• USD: Lower, Bernanke discusses an exit plan, says unemployment to remain elevated
  • JPY: Higher, BOJ minutes state concern about the outlook for jobs and wages in Japan
  • EUR: Higher, supported by gains in cross trade to GBP
  • GBP: Lower, UK budget deficit reaches record high, Bean says above target inflation would trigger tightening
  • CAD and AUD: AUD & CAD higher, upbeat RBA economic outlook, BOC holds rate poly steady


USD traded mixed to lower in Tuesday's trade as investors digest Fed chairman Bernanke's outline of an exit strategy from quantitative ease. According to an article written by Bernanke in today's Wall Street Journal, Bernanke expects the Fed to raise interest rates at some point to combat inflation risk and he is confident that the Fed has tools to raise borrowing costs when the economy recovers. He also made it clear that the Fed will remain accommodative for some time to come. GBP underperformed pressured by report of a record UK June budget deficit and comments from the BOE's Bean that weaker GBP should help to boost UK exports. CHF showed limited reaction to report that the Swiss National Bank raised its foreign reserve currency holdings to their highest level in 12 years with 60% of the reserves held in EUR. This could make it more difficult for SNB to sustain intervention efforts to weaken the CHF. JPY opened lower as Asian equity markets continued to rise and the minutes from the BOJ June policy meeting showed that a number of BOJ board members remain concerned about the outlook for jobs and wages in Japan. The commodity currencies continue to benefit from rising crude prices and optimism about the global recovery. AUD was supported by the minutes from the June RBA policy meeting which state that downside risks have diminished for the Australian economy. The BOC elected to hold rate policy steady as expected and said that economic activity has begun to expand in many countries. In his testimony before Congress, Bernanke said that the pace of economic decline has slowed significantly, job losses weak housing market and tight credit conditions will limit consumer spending, unemployment will peak at end of 2009 but remain high, growth will accelerate in 2011 and accommodative policy will extend for a long time. USD edged higher in reaction to Bernanke's warning that US unemployment will remain high which means US recovery will be weak.

Today's US data:
No major US economic data was released in today's trade.

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.

JPY opened lower pressured by improving risk sentiment as Asian equity markets followed Monday's rally on Wall Street and by selling in cross trade. The minutes for the June BOJ policy meeting were released last night. The minutes indicate that a number of the BOJ board members remain concerned about the outlook for jobs and wages in Japan. The BOJ made no specific reference to the JPY or possible intervention. One board member said that the BOJ must begin discussing an exit strategy from quantitative ease. The only other news from Japan was the Japanese Cabinet has set August 30th as the date for national elections Japan. JPY traded mixed in cross trade with AUD/JPY supported by upbeat outlook from the RBA for the Australian economy. EUR/JPY traded higher supported by higher equity market trade. GBP/JPY drifted lower with GBP pressured by report of a record UK budget deficit. Fed Chairman Bernanke's outline of an exit strategy from quantitative ease and discussion of the Feds need to eventually tighten monetary policy added to light selling of the JPY. JPY turned higher in US trade supported by a modest spike in risk aversion in reaction to Bernanke's warning that US unemployment will remain elevated.

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 in a range Tuesday consolidating yesterday's gains. There were no major economic reports from the EU released Tuesday and this contributed to a lack of price movement in the EUR. This Swiss trade balance narrowed which confirms EU export demand remains weak in Europe. The main price activity took place in the EUR/GBP cross with GBP pressured by report of record UK budget deficit. There was limited reaction to Fed Chairman Bernanke's comments about the need for eventual Fed tightening as Bernanke outline details of an exit strategy from quantitative ease and indicated that that policy would remain accommodative for the foreseeable future. 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 and if the ECB will begin to focus on an exit strategy from quantitative ease.

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.


GBP traded lower pressured by report that the UK June budget deficit rose to a record level and in reaction to comments by the BOE's Bean that weaker GBP should help boost UK exports. UK June budget deficit rose to a record 18 bln. The rise in the budget deficit was actually smaller than market expectation of 20 bln, but nonetheless pressured the GBP. The IMF warned last week that the GBP is vulnerable if the UK does not rein in its deficit spending. Bean made some interesting comments about BOE rate policy outlook. Bean said that interest rates will not stay low for long and the BOE plans to raise rates quickly when the economic recovery is sustainable. Bean also discussed what might trigger the BOE to consider exiting quantitative ease. According to Bean, if UK inflation looks to overshoot the 2% BOE inflation target rate the inflation threat could trigger a tightening by the BOE. It's interesting that Bean's comments are appearing on the same day that Chairman Bernanke is outlining a possible exit strategy from quantitative ease. Because the US and UK governments have been the biggest expanders of budget deficit spending to combat the global recession, the Fed and BOE appear to be quite sensitive to criticism that the combined fiscal and monetary stimulus may eventually trigger inflation. Hawkish rhetoric from the BOE and Fed may be designed to try to tamp down inflation expectations. 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 BOC decision to hold rate policy steady. The BOC elected to hold rates steady at 0.25%. The BOC said that rate policy will remain on hold until the second quarter of 2010. In the statement accompanying the policy decision the BOC again expressed concern that strong CAD could limit the recovery process. The BOC policy statement also indicated that the BOC sees the global economy stabilizing and notes that there are signs that economic activity in many countries has begun to expand. The BOC expects the economy to contract by 2.3% in 2009 and rise 3% in 2010 and 3.5% in 2011. The BOC expects inflation to return to the 2% target by mid-2011. CAD is trading at a five-week high. If the CAD continues to rally it will increase the risk of BOC intervention. The BOC policy statement repeats concern that stronger CAD will slow the recovery. There were no major Canadian economic reports released in today's trade. Monday, Canada reported better than expected wholesale sales and a sharp increase in net foreign investment flows to Canada last month. Focus turns to Wednesday's release of May retail sales.

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 and 1.0800 with resistance at 1.1225 the July 16th high.


AUD traded higher extending Monday's gains supported by rising food prices and higher global equity markets. AUD was also supported by upbeat RBA policy minutes from the June meeting. The RBA minutes state that current monetary policy is consistent with sustainable growth, there is room to cut rates if needed, economic activity is not as weak as expected and downside risks to the economy have diminished. The RBA also said that it used the recent AUD rally to increase its reserves. The last time the AUD rallied above 8100 in June, the RBA intervened aggressively selling AUD. If the AUD continues to rally there will be an increased risk of more intervention sales from the RBA. The RBA has expressed similar concerns noted by the BOC that strengthening currency could choke economic recovery. According to the RBA minutes and RBA used the June meeting rally as an opportunity to increase its foreign reserves. In addition, the AUD was supported by report that Australia's June auto sales rose 5.7% in June Yesterday Australia reported that Q2 PPI fell 0.8%. 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 rate cut speculation and threat of intervention are the main risks to further AUD gains AUD price direction will closely track risk sentiment and commodity markets.

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.