• USD: Higher, consolidating nfp gains, FOMC awaited
  • JPY: Higher, core machinery orders and exports rise, BOJ policy decision Tuesday
  • EUR: Lower, investor sentiment rises to one year high, French industrial production beat expectations
  • CHF: Lower, Swiss unemployment rises to five year high, vulnerable to improving risk sentiment
  • GBP: Lower, Daily Telegraph says UK may face Japanese-style lost decade, BOE to downgrade its forecast
  • CAD and AUD: AUD higher & CAD lower, Goldman raises its GDP forecast for Asian and China

 

Overview     
USD traded mixed to start the week with the JPY supported by report of improving Japanese core machinery orders and weaker equity market trade in Europe and the US. GBP was pressured by a Daily Telegraph report that says the BOE will warn about the risk of deflation in the UK. The Telegraph report says that the UK may be facing a Japanese-style lost decade. EUR opened higher supported by report that investor confidence rose to its highest level for the year and better-than-expected French industrial production. AUD traded higher supported by optimism about the global recovery as Goldman Sachs raises its GDP forecast for Asia and China. CAD traded lower extending Friday's decline sparked by weaker than expected Canadian unemployment. There is more talk of possible BOC intervention should the CAD resume its recent rally.

USD rallied sharply Friday supported by report of better than expected US July employment data. The USD rallied despite improving risk sentiment. This has encouraged a debate as to whether USD price direction is de-linking from risk sentiment and if FX focus is shifting towards improving US economic fundamentals. For most of the year positive US economic news has been negative for the USD as the news fuels improved risk sentiment and liquidation of safe haven positions in the USD. The US employment report generates speculation that the US recession is ending and that the US economy will outperform other nations. The trade will be watching closely to see if the close correlation between equities/risk sentiment and the direction of the USD continues to de-link.

This week's key focus will be the FOMC rate decision Wednesday, Thursday's release of US retail sales and Friday's release of CPI and University of Michigan consumer sentiment. The trade will be looking to the FOMC meeting and this week's US economic data to try and gauge whether USD price direction will continue to focus on risk sentiment or shift focus to improving US economic data. The FOMC is expected to hold rate policy steady and the trade will be looking to determine whether the Fed sees a need to increase quantitative ease or if the Fed sees economic landscape improving enough to begin to lay out a timeframe for an exit from quantitative ease. Last week the BOE surprised the markets and expanded quantitative ease sending the GBP lower. If the FOMC were to follow the lead of the BOE the USD would likely weaken as well. If the FOMC signals a timeframe for the end of quantitative ease the USD could extend its current rebound. The Fed is likely to be cautious about the US recovery and try to dampen rate hike expectations. US retail sales and consumer confidence are expected to show continued improvement. Economist Krugman says that the US economy is on the cusp of recovery. This weeks US economic data is expected to support US recovery hopes.

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 11th release Q2 productivity expected at 3.7% compared to 1.6% last month. Q2 unit labor costs will also be released on August 11th expected at -1.5% compared to 3% last quarter. June wholesale sales and inventories will also be released on August 11th. Inventories are expected unchanged at -0.8% and sales are expected unchanged at 0.2%. On August 12th June trade balance will released expected at- 28.45 bln compared to -25.96 bln last month. On August 13th initial jobless claims for week ending 08/08 will be released expected at 535k compared to 550k last week. July retail sales and June business inventories will also be released on August 13th. Retail sales are expected to rise 0.3% compared to 1% last month. On August 14th July CPI will be released expected at 0.1% compared to 0.7% last month along with July industrial production and capacity utilization and August Michigan consumer sentiment. Industrial production is expected flat compared to -0.4% last month. Capacity utilization is expected to improve to 68.1 from 68 last month. University of Michigan consumer confidence is expected to prove to 68 from 66 last month.

JPY
JPY traded higher Monday supported by report of stronger than expected Japanese machinery orders and a slight dip in risk appetite as equity markets weakened in Europe and in the US. Japan's June core machinery orders rose 9.7%, the trade was looking for rise of 2.6%. This was the first rise in four months for Japan's machinery orders but on a quarterly basis Japan's core machinery orders have declined for six straight quarters. JPY was also supported by report of widening of Japan's current account surplus which was partly fueled by rising exports. Today's Japanese economic data suggests that the Japanese recession may be nearing an end. JPY was the weakest performing currency last week falling 2.3% versus the USD primarily pressured by improving risk sentiment. A similar debate is emerging for the outlook for JPY and risk appetite as has emerged for the USD. It is not yet clear whether improving Japanese economic outlook and signs that the global economy is on the verge of recovery will offset selling of the JPY based on improving risk appetite. Polls released Friday suggest that the opposition party in Japan is expanding its lead over the LDP in front of the national elections scheduled for August 30th. JPY may have also gotten a boost from a statement from the leaders of the opposition party that FX intervention is undesirable if FX markets are in line with fundamentals. Focus turns to Tuesday's BOJ policy decision. No policy change is expected. BOJ is expected to maintain a cautious view of US economy. The trade will be looking to see whether the BOJ is considering in an exit strategy from quantitative ease.

