• USD: Lower, equity markets rise in reaction to better than expected earnings at Intel
  • JPY: Lower, BOJ holds rate policy steady, limits expansion of quantitative ease, pressured in cross trade
  • EUR: Higher, EU annual inflation falls in June, Constancio says interest rates are at appropriate level
  • GBP: Higher, claimant count rises less than expected, unemployment at the highest level since 1995
  • CAD and AUD: AUD & CAD higher, tracking equity markets and higher crude prices, Baltic index rises 4%

Overview
USD traded sharply lower Wednesday pressured by improving risk sentiment as global equity markets rally in reaction to better than expected earnings reports at Intel and Goldman Sachs. Risk sentiment and the direction of equity markets are the main drivers for a FX trade. The trade will continue to monitor US earnings reports to gauge whether the US recession may be nearing an end. Positive news for the US economy is seen as negative for the USD as it reduces safe haven demand for the USD. News from overseas was mixed with the Bank of Japan holding rate policy steady as expected. The BOJ however extended quantitative ease for just three months instead of six months. This suggests that BOJ may be concerned about the amount of stimulus that has been pumped into the Japanese economy by the Bank of Japan. Similar concerns may be emerging at China's central bank. The Chinese central bank made a small move to tighten monetary policy today. EUR rallied despite report of a bigger decline in June inflation. The UK posted its largest quarterly job losses on record. The GBP traded higher supported by improving risk sentiment and stronger global equity market trade. GBP upside was limited by the BOE's Beans statement that quantitative ease may have to be extended. Commodity currencies traded higher supported by improving optimism about the global recovery and CRB. CAD rallied despite report of a sharp drop in Canadian manufacturing shipments. US economic data was mixed with CPI rising a bit more than expected the Empire Manufacturing Index showing strong improvement industrial production falling less than expected and capacity utilization at a record low. USD remained on the defensive after the release of these reports as the data is unlikely to encourage a shift in the Fed's dovish policy bias. USD price direction will continue to track equity markets.

Today's US data:
June CPI rose 0.7%, the trade was looking for 0.5% rise. June core CPI rose 0.2%, a 0.1% rise was expected. CPI rose at its fastest level in 11 months but if you exclude rising gasoline prices core inflation remains low. July Empire Manufacturing Index improved to -0.55 from -9.41 in June, a reading of -5 was expected. June industrial production falls 0.4%, a 0.6% decline was expected. June capacity use falls to a record low 68 from 68.3 last month.

Upcoming US data:
On July 16th Philly Fed survey for July will be released expected -5 compared to -2.2 in June along with July NAHB index expected unchanged at 15.

JPY
JPY traded mixed with gains limited by selling in cross trade and diminished risk aversion as global equity markets rally. Better than expected earnings at Intel and Goldman Sachs fuels recovery hope. The BOJ elected to hold rate policy steady as expected but reduced the time frame for extension of quantitative ease. The BOJ said it will extend quantitative ease for just three months instead of its prior extension of six months. The BOJ's decision to reduce the time frame for quantitative ease is an indication that the Bank of Japan may be concerned about the amount of stimulus that has been pumped from the Japanese economy. This could be a prelude to an exit strategy for the BOJ from quantitative ease at some point in the near future. The BOJ lowered its 2009 fiscal GDP forecast -3.4% from -3.1% and raised its core CPI forecast to -1.3% from -1.5% last month. The BOJ's upward revision of its CPI forecast may reduce fear that Japan faces increased deflation risk. JPY turned lower in US session pressured by an extension of the US equity market rally.

On July 16th May tertiary activity will be released expected at -6.6% compared to -6.2% last month. On July 17th May leading indicators will be released expected unchanged at 0.9%.

Key technical levels to watch in USD/JPY include support at 91.75 the July 13th low and 91.15 the February 16th low with resistance at 94.00.

 

EUR
EUR traded sharply higher mainly supported by improving risk sentiment as better then expected earnings reports from the US generates hope that the global recession is ending. The EUR is also supported by a statement from the ECB's Constancio that interest rates are an appropriate level. EUR rallied despite report that EU core inflation unexpectedly declined in June. EU June inflation rose 0.2% m/m but declined 0.1% on an annual basis. EU core annual inflation rate declined at 1.4%. The June inflation report suggests that EU economic activity remains weak. Tuesday the German Zew index of economic sentiment was reported to have unexpectedly declined in July and May EU industrial production was weaker than expected. These reports coupled with today's decline in EU annual inflation rate suggest that deflationary pressures will continue in the EU. EUR traded above 1.4000 tracking strong rallies in European and US equity markets. EUR is well supported on breaks by improving risk sentiment and rising global equity markets.

