- USD: Lower, at six week low, CIT avoids bankruptcy, NABE says US recession may be ending, LEI rises
- JPY: Lower, markets closed for holiday, tracking risk sentiment
- EUR: Higher, supported by improving risk sentiment, gains in cross trade to JPY, German factory prices fall
- CHF: Higher, Swiss import and export prices fall most since 1986, threat of intervention
- GBP: Higher, house price index rises, mortgage lending rises to a six-month high
- CAD and AUD: AUD & CAD higher, crude prices top $64 a barrel, net investment flows to Canada surge
USD and JPY start the week lower as risk sentiment continues to improve. The combination of better than expected US corporate earnings, report that CIT will avoid bankruptcy, Morgan Stanley's upgrade of its target for the Kospi index and NABE said that the US recession is easing fuels a rally in global equity markets and improving risk sentiment. USD is trading in a six-week low mainly pressured by report that CIT has secured a $3 bln loan to avoid bankruptcy. GBP was supported by report of rising UK house prices and improving risk sentiment. UK mortgage lending hit a six month high. EUR traded sharply higher supported by strong gains in cross trade to the JPY. The commodity currencies rallied in reaction to higher crude prices which topped $64 a barrel and optimism about the global recovery. CAD was supported by report a surge in foreign investment flows to Canada. The trade awaits this week's testimony by Fed Chairman Bernanke before Congress on Tuesday and Wednesday for clues to his view on the economic recovery and whether the Fed is nearing a decision on when to begin to exit quantitative ease. If Bernanke expresses optimism about the US economic outlook his comments could further pressure the USD. If Bernanke outlines an exit strategy from quantitative ease and signals a time frame for implementation of exit strategy this could revive concern about whether the US recovery is sustainable and encourage fresh demand for the USD. In addition the prospect that US interest rates will eventually need to rise as the recovery becomes sustainable could also cap the USD selloff. Focus turns to this week's release of a number of US corporate earnings reports. FX direction will continue to track equities and risk sentiment. USD sentiment has turned quite negative. According to CFTC commitment of traders report released Friday for the IMM net short USD positions are at the highest level since July 2008.
Today's US data:
June leading economic indicators rose 0.7, a 0.4% rise was expected. This was the third consecutive month that the leading indicators have risen and suggests US recession is nearing an end.
Upcoming US data:
On July 23rd initial jobless claims for the week ending 7/18 will be released expected 540k compared to 522k last week. Existing home sales for June will also be released on July 23rd expected at 4820k compared to 4770k last month. On July 24th July final University of Michigan consumer sentiment will be released expected 73.4 compared to 70.4 last month.
Japanese markets were closed for holiday Monday and JPY traded lower pressured by improving risk sentiment and selling in cross trade. As noted above, report that CIT has secured a loan which will help avoid bankruptcy and US Conference Board report that the US recession may be ending sparked a rally in global equity markets, commodities and demand for higher risk assets. EUR/JPY, GBP/JPY and AUD/JPY crosses traded more than 1% higher Monday. If equity markets continue to rally and sentiment continues to improve, JPY will likely trade lower pressured by fresh demand for JPY carry trades. Focus turns to Tuesday's release of BOJ policy minutes. The trade will look to the policy minutes for clues to whether the BOJ is considering exiting quantitative ease and for insight to BOJ outlook for the Japanese economy. Last week Japan reported improvement in consumer confidence but weaker demand for services. The trade will also be looking to see whether the Bank of Japan signals an increased threat of intervention should the JPY get to strong.
This week's Japanese economic calendar includes the July 23rd release of June trade balance expected at 0.53 bln compared to 0.30 bln last month. On July 24th May all industry activity will be released expected at 1.1% compared to 2.7% last month.
Key technical levels to watch in USD/JPY include support at 93.25 the July 15th low with resistance at 94.95 the July 8th high.
EUR traded above 1.4200 supported by improving risk sentiment and gains in cross trade to the JPY. EUR demand is attributed to firming global equity markets. Equity markets rallied in reaction to news that CIT will secure a loan to avoid bankruptcy and the US Conference Board says US recession may be ending. The CIT news and Conference Board forecast fuels risk appetite. In addition euro and sterling Libor rates sank to a record low which suggests that credit markets continue to thaw. Russian accounts were reported good buyers of the EUR in Monday's trade. The trade ignored report that German factory prices fell 4.6%. The drop in German factory prices suggests a continued risk of deflation in the EU. Improving risk sentiment helped offset the impact of the weak German data. The German factory price data will likely keep the ECB policy on hold. This week's key focus will be the July 24th release of EU manufacturing and services PMI and German IFO. The trade will be looking to these reports to gauge whether the EU economy continues to show improvement.
On July 22nd June EU industrial orders will be released expected at -1.2% compared 1% last month. On July 23rd EU May current account will be released expected -9.6 bln compared to -9.2 mln last month. On July 24th EU July flash manufacturing and services PMI indices will be released. The manufacturing PMI is expected at 41.3 compared to 40.9 last month. The services index is expected at 44.8 compared to 45.2 last month. German July IFO will all also be released expected at 86.6 compared to 85.9 last month.
The technical outlook for the EUR has improved as the EUR rises above 1.4200. Expect EUR support at 1.4105 the July 20th low with resistance at 1.4360 the December 29th high.
