• USD: Lower, house prices rise for second month in a row, consumer confidence soars
  • JPY: Higher, Yasano said Japan's fiscal situation cannot support Democratic Party spending plans
  • EUR: Higher, shrugs off Mersch warning that the EU recovery may be unsustainable
  • GBP: Higher, UK mortgage approvals rise to a 17 month high
  • CAD and AUD: AUD & CAD mixed, supported by firmer equity market trade, spike in yields limits gains

Overview     
USD traded lower pressured by report of rising US home prices and improving consumer confidence. The data reduces safe haven demand for USD. A sharp drop in the Shanghai Index sparked by a statement from China's premier that the Chinese recovery faces many uncertainties sparked initial safe haven demand for USD and JPY. The Shanghai Index was also pressured by rumor that a Chinese bank needs to raise more capital to meet the recent change in China's bank capital requirements. USD and JPY reversed overseas gains as European and US equity markets edged higher an ignored the decline in Asian equities. EUR traded higher reversing early losses that were inspired by a statement from the ECB's Mersch that the EU recovery depends on global demand and may be unsustainable. GBP traded mixed despite report of the sharp jump in UK mortgage approvals in July. UK mortgage approvals rose to the highest level since February of 2008. CHF traded higher and shrugged off report of weaker Swiss employment and consumption data. Swiss Q2 nonfarm payrolls declined by 0.4% and the UBS July Swiss consumption index declined to 0.766 from 0.951 last month. Commodity currencies traded in a choppy range tracking the shifts in equity market direction. A report that President Obama re-nominated Fed Chairman Bernanke for a second term also contributed to risk sentiment assuring continuity at the Fed. Case-Shiller June home price index rose for the second month in a row in June and August consumer confidence rose more than expected. The home price rise and better than expected consumer confidence fuels recovery hope and firmer equity markets. Stabilization in US housing market and consumer demand are key to the US recovery. USD edged higher after the release of the consumer confidence report partly because the report came in line with pre-release rumors and US bond yields spiked higher.

Today's US data:
Case-Shiller home price index rose for the second month in row to -20, a reading of -16.8 was expected. The index remains 15.4% lower y/y. Case-Shiller warns that home prices could turn down again. August consumer confidence rose to 54.1, a reading of 48 was expected. The rise in consumer confidence reflects improving employment outlook and the impact of the cash for clunkers plan.

Upcoming US data:
On August 26th durable goods and new home sales for July will be released. Durable goods are expected to rise 1.7% compared to -2.2% last month and new home sales are expected to rise to 390k from 384k last month. On August 27th jobless claims for week ending August 22nd will be released expected at 550k compared to 576k last week. Q2 GDP will also be released on August 27th expected at -1.4% compared to -1% last quarter. On August 28th July personal income and personal consumption will be released with both reports expected to rise by 0.2%. Final University of Michigan consumer confidence will also be released on the 28th expected 64.5 compared to 63.2 last month.

JPY
JPY traded mixed initially supported by safe haven demand as Asian equity markets decline. JPY turned lower in reaction to a recovery in European and US equity markets and selling pressure in cross trade. The Nikkei closed 84 points lower and the Shanghai Index was sharply lower pressured by Chinese bank rumors and uncertainty about China's economic outlook. The trade showed limited reaction to a statement from Japan's finance minister Yasano warning that the current fiscal conditions in Japan will not allow the Democratic Party to carry out its spending plans if elected. Japan's national elections will be held on August 30th. The latest election polls indicate that the opposition Democratic Party will win the election. One of the numerous platforms of the Democratic Party is a pledge to increase spending to boost the domestic economy. Japan's Finance Minister warns that Japan already faces a sharp fiscal deficit and more spending would be difficult to sustain based on the current state of Japan's fiscal outlook. JPY edged higher as US equity markets struggle to sustain early gains as the White House says US unemployment rate will peak at 10% at the end of 2009 but remain elevated. JPY traded flat after the release of better than expected US consumer confidence.

This week's Japanese economic calendar includes the August 27th release of July trade balance expected at 507.5. On August 27th Japan's unemployment rate will be released expected at 5.4% along with household spending expected to rise to 0.2% along with July CPI expected to fall 1.8%. On August 28th July CPI will be released along with July retail sales and industrial output. CPI is expected to fall 0.2%, retail sales are expected to rise 0.3% and industrial output is expected at 0.5%.

Key technical levels to watch in USD/JPY include support at 92.70 the July 14th low with resistance at 95.30 the August 18th high.

EUR
EUR traded mixed initially pressured by concern about the EU recovery as the ECB's Mersch warns that the recovery may not be sustainable and the ECB's Gonzalez-Paramo says the EU economic outlook remains uncertain. Mersch said that the EU recovery depends on global demand and he warned about succumbing to optimism about the recovery. The impact of Mersch's warning was partly offset by report that German final Q2 GDP expanded by 0.3% and by a modest rebound in European equity markets. The German GDP data confirms that the German economy is emerging from recession. Monday, the EU reported that industrial orders rose much more than expected reported a 3.1%. The rise in EU industrial orders is further confirmation that the EU recession is ending and follows last weeks report of improving EU manufacturing and services PMI. There remains a great deal of uncertainty about the potential strength of the global recovery with the outlook in China becoming more uncertain and ECB officials expressing concern about the sustainability of the EU recovery. EUR traded higher in US session supported by firmer equity markets and report of rising US home prices. EUR gains were limited by a rise in US bond yields post release of stronger than expected US consumer confidence. Focus turns to Wednesday's release of German IFO.