On July 17th, EU May trade balance will be released expected to 3.1 bln compared to 2.7 bln last month.

The technical outlook for the EUR has improved as the EUR rises above 1.4000. Expect EUR support at 1.3970 the July 15th low with resistance at 1.4200 the July 1st high.

 

GBP
GBP traded higher supported by improving risk sentiment as global equity markets rally. GBP rallied despite mixed UK employment data and dovish comments from the BOE's Bean. UK headline unemployment rose 0.2% to 7.6% and the claimant count came in better than expected at 23.8k, the trade was looking for 41.3k rise in the claimant count. UK unemployment is at its highest level since 1995 and the claimant count this as a 12 year high. Average earnings reported up 2.3%. He was supported by the release of the survey that job openings in the London financial services industry rose to the highest level this year in June. The BOE's Bean expressed concern about UK banking sector and economic outlook. Bean suggested that the BOE can expand quantitative ease if necessary and that Bank of England would decide whether quantitative ease needs to be extended at the next monetary policy meeting. GBP direction will remain closely tied to equity markets and risk sentiment.

The technical outlook for GBP has improved as GBP rises above 1.6400. Expect near-term support at 1.6220 the July 14th with resistance at 1.6545 the July 1st high.

 

CAD
CAD traded higher supported by rising equity markets and higher crude prices. Equity markets rallied in reaction to report a better than expected earnings at Intel and Goldman Sachs, stronger Empire manufacturing data and higher US core inflation. Crude prices rallied above $60 a barrel. CAD traded higher despite report of much weaker than expected Canadian manufacturing shipments. Canada's May manufacturing shipments declined 6%, the trade had expected 2.5% decline. The drop in manufacturing shipments reflects weak auto sales and the shutdown of manufacturing plants. CAD extended its rally from Tuesday's trade to trade at a one-month high mainly supported by hope that the global recession may be ending. CAD was also supported by report of improving Canadian housing market. According to Canada's Real Estate Association, housing starts rose 8.7% in June. CAD firmed to start the week supported by upbeat comments from Canada's PM Harper. Canada's Prime Minister Harper said it was too early to unwind the fiscal stimulus, that spending cuts and tax hikes are not needed in Canada, he expects the Canadian budget to be back in the black as the economy rebounds and he sees signs of greater stability in the global economy. Harper expects Canada's budget to be in full recovery by 2011 supported by rising tax revenues. The direction of the CAD remains closely correlated to the outlook for the global economy and the direction of equities and commodity prices. Focus turns to the release of Canadian inflation and leading indicators.

On July 17th June CPI will be released expected unchanged at 0.1%. May leading index will also be released on July 17th expected 0.1% compared to -0.1% last month.

The technical outlook for CAD has improved as USD/CAD falls decisively below 1.1600. Look for near-term support at 1.1005 the June 12th low with resistance at 1.1400 the July 14th high.

 

AUD
AUD traded higher supported by improving risk sentiment and gains in cross trade to the JPY. A sharp rally in European and US equity markets fuels demand for higher yield assets and optimism that the global recession is nearing an end. AUD extended Tuesday's rally which was sparked by report of improving Australian business conditions. AUD/JPY traded 1% higher with JPY pressured by diminished safe haven demand as equity markets rally. Better than expected US corporate earnings and a sharp rise in the Baltic freight Index sparked demand for the AUD. The Baltic freight Index rose over 4% which could be a sign that global demand for goods has improved. AUD was also supported by a sharp rise in the CRB as crude and metal prices traded sharply higher. It remains an interesting question whether the rise in the CRB is primarily a reflection of weaker USD trade or an indication of improving global demand for commodities. China's Q2 reserves rose to 2.13 trln. Some of these reserves may be used by commodities or research could be diversified to non dollar-denominated currencies. AUD was also supported by technical demand which some analysts suggest was short covering sparked by stops above 8000. During June the AUD experienced significant liquidation selling pressure because of uncertainty about the pace of the global recovery and a downside correction in global equity markets and commodity prices. Better than expected earnings Intel Goldman Sachs and Johnson & Johnson coupled with upbeat comments from US Treasury Secretary Geithner helped to reduce fears about the global recovery. AUD price direction will closely track risk sentiment and commodity markets.

This week's Australian economic calendar includes the July 17th release of Q2 export and import prices. Export prices are expected at -9% compared to -4.5% last quarter. Import prices are expected at -8% compared to -2.8% last quarter.

The technical outlook for the AUD has improved as AUD rallies above 8000. Expect AUD support at 7814 the July 14th low with resistance at 7914 the June 30th high and 8040 the July 7th high.