• USD: Mixed, pressured by speculation that the global recession is ending, equities trade at 10 month high
  • JPY: Lower, pressured by improving risk sentiment as the Nikkei rallies 3.5%
  • EUR: Mixed, industrial orders rise, Trichet urges caution about recovery outlook, no quick exit from stimulus
  • CHF: Mixed, exports rise and consumer confidence hits three year high
  • GBP: Lower, UK consumer confidence rises at a record pace, tax revenues fall 20%
  • CAD and AUD: AUD & CAD higher, crude prices top $74, Canadian retail sales rise more than expected

Overview     
USD traded mixed to lower Monday as central bankers meeting in Jackson Hole Friday said the worst of the global recession was nearing an end. Global equity markets traded at a 10 month high fueling risk appetite and selling of the USD. Positive US housing data, strong EU industrial orders, and rising UK consumer confidence add to speculation that the global recession is ending. Commodity currencies outperformed supported by hope for improving global demand. CAD was supported by report of better than expected Canadian retail sales. JPY traded lower pressured by improving risk sentiment as the Nikkei rises 3.5%. USD downside was partly limited by uncertainty about the potential strength of the global recovery. Economists Feldstein and Roubini warned that the US faces another downturn and that there's a big risk of a double dip recession. In addition, ECB President Trichet said that the recovery road ahead would be bumpy and that the ECB would not exit emergency stimulus soon. In contrast, the Fed's Bullard said that the US will experience positive growth in Q4 and that the odds are against a double dip recession. Bullard warned the recovery would be sluggish. Focus turns to this week's release of key US reports on home prices, consumer confidence, new home sales and GDP. The trade will be looking at these reports for confirmation that the US recession is ending. Assessing the outlook for the global recovery will emerge as the key focus for financial market trade. The key risk to the global recovery is whether fiscal and monetary stimulus is withdrawn too soon raising new risks for the global recovery.

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

Upcoming US data:
This week's US economic calendar includes the August 25th release of June Case-Shiller home price index expected at -16.8 compared to -17.1 last month. Also on August 25th August consumer confidence will be released expected at 48 compared to 46.6 last month. 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 lower pressured by improving risk sentiment as global equity markets surged to a 10 month high and the Nikkei closes 3.5% higher. Speculation that the global recession has ended is the main driver for FX and financial market trade. JPY was also pressured in cross trade with EUR supported by report of better than expected EU industrial orders, GBP supported by report of the surge in UK consumer confidence and the commodity currencies supported by rising price of crude. There was limited reaction to report that BOJ Governor Shirakawa said that recent low interest rates contributed to the economic crisis and the central banks must work to avoid creating bubbles. He called for further coordination of central bank policies. The improvement in risk sentiment was somewhat tempered by the Financial Times report which warned that economic risks are rising in China as stimulus plans are ending and the Wall Street Journal report that China is facing a wave of bad loans. The Chinese economy is seen as key to the strength of the global recovery and concern about slower growth in China may limit the current rally in global equity markets. JPY price direction has re-linked with the direction of equities and risk sentiment.

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 supported by improving risk sentiment and report of better than expected EU industrial orders. Global equity markets rallied to a 10 month high with European equities trading about 1% higher. Euro and sterling rates declined to record low adding to speculation that the financial crisis is ending. EU June industrial orders rose 3.1%, well above market forecast of a 1.5% rise. The rise in EU industrial orders is further confirmation that the EU recession is ending and follows last week's report of improving EU manufacturing and services PMI. EUR gains were partly limited by cautious comments from ECB President Trichet. Trichet warned that the recovery road ahead will be bumpy and that the EU does not plan to exit emergency stimulus anytime soon. It appears that Trichet is trying to discourage speculation that the ECB will be raising interest rates. A premature tightening by the ECB could choke off EU economic recovery. Improving EU economic outlook may encourage speculation that the ECB would hike rates sooner than expected. As noted above, there remains a great deal of uncertainty about the potential strength of the global recovery with the outlook in China becoming more uncertain and too well-regarded economists warning of the risk of the double dip recession. Economists Roubini said the risk of a double dip recession is rising because of risk related to withdrawal of global monetary and fiscal stimulus.

