month. On October 1st initial claims for the week ending 9/26 will be released expected at -525k compared to -530k last week. August personal income and consumption will also be released on October 1st expected at 0.1% and 1% respectively. August construction spending, September ISM index and pending home sales index will also be released along with September domestic auto sales on October 1st. Construction spending is expected unchanged  at -0.2%, the ISM index is expected 54 compared to 52.9 last month, pending home sales are expected at 99.1 compared to 97.6 in July. On October 2nd September unemployment will be released expected 9.8% compared to 9.7% with nonfarm payrolls at -188k compared to -216k last month. August factory orders will also be released on October 2nd expected at 1.1% compared to 1.3% last month.

JPY
JPY traded at a seven month high versus the USD and surged in cross trade supported by a statement from Japan's finance minister that he opposes intervention in foreign exchange markets and safe haven flows sparked by a 2.6% decline in the Nikkei. Japan's new Finance Minister Fujii said that he opposes intervention in foreign exchange markets. Fuji has been inconsistent in his statements about intervention in Forex markets waffling between opposition to intervention, to making statements earlier in the week that he did not want to be labeled as a supporter strong JPY and that JPY should reflect economic fundamentals in Japan. Confusion over Japan's intervention policy is likely to continue as the new Japanese government plans to transition Japan's economy from dependence on exports and focus on boosting domestic demand. This shift in focus means that the new Japanese government will rely less on a weak JPY and intervention to boost export competitiveness. The incoming foreign exchange advisor to Japan's finance minister, Gyohten said Thursday that the Japanese government should not rule out FX intervention and should retain currency market intervention as a policy option to counter rapid foreign exchange movements that could destabilize economies. Investors will be looking to see how much influence Gyohten will have on Japan's foreign exchange intervention policy. JPY was also supported by repatriation flows in front of Japan's fiscal year-end on September 30th. Seasonal repatriation flows in front of Japan's fiscal year end coupled with the G-20 pledge to maintain stimulus should continue to boost demand for the JPY.

Next week's Japanese economic calendar includes the September 29th release of August CPI expected at -0.3% compared to 0.3% last month. On September 30th August industrial output will be released expected at 1.9% compared to 2.1% last month. Housing starts and construction orders for August will also be released on September 30th.  Housing starts are expected to fall 0.8% compared -0.4% last month. Construction orders are expected to fall by 24.5% compared to -42.8% last month. On October 1st the September Tankan Index will be released expected at -35 compared to- 48 last quarter with CAPEX spending expected at -11%. August retail sales will also be released on October 1st expected at 0.4% compared to -0.2% in July. On October 2nd August unemployment and household spending will be released. The unemployment rate is expected to rise to 5.8% from 5.7% and household spending is expected to rise by.3% compared to a 1.3% decline last month.

Key technical levels to watch in USD/JPY include support at 89.70 the February 11th low and 88.85 the February 4th low with resistance at 92.08 the September 22nd high.

 

EUR
EUR traded higher firming in reaction to report that German consumer confidence rose to its highest level in 16 months and by gains in cross trade to the GBP. German October GFK consumer confidence index rose to 4.3% from 3.8% last month. The rise in the German consumer confidence is another sign that the EU economy is emerging from recession. There was limited reaction to report that EU August M3 rose by 2.5%. ECB officials continue to urge caution about the outlook for the EU recovery. ECB's Mersch said that the financial crisis is not completely over that the ECB would not implement an exit strategy until interbank markets are secured. Birch went on to say that an early exit from monetary policy stimulus could lead to double dip recession. ECB's Weber warns that economic activity will remain subdued because of the risk of rising unemployment. This week's economic data points to moderate recovery in the EU with German IFO business confidence improving, manufacturing and services PMI rising and EU industrial production reported above expectation. There was limited reaction to report that the Swiss KOF Institute cut its Swiss 2009 GDP outlook to -3.4% and a comment from the SNB's Jordan that the SNB will continue to take action to fight the appreciation of the CHF versus the EUR.EUR/CHF cross edged higher in reaction to Jordan's intervention rhetoric.  EUR/GBP traded above 9150 with GBP pressured by a statement from the BOE Governor King that a weak GBP will help to rebalance the UK economy. EUR traded lower after the release of weaker than expected US durable goods as equity markets reversed early gains  and turned higher in reaction to report of rising US new home sales and better than expected Michigan consumer sentiment. Good news for US economy is bad news for USD.

Next week's EU economic calendar includes the September 28th release of German CPI expected at 0.2%.On September 29th EU business climate will be released  expected at -2.01 compared -2.21 last month. EU money supply is also expected to be released on September 29th expected at 4%. On September 30th German unemployment rate will be released expected at 8.4% compared to 8.3% last month. On October 2nd EU PPI will be released expected at -0.6% compared to -0.8% last month.