On August 26th German August IFO will be released expected at 87.3 with expectations index expected at 90.4 in current assessment expected 84.3. On August 27th German of the CPI and EU M3 will be released. German CPI is expected flat and EU M3 is expected to rise 3.5% y/y. On August 28th EU business and economic sentiment is due for release. The business climate index is expected -2.71 and economic confidence index expected 76. 

The technical outlook for the EUR is positive as the EUR rise above 1.4300. Expect EUR support at 1.4209 the August 21st low with resistance at 1.4450 the August 5th high.

GBP
GBP traded mixed initially supported by report that UK mortgage approvals rose to a 17 month high in July. The British Bankers Association reported that UK mortgage approvals rose to 38,181 from 35,564 last month. The rise in UK mortgage approvals suggests that the UK housing market is stabilizing and UK recession may be ending. The impact of the rise in UK mortgage approvals was partly offset by report that consumer lending remains weak. Weak consumer lending presents continued downside risk for the UK economy. GBP continues to weaken in cross trade to the EUR with selling pressure attributed to the BOE's recent decision to expand quantitative ease and from concern about expanding UK budget deficit. The BOE expanded quantitative ease by £50 bln earlier in the month UK reported a record budget deficit in July. The UK government plans to raise a record 220 bln GBP this year and may have to increase debt issuance to cover the budget gap. Positive US house price and consumer confidence failed to boost demand for GBP.

Focus turns to this week's release of UK GDP for further clues to whether the UK economy is emerging from recession along with the rest of Europe. This week's UK economic calendar includes the August 27th release of GFK consumer confidence expected at -25. On August 28th UK GDP will be released expected at -0.8% for the quarter.

The technical outlook for GBP is mixed as GBP rally stalls above at 1.6500. Expect near-term support at 1.6275 the August 17th low with resistance at 1.6670 the August 13th high.

 

CAD
CAD traded mixed initially supported by firmer equity market trade and report of rising US home prices. No major Canadian economic reports were released in Tuesday's trade. CAD continues to find support from Monday's release of stronger than expected Canadian retail sales. Canada's June retail sales rose 1% and 1% ex-autos. The trade was looking for headline retail sales rise of 0.2% and an ex-autos rise of 0.5%. The Canadian retail sales report adds to speculation that Canadian recession is nearing an end. Last week Canada reported an unexpected fall in consumer prices. Part of the drop in Canada's CPI can be attributed to the strength of the CAD. Canadian CPI report and Monday's sharp rise in the CAD post-release of strong retail sales data may increase the risk of intervention rhetoric. CAD direction will remain closely correlated to speculation about the global recovery and risk sentiment. Global equity markets are struggling to maintain the current rally and this may limit demand for the CAD. CAD gains were limited by a spike in US bond yields post release of stronger than expected US consumer confidence and a dip in crude prices.

On August 28th the current account balance will be released expected at -9.1 bln along with industrial products price expected at 0.7% and the raw materials price index at 6.2%. 

The technical outlook for CAD has turned positive as USD/CAD falls back below 1.0900. Look for near-term support at 1.0635 the August 4th low with resistance at 1.10940 the August 21st high.

 

AUD
AUD traded higher supported by rising equity markets demand in cross trade to the JPY and better than expected US house price data. A statement from the PBOC's Wen that China will keep moderately loose monetary policy and sufficient liquidity helped to reduce fear that China would continue tightening credit. Fear that China would continue to limit lending generated uncertainty about the Chinese economic outlook and global recovery. In overseas trade AUD traded lower pressured by a sharp decline Shanghai Index sparked by concerns about Chinese banks and the Chinese recovery. Rumors were circulating that a Chinese bank may be in trouble and would be forced to raise capital to meet the recent change in Chinese bank capital requirements. China's premier also warned that the Chinese recovery faces many uncertainties. The Shanghai Index traded as much as 5% lower but rallied back to close a little more than 2.5% lower for the day. If the AUD continues to rally it may increase the risk of intervention. Over the last few months the RBA has been an aggressive seller of AUD on rallies above 8400. Last Thursday, the RBA confirmed that it sold A$705 mln in July after selling a record A$194 bln in June. Prior RBA intervention appears to be targeting AUD rallies above the 8400. RBA officials are concerned that continued strengthening of the AUD could hurt Australian exports and choke off Australia's recovery. AUD price direction is the most sensitive to developments in the China as China is a major export destination for Australian goods. The trade is closely monitoring the Shanghai Index and is wary of the threat of intervention.

On Wednesday Q2 construction work survey will be released expected -3% compared to -3.7% last quarter. Thursday the Conference Board leading Index survey will be released along with private capital expenditures for Q2. The leading index is expected to improve to -1 from -1.7% last month. Capital expenditures are expected to improve to -5% from -8.9% last month.

The technical outlook for the AUD is positive as AUD rallies back above 8400. Expect AUD support at 8217 the August 21st low with resistance at 8480 the August 14th high.