On August 12th July corporate goods orders will be released expected at -0.1% compared to -0.3% last month. Also on August 12th revised June industrial output is due for release expected at 2.6% compared to 5.7% last month. On August 14th June tertiary activity will be released expected at -0.3% compared to -0.1% last month.

Key technical levels to watch in USD/JPY include support at 96.25 with resistance at 97.80 the August 7th high and 98.60 the June15th high.

 

EUR
EUR traded mixed finding limited support from report that EU investor confidence rose to its best level in over a year and French industrial production came in above expectations. EU Sentix index improved to -17 in August from -31.3 in July. The trade had expected a reading of -25.8. The Sentix outlook component also improved to 8 from -5.5 last month. French June industrial production rose by 0.3%, the trade was looking for a flat reading on the French industrial production. Last week the EU reported that manufacturing PMI rose to one year high. These reports will encourage speculation that the EU recession is ending. Apart from focus on the FOMC meeting and the US economic calendar the trade will be looking at this week's release of EU Q2 GDP industrial production and CPI. GDP is expected to confirm continued contraction but at a slower rate. The industrial production report is expected to show a modest rise. EU CPI is expected to show a slight rise. These reports will be important to investor speculation about outlook for the EU economy and ECB policy. ECB officials continue to downplay the risk of deflation and expect gradual economic recovery in 2010. The GDP and CPI reports will likely encourage the ECB to maintain steady monetary policy and the current size of the ECB's asset purchase program. The ECB elected to hold rate policy steady last week at 1% and maintain a neutral bias. EUR traded lower to end the week pressured by report of better than expected US unemployment. The trade will look to see whether there is a similar reaction should this week's US retail sales and Michigan sentiment confirm improved outlook for the US economy. EUR is experiencing selling interest above 1.4200. Last weeks break of 1.4300 suggests that the EUR may be ripe for a deeper correction.

On August 11th July German final CPI will be released expected at 0.7% compared to 0.5% last month. On August 12 EU industrial production will be released expected to rise 0.3% compared to 0.5% last month. On August 13th EU Q2 flash GDP is due for release expected at -1.1%. On August 14th EU July HICP will be released expected at 0.1% compared to flat last month.

The technical outlook for the EUR is turning negative as the EUR struggles hold will above 1.4200 and EUR price direction may be de-linking from risk sentiment. Expect EUR support at 1.4065 July 31st low with resistance at 1.4330.

    

CHF
CHF drifted lower Monday with selling pressure attributed to improving risk sentiment. Last week JPY and CHF were the worst-performing currencies primarily pressured by improving risk sentiment and diminished safe haven flows as a smaller than expected decline in US nfp encouraged speculation that the US recession is ending. For the past few months the CHF has been losing its safe haven attraction partly because of ongoing threat of SNB intervention coupled with continued weakening of the Swiss economic outlook. Last week Switzerland reported that Swiss unemployment rate rose to its highest level in five years. If this weeks US economic data confirms improved economic outlook for the US, widening of growth differential may spark additional selling pressure of the CHF. The only key economic release from Switzerland this week will be Thursday's release of July producer and import prices expected to fall 5.8% compared to a 5.6% decline last month. The trade will be looking at the producer and import prices to gauge deflation risk in Switzerland. The SNB is concerned that stronger CHF has contributed to lower inflation in Switzerland and soft producer and import prices could revive the threat of intervention as the SNB seeks to fight deflation risk in Switzerland. EUR/CHF cross has been holding above the 1.5300 level and SNB is most likely unconcerned about the cross at the current level. This may reduce the risk of intervention as long as the cross holds its recent gains. Expect USD/CHF support at 1.0565 the August 3rd low with resistance at 1.0955 July 6th high.