The technical outlook for the EUR is mixed as EUR fails to hold rallies above 1.4700. Expect EUR support at 1.4561 the September 15th low with resistance at 1.4800.

     

GBP
GBP traded lower versus the USD and at a six month low versus the EUR pressured by sell stops triggered below 1.6000 sparked by BOE Governor King's support for a weaker GBP. Thursday BOE Governor King said that a weak GBP will help to rebalance the UK economy. It is clear from Kings comments that the BOE would like to see a weaker GBP to help stimulate UK export growth and boost inflation. GBP was also pressured by report that UK business investments declined by 10.2% in the second quarter. The GBP continues to underperform and weakened over last few days with selling pressure attributed to a Daily Telegraph report that the BOE has called an emergency meeting next Tuesday with major economists to discuss financial crisis. BOE officials denied that the meeting to be held Tuesday would be a crisis meeting and said that the meeting was to update on the impact of quantitative ease. GBP also remains vulnerable to rumors that the BOE is considering cutting its remuneration rate on funds held for institutions by the BOE.EUR/GBP traded at a six month high breaking above 9150 in reaction to Kings weak GBP comment. Near term target for EUR GBP is 9400 with some analysts seeing a target of parity in the months ahead. GBP rallied from the day's lows in reaction to a statement from UK Chancellor Darling that at the UK government is not seeking a weaker GBP.

Next week's UK economic calendar includes September 29th release of August consumer credit expected at -0.151 compared to -0.217. Final Q2 GDP will also be released on September 29th expected at -0.7% along with mortgage applications, lending and CBI distributive trades for September. CBI Index is expected at -12 compared to -16 last month. On September 30th September GFK survey will be released expected at -20 compared to-25 last month. On October 1st September CIPS PMI manufacturing index will be released expected at 50.2 compared to 49.7 last month.

The technical outlook for GBP is negative as GBP trades below 1.6000. Expect near-term support at 1. 1.5803 the June 8th low with resistance at 1.6389 the September 24th high.

 

CAD
CAD traded mixed initially pressured by weaker equity market trade and uncertainty about the US and Canadian economic recovery. CAD traded sharply lower Thursday with selling attributed to report of weaker than expected US August existing home sales and extended the selloff in early trade after the release Friday of weaker than expected US durable goods. The existing home sales and durable goods report suggest the US recovery will be weak and heightens fears about the Canadian economy. CAD turned higher for the day tracking a rebound in US equities sparked by report of better than expected Michigan consumer confidence and a rise in US August new home sales. Threat of intervention limits CAD gains Earlier in the week BOC officials expressed concern about CAD strength and warned that the strong CAD is a risk to the Canadian recovery. Canada's PM Harper said that Canada has a fragile recovery with most of the growth tied to stimulus. Harper said that he is not seeing the type of growth to improve the labor market. BOC's Carney warns that Canada's jobless rate is likely to continue to rise and that it was too early to say if Canada is experiencing self-sustaining growth. BOC Deputy Governor Longworth said that persistent strength of the CAD remains a risk to growth and to the return of inflation to target. No major Canadian economic data was released in today's trade. CAD will continue to track the direction of equity and oil markets.

The technical outlook for CAD is negative as USD/CAD trades above 1.0900. Look for near-term support at 1.0860 the September 25th low with resistance at 1.1075 the September 3rd high.

 

AUD
AUD traded higher with support from the G- 20 statement that the G-20 nations will avoid premature withdrawal of stimulus. AUD gains were limited by mixed to weaker equity market trade as Asian equity markets traded lower and US equities traded both sides of settlement. AUD experienced with whipsaw price action weakening after the release of US durable goods and firming after the release of US new home sales in Michigan consumer sentiment reports. AUD failed to hold above 8700 despite Thursday's report that Australia's August new home sales rose 11.4%. The strong rise in Australian new home sales is further confirmation of improving domestic economic outlook in Australia. The home sales report may encourage RBA rate hike speculation. AUD traded at a one year high last week of 8778 supported by RBA rate hike speculation improving optimism. AUD has not taken out the 8778 level with today's high and 8714 at the time of this writing. Failure to take on this level could signal a technical divergence and lack of upside confirmation for the AUD rally. The fact that the AUD rally continues to stall at last week's high may raise suspicions that the RBA is intervening to try to limit AUD gains. AUD price direction will continue to track commodities, equities and risk sentiment with further gains linked to speculation about global economic outlook.

 The technical outlook for the AUD is mixed as AUD trades below 8700. Expect AUD support at 8585 the September 21st low with resistance at 8714 the September 25th high and 8820 the August 22nd 2008 high.