CHF traded higher supported by improving risk sentiment as news that CIT will avoid bankruptcy generates hope that the worst for US credit markets may be over. There was limited reaction to report that Swiss and US officials plan to meet this week to discuss ways to resolve the row over Swiss accounts thought to be involved tax fraud. US officials want Swiss banks to open up their books on a number of foreign held accounts suspected of possible tax avoidance.Â The continuing strength of the CHF heightens the risk of SNB intervention. Last week Switzerland reported a sharp drop in Swiss producer and import prices, weaker retail sales and a drop in investor confidence. Swiss import and export prices fell the most since 1986 generating increased concern about the risk of deflation. The increased risk of deflation in Switzerland will increase pressure on the SNB to act to try and weaken the CHF. EUR/CHF cross traded mixed holding above 1.5100. SNB is expected to defend the 1.5100 level in the EUR/CHF cross. This week's Swiss economic calendar includes the July 21st release of June trade balance expected at 1196 mln compared to 2013 mln last month Expect USD/CHF support at 1.0485 the December 30th low with resistance at 1.0785 July 17th.
GBP traded higher supported by report of rising UK house prices, an increase in UK mortgage lending and improving risk sentiment as global equity markets surge in reaction to report that CIT will avoid bankruptcy. UK July Rightmove House Price Index rose 0.6%. UK mortgage lending rose to its highest level in six months. These reports suggest that the UK housing market is stabilizing and this could be further confirmation that the UK economy is nearing the end of recession. Equity markets rallied for the sixth day in a row supporting by improved risk appetite. GBP is trading at its highest level since July 2nd rallying above 1.6500. The GBP rally is impressive in light of last week's warning by the IMF that the GBP is vulnerable to concern about expanding UK budget deficit. Last week's UK economic data was mixed with unemployment rising to a 12 year high and CPI falling below the BOE's 2% target. The main risk to GBP is BOE policy uncertainty and whether the BOE will be forced to expand quantitative ease to combat deflationary pressures and boost UK growth. GBP direction will remain closely tied to equity markets, risk sentiment and speculation about the outlook for the UK economy.
This week's UK economic calendar includes the July 22nd release of July CBI orders expected at -48 compared to -51 last month. On July 23rd June retail sales would be released expected -0.2% compared to -0.6% last month. On July 24th Q2 GDP will be released expected at -0.8% compared to -2.4% last quarter.
The technical outlook for GBP is positive as GBP trades above 1.6400. Expect near-term support at 1.6320 the July 20th low with resistance at 1.6745 the June 30th high.
CAD traded higher supported by rising equity markets, higher crude prices and better than expected Canadian economic data. Equity markets traded higher for the 6th day in a row supported by report that CIT will avoid bankruptcy. Crude prices rallied above $64 a barrel supported by optimism that the global recession is nearing an end. Canada's May wholesale sales fall 0.3%, the trade was looking for 2.1% decline. Net foreign investments to Canada rose sharply to 18.89 bln in May, an inflow of 8 bln was expected. Focus turns to BOC policy meeting Tuesday. The BOC is expected to hold rate policy steady and refrain from implementing quantitative ease. The BOC is expected to upgrade its forecast for Canada's economic outlook. The BOC plans to release economic projections four times a year instead of the previous two times a year. BOC projections for Canada's economy will be released in the July 23rd BOC Monetary Policy report. Friday Canada reported that inflation fell at its fastest pace since 1955 but core inflation rate was up when you exclude gas prices. The CPI report is unlikely to encourage the Bank of Canada to make any policy change at Tuesday's policy meeting as the BOC expects inflation to rise as the Canadian economy recovers. BOC survey of Canadian business shows business conditions have the best prospects in the last 10 years and BOC expects the Canadian economy to recover into year end. The direction of the CAD remains closely correlated to the outlook for the global economy and the direction of equities and commodity prices.Â
BOC meet on July 21st. On July 22nd, May retail sales would be released expected at 0.1% compared to -0.8% last month.
The technical outlook for CAD has improved as USD/CAD falls below 1.1100. Look for near-term support at 1.1005 the June 12th low and 1.0930 the June 4th low with resistance at 1.1225 the July 16th high.
AUD traded sharply higher as rising global equity markets spark demand for high yield assets. AUD was also supported by sharp gain in cross trade to the JPY. AUD/JPY traded over 1.5% higher as investors seek higher yield. AUD rallied despite report Q2 PPI fell 0.8%, a 0.1% decline was expected. The decline in the Australian PPI suggests that the RBA has room to further cut interest rates as inflation pressures remain well in check. RBA minutes will be released Tuesday. The trade will to look to the minutes to see if the RBA is considering a rate cut before year end. Recent Australian domestic economic data has been mixed with Friday's report that Q2 export prices fell 20.6% and report last week that NAB business confidence turned positive first time in two years. Investors are looking beyond Australia's domestic economic data to growing optimism that the global recession is nearing an end. Last week China reported stronger than expected Q2 GDP, last week's US earnings reports on balance came out better than market expectations and today Goldman Sachs raised its year-end target for S&P to 1064 from 940. Also, the NABE said that the US recession may be ending. RBA rate cut speculation and threat of intervention are the main risks to further AUD gains. The RBA intervened and aggressively sold the AUD in June when he AUD traded above 8100. RBA officials are concerned that strengthening AUD will contribute to deflationary pressures in Australia and may choke off economic recovery by making Australian exports less competitive. AUD price direction will closely track risk sentiment and commodity markets.
On July 21st June new car sales released expected at 7% compared to 5.4% last month along with Q2 CPI expected at 1.8% compared to 2.5% last month.
The technical outlook for the AUD has improved as AUD rallies above 8000 and breaks above trendline resistance. Expect AUD support at 8024 the July 20th low with resistance at 8265 the June 3rd high.