GBP
GBP traded lower pressured by a Daily Telegraph report which says that the BOE is expected to warn about UK deflation risk and that the BOE is also expected to downgrade its economic forecasts for the UK economy. Last week, GBP closed little changed versus the USD but traded sharply off of 10 month highs after the BOE surprised investors and expanded quantitative ease. The BOE's decision to expand quantitative ease suggests the BOE is not yet convinced that the UK recession is ending despite a string of recent UK economic reports which suggest the UK economy is improving. Last Thursday the BOE elected to extend quantitative ease by £50 bln to a total of £75 bln and elected to hold rate steady at 0.5%. The BOE decision to extend quantitative ease was directed at trying to boost the UK economy. The key question is how much further is the BOE is willing to go on quantitative ease? Last Friday the UK reported higher than expected PPI. Higher UK PPI suggests that the BOE may be closer to the end of quantitative ease. This week's key event risk will be Wednesday's release of the BOE's quarterly inflation report. In light of the BOE's decision to expand quantitative ease last week and today's Telegraph report which says that UK may be facing a Japanese style decade of deflation, the UK inflation outlook will become very important to future BOE policy decisions.

This week's UK economic calendar includes the August 11th release of July BRC retail sales expected at 1.1% compared to 1.4% last month. Also on August 11th June trade balance will be released expected at -6.14 bln compared to -6.26 bln last month. On August 12th June unemployment will be released expected unchanged at 7.6% with claimant count expected to rise by 15k along with the BOE quarterly inflation report.

The technical outlook for GBP is mixed as GBP fails to hold below 1.6600. Expect near-term support at 1.6470 the July 30th low with resistance at 1.6720 the August 7th high.

 

CAD
CAD traded lower continuing to experience selling pressure sparked by Friday's release of weaker than expected Canadian employment report. Canada's July unemployment rate was unchanged at 8.6% but employment growth fell by 45k. The trade had expected Canadian job loss of -15k. Canada's August Ivey manufactured PMI came in at 51.8, well below market expectations of a rise to 54.5. CAD was also pressured by a slight uptick in risk aversion as US and European equity markets drift lower. There were no major Canadian economic reports released in today's trade. CAD ended last week 0.4% lower versus the USD. The Canadian employment report and comments from Canada's Finance Minister Flaherty warning that Canada can take steps to slow the CAD appreciation sparked selling of the CAD. The threat of intervention remains the near-term focus for CAD trade. Late Tuesday, Canada's Finance Minister Flaherty said he is concerned with rapid changes in the CAD rate and that there are steps that can be taken to dampen the CAD's rapid appreciation. Flaherty's comments raise the risk of intervention to try to weaken the CAD. In late July, BOC Governor Carney said that stronger CAD versus the USD is an important brake on growth. Focus turns to Tuesday's release of Canada's housing starts. Bloomberg reports that the head of Canada's largest pension fund said that BOC intervention to weaken the CAD would be successful. He cited the recent success of the SNB intervention to weaken the CHF.

This week's Canadian economic calendar includes the August 12th release of June new Housing Price Index expected and on August 14th June manufacturing shipments will be released.

The technical outlook for CAD is mixed as USD/CAD rises back above low 1.0700. Look for near-term support at 1.0675 the August 5th low with resistance at 1.0915 the July 30th high.

 

AUD
AUD traded higher Monday but struggled to hold gains as the rally in equity markets stalls and there are reports that Chinese banks have been ordered to slow lending. AUD strengthened in overseas trade supported by report that Australia's June housing finance rose 1.1%. AUD was also supported by a rise in Asian equity markets and reports that Goldman Sachs has raised its GDP forecast for Asian and China. The Nikkei closed 1.5% higher. Asian and Chinese growth outlook are key to Australia's export outlook. There however is uncertainty about the outlook for Asian growth. If banks in China take action to try and reduce lending and this slows the Chinese economic recovery it could be a negative for the Australian export outlook and Australian economy.  AUD gains were limited by light selling pressure in the AUD/ JPY cross with JPY supported by report of improving machine orders and higher exports in Japan. AUD ended last week little changed versus the USD but was generally supported by a shift in RBA monetary policy. Last week the RBA elected to hold monetary policy steady at 3% and dropped its easing bias. In its monetary policy statement for August the RBA said that it will look to move towards more normal interest rate policy and that there is less need for further rate cuts. The RBA went on to upgrade its inflation and growth forecasts. It's not clear whether the RBA has been intervening to sell the AUD the last few days. In June the RBA aggressively sold a record amount of AUD intervening to try to slow the AUD rise when the AUD approached 8300. Heavy selling interest of the AUD is reported above 8400. It would not be surprising to find out that the RBA was active in today's trade as well. The main risk to further AUD gains is investor positioning and sentiment. Sentiment towards the AUD may be reaching extreme on bullish consensus and the trade is heavily long AUD. AUD may be ripe for a technical selloff.

On august 12th, Q2 Labor cost index will be released expected unchanged at 0.8%.

The technical outlook for the AUD is positive as AUD rallies above 8400. Expect AUD support at 8235 the July 31st low with resistance at 8470 the August 4th high.