On August 25th German GDP will be released expected -3.8% for the quarter. 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.

     

CHF
CHF drifted lower pressured by selling in cross trade to the EUR after the release of stronger than expected EU industrial orders for June. CHF downside was limited by improving risk sentiment as global equity markets rally to a 10 month high. Swiss economic data released last week showed signs of improvement with retail sales rising 0.9% exports up 4.1% in July and investor confidence rising to a three year high. These reports are further confirmation that the Swiss economy is stabilizing. The data may reduce the risk of SNB intervention as Swiss export growth improved despite strong CHF. SNB member Jordan last week said the SNB is comfortable with the current exchange rate and see signs of recovery as exports rise. Jordan went on to say that the SNB will not accept CHF rise versus the EUR. EUR/CHF cross is trading around 1.5200. The SNB has defended the cross around 1.5100. This week's Swiss economic calendar includes Tuesday's release of UBS July consumption index expected at 0.98 compared to 0.96 last month. Q2 nonfarm payrolls will also be released on Tuesday expected at 3.956 compared to 3.957 last month. On Friday, August 28th August KOF leading indicator will be released expected at -0.60 compared to -0.99 last month. Expect USD/CHF support at 1.0485 the December 30th low with resistance at 1.0785 the August 19th high.

 

GBP
GBP traded mixed to lower despite report of a sharp rise in UK consumer confidence and report in the Sunday Times that the UK recession has ended. UK Q3 confidence indicator rose by a record 4.8%. According to the Sunday Times UK recession is over as consumer confidence soars. GBP upside was limited by selling pressure in cross to the EUR and by concern about funding of UK government debt. GBP traded at an 11 week low versus the EUR. The Sunday Times also reports concern about the UK government spending spree and said that UK tax receipts have fallen 20% since last year as the economy slid into deep recession. Last week the UK reported a record budget deficit for July. The record UK budget deficit means that the UK may be forced to sell more debt and raise taxes to support government spending. 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. GBP was also pressured last week by the release of the MPC minutes for the August meeting which showed that the MPC was split over the expansion of quantitative ease. At the August meeting the BOE elected to expand quantitative ease by £50 bln. According to the MPC minutes BOE Governor King and two other board members argued for an expansion of quantitative ease by £75 bln. The MPC voted 6 to 3 in favor of expanding quantitative ease by £50 bln.

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. Next 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 higher supported by rising equity markets, stronger crude prices and report of better than expected Canadian retail sales. Global equity markets traded at a 10 month high supported by speculation the global recession has ended. Crude prices rallied above $74 a barrel supported by weaker USD and speculation of improving global demand. 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%. Today's Canadian retail sales report adds to speculation Canadian recession is nearing an end. Last week Canada reported an unexpected fall in consumer prices. Canada's July CPI declined by 0.3% m/m and 0.9% y/y. The core inflation rate was flat. The trade had expected a 0.2% decline in CPI with a 0.1% rise in the core inflation rate. Canada's inflation rate sank to the 56 year low. The drop in Canada's CPI reflects lower energy prices. Part of the drop in Canada's CPI can be attributed to the strength of the CAD. Canadian CPI report and today'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.

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 and commodity markets as central bankers say that the global recession is ending. A 3.5% rise in the Nikkei helped boost risk appetite and sparked demand for high-yield assets like the AUD. Strong economic data from the UK and EU added to positive risk sentiment and hope that the global recession has ended. AUD rally was impressive in light of the fact that Australia reported that new auto sales declined 6.9% last month. The decline in auto sales mainly reflects a downward correction from last month's strong auto sales report. In addition RBA officials last week tried to discourage speculation that the RBA would soon raise interest rates stating that the RBA does not want to choke growth off prematurely. Also there was little reaction to report of rising concern about China's exposure to bad bank loans and potential slowdown in China's growth as the Chinese government begins to remove for fiscal stimulus. Last week it was reported that the Chinese government will begin to audit Chinese banks. This could further reduce bank lending in China and slow the Chinese recovery. Today's rally in the AUD 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 China's recovery is key to demand for commodity prices. AUD price direction remains closely correlated to risk sentiment and the direction of equity markets. 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.