•  USD: Lower, ADP falls more than expected, planned layoffs decline, labor costs decline, productivity rises
  • JPY: Higher, rising risk aversion as global equity markets decline, DPJ supports USD reserve status
  • EUR: Higher, EU producer prices fall at record pace, GDP as expected
  • GBP: Higher, UK construction PMI rises to an 18 month high
  • CAD and AUD: AUD higher & CAD lower, Australian GDP strong, political uncertainty in Canada

Overview     
USD traded lower Wednesday with the AUD leading the way supported by stronger than expected Australian Q2 GDP and GBP supported by higher UK construction PMI. JPY traded at seven week high supported by risk aversion sparked by report of worse than expected ADP jobs report, a sharp drop in the Nikkei and weaker equity market trade in Europe. The impact of the ADP report was partly offset by a report that US nonfarm labor costs posted their biggest decline since 2000 and nonfarm labor productivity posted its biggest gain since 2003. EUR traded mixed initially pressured by report that EU producer prices declined at a record pace in June. CAD traded lower pressured by political uncertainty in Canada as Canada's Liberals say they will no longer support the minority government and by report of weak auto sales. Investors are trying to gauge whether recent data which shows the global economy improving is sustainable. Caution about the global economic recovery limits USD downside as risk aversion re-emerges. Equity markets and investor sentiment are approaching a key inflection point. It's unclear whether the re-emergence of risk aversion will be short-lived or begin to trend higher. Economists declared that the US recession ended after Tuesday's release of ISM manufacturing data which rose above 50, but it's not clear whether there will be solid evidence of economic recovery until later in the year. An uneven US and global economic recovery may lead to more choppy price action and FX markets.

Today's US data:
August ADP employment falls by 298k, the trade expected a decline of 250k. Q2 productivity rises 6.6% and labor costs declined by 5.9%. July factory orders rise 1.3%, a 0.8% rise was expected. USD drifted lower post release of the factory orders report as stocks stabilized.

Upcoming US data:
On September 3rd initial jobless claims for the week ending 8/29 will be released expected 556k compared to 570k last month along with August services 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
JPY traded at a seven week high supported by safe haven demand as the Nikkei closes 250 points lower and risk appetite falls. There was little reaction to report that Japan's incoming government says there will not be any dramatic change in US Japanese relations, and that the new government does not plan to interfere with BOJ policy or JGB purchases. JPY also benefited from DPJ statement that the economy will benefit from stronger JPY if the new government boosts domestic led growth. There is expectation that the new Japanese government will be less inclined to intervene to try and weaken the JPY as focus shifts away from export led growth to domestic. JPY extended its early rally after the release of weaker than expected August ADP employment report. Japan's monetary base rose 3.6% in August. JPY price direction will continue to focus on equity markets and risk sentiment.

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

Key technical levels to watch in USD/JPY include support at 91.75 the July 13th low with resistance at 94.06 the August 28th high.

EUR
EUR opened lower pressured by report that EU producer prices declined at a record annual rate and by selling a cross trade to the GBP. EU June producer prices fell 0.8% m/m and 8.5% y/y. There was limited reaction to report that EU Q2 GDP was revised at -0.1%. The decline in EU producer prices may increase the risk of deflation in the EU but the data is unlikely to impact Thursday's ECB policy meeting.  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 in the months ahead. The trade will also be looking for ECB comments on an possible timing of the exit strategy from its bond purchase plan The EU's Almunia said that exit strategies from quantitative ease should be internationally coordinated. EUR traded lower in cross trade after the release of better than expected UK construction PMI.EUR turned higher after the release of stronger than expected US factory orders tracking firmer stocks.

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 to negative as the EUR breaks below the low end of its eight day range trade. Expect EUR support at 1.4045 the August 17th low with resistance at 1.4339 the August 28th high.

 

GBP
GBP traded higher supported by report of better than expected UK construction PMI and gains in cross trade to the EUR. August construction PMI rose to 47.7 from 47 last month reaching its highest level in 18 months. The rise in UK construction PMI is unlikely to encourage any change in BOE policy as BOE officials remain concerned that the signs of UK economic recovery are tentative. 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. If the BOE decides to again expand quantitative ease it 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, calling for a wider expansion of quantitative ease.

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 and 1.5983 the July 8th low with resistance at 1.6382 the August 28th high.

CAD
CAD traded lower pressured by weaker equity markets, lower crude and political uncertainty in Canada. Apart from a modest improvement in the Shanghai Index equity markets were generally weaker Wednesday. Crude oil prices drifted below $68 a barrel. Late yesterday there was a report that Canada's Liberals said they would no longer support the minority government. Political uncertainty in Canada contributes to additional selling pressure of the CAD. There were no major Canadian economic reports released in today's trade but weaker than expected US ADP employment data contributed to diminished risk appetite. Last night Canada reported that August auto sales fell for the 10th straight month at -7.9%. Monday the CAD traded sharply lower as Canada reported that GDP contracted at a faster than expected pace in the second quarter. Concern about the strength of Canada's may limit CAD demand. CAD direction will remain closely correlated to speculation about the global recovery and risk sentiment. This week's key focus is Friday's release of Canada's unemployment for July. The trade expects the July unemployment to show that the rate of job losses slowed in Canada.

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 1.0872 the September 1st low with resistance at 1.1170 the July 20th high.

AUD
AUD traded higher supported by report of stronger than expected Australian Q2 GDP and positive comments from Australia's Swan which suggest that at some point interest rates will have to rise. Improving Australian growth outlook and RBA rate hike speculation are the main positives for the AUD. AUD received an additional boost from a slight improvement in the Shanghai Index in last night's trade. Australia's Q2 GDP rose by 0.6%, the trade was looking for a 0.2% rise. Australia's Swan said that the government would need to withdraw stimulus and interest rates will have to be adjusted at some point. Swan went on to warn that unemployment may remain high and growth may moderate as stimulus is withdrawn. The RBA elected to hold policy steady at 3% Tuesday and failed to lay out a timeline for rate hikes. The AUD traded lower after the RBA meeting pressured by perception that the RBA policy statement was more dovish than expected. Many analysts expect the RBA to hike rates before year end. Today's Australian GDP report supports the conclusion that the RBA will raise rates before year end. AUD price direction has been closely tracking the direction of the Shanghai Index.

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.