• USD: Mixed, personal income falls most since 2005, pending home sales rise 3.6%
  • JPY: Mixed, supported by a dip in risk appetite, Japan's retail trust funds see first net inflows for 2009
  • EUR: Mixed, EU annual PPI falls at a record pace
  • GBP: Higher, UK construction PMI rises to 16 month high, Q2 money supply rises faster than expected
  • CAD and AUD: AUD & CAD mixed, RBA drops easing bias, crude prices fall below $71

 

Overview
USD traded mixed Tuesday rebounding from 2009 lows as the rally in global equity markets and risk appetite takes a breather. Profit-taking emerged in global equity markets and the FX markets as investors brace for this week's key event risks which include ECB and BOE central bank policy meetings Thursday and Friday's release of US July nonfarm payrolls. No major change is expected from the ECB or the Bank of England. The trade will be looking to see whether either central bank elects to expand their asset purchase programs. The White House says that Friday's US jobless data will show higher unemployment. A number of analysts expect a smaller decline in US nonfarm payrolls primarily because of seasonal factors and that the July unemployment report will confirm a slower pace of jobs destruction in the US. In overseas trade, the AUD and GBP rallied to new multi-month highs as the RBA drops its easing bias and UK construction PMI was at its best level in 16 months. EUR drifted lower pressured by report that EU PPI fell to a record low. JPY traded higher supported by profit-taking in equity markets and a modest dip in risk appetite. The recent rally in equities and commodities sparked improvement in risk appetite and sent the USD to new lows for 2009. The rally in equities and commodities is based on speculation that the worst of the global recession has passed. The key issues for USD outlook include how strong the global recovery will be and can the rise in risk appetite be sustained? Most analysts expect a weak global recovery. This may mean that USD downside will be limited. The direction of equity markets is a key gauge risk sentiment. The trade will monitor equity markets and upcoming global economic data to determine whether the current trends in equities and risk appetite can be sustained. US personal income fell at its fastest space since January of 2005. The drop in personal income raises questions about the potential strength of US economic recovery. The fall in personal income was counterbalanced by report that June pending home sales rose 3.6%. Stocks turned higher and the USD lower after the release of better than expected pending home sales. Expect near-term consolidation in the FX markets with a slightly positive bias for the USD as technical indicators suggest the USD is oversold.

Today's US data:
July personal income fell by 1.3% and personal consumption rose 0.4%. Personal income was expected to fall 1% and personal consumption was expected to rise 0.3%.The personal income decline was the largest monthly decline since January 2005. June Pending Home Sales Index rose 3.6% to 94.6, a reading of 91.2 was expected. Pending home sales have risen 6.7% in 2009 and rose for the fifth straight month in June.

Upcoming US data:
On August 5th June factory orders will be released along with July nonmanufacturing ISM index. Factory orders are expected to fall 1% compared to 1.2% rise last month. The nonmanufacturing ISM index is expected to rise to 48 from 47 last month. On August 6th initial jobless claims for the week ending 08/01 will be released expected at 580k compared to 584k last week. On August 7th July unemployment and nonfarm payrolls will be released. The unemployment rate is expected to rise to 9.6% from 9.5% last month with nonfarm payrolls at -320k compared to -467k in June.

JPY
JPY opened higher and rebounded in cross trade mainly supported by a dip in risk appetite as global equity markets weakened on profit-taking. JPY was also supported by report that Japan's retail trust funds experienced their first net inflow for 2009. The net inflow to Japanese retail trust funds is a sign that Japanese investors are growing more confident in the global economy. Japan's July monetary base rose 6.1%. Japan's Finance Minister Yasano said he is not concerned about the recent rise in long-term interest rates. Japan's Economics Minister Hayashi said it was too early to conclude that the deflation risk has returned. These comments confirm recent Japanese economic reports which suggest that the Japanese economy is stabilizing. The stabilization of Japan's economy should reduce the risk of deflation and justifies the current rise in long-term bond yields. EUR/JPY, GBP/JPY and AUD/JPY initially traded higher with GBP supported by report of improving UK construction PMI and AUD supported by the RBA's decision to drop its easing bias. The JPY crosses turned lower pressured by profit-taking and a modest dip in risk appetite as equity markets pare recent gains. JPY price direction will continue to be closely correlated to equity markets and risk appetite. JPY turned lower after the release of strong US pending home sales data as stocks rebound from the day's lows. This week's Japanese economic calendar includes the August 6th release of June leading indicators expected at 1.1% compared to 0.9% last month. On August 7th June machinery orders will be released.

Key technical levels to watch in USD/JPY include support at 93.50 the July 23rd low with resistance at 95.90 the July 30th high.

 

EUR
EUR traded mixed to lower pressured by profit-taking, a dip in risk appetite and report of a record fall in EU producer prices. EU July PPI fell at a record pace of 6.6% on an annualized basis. The trade is debating the implications for ECB policy from today's EU PPI data. The annual record decline may encourage the ECB to take additional easing measures to fight deflation risks. Recent comments from the ECB indicate that the ECB expects improving growth and rising energy prices to bring inflation back to target some time in 2010. The ECB will likely hold policy steady and maintain its forecast that deflation is not a risk for the EU discounting today's PPI report. EUR downside was limited as the correction in equity markets was moderate and the trade expects the ECB to hold monetary policy steady at Thursday's policy meeting. The week's main focus will be Thursday's ECB policy meeting. The improvement in EU economic outlook and today's report of the first monthly gain in EU PPI since July 2008 will encourage the ECB to maintain steady interest rate policy. EUR may find additional support if the ECB elects to hold monetary policy steady. The trade may begin to debate the potential timing of a possible tightening by the ECB if commodity prices continue to rally and the global economic outlook improves. Today the RBA announced that it was dropping its easing bias. The ECB may not want to be left too far behind as the RBA is laying the foundation to be the first central bank to raise interest rates as the global economy recovers. Based on Monday's release of improving EU manufacturing PMI the ECB is unlikely to  increase its covered bond purchases.

On August 5th EU services PMI for July will be released expected at 45.6 compared to 44.7 last month along with June retail sales expected to rise 0.2% compared to -0.4% last month. On August 6th the ECB meet, no policy change is expected. Also on August 6th German June factory orders will be released expected to rise 0.6%

The technical outlook for the EUR is positive as the EUR rises above 1.4400. Expect EUR support at 1.4300 with resistance at 1.4500.

 

GBP
GBP traded at a 10 month high versus the USD supported by report of better than expected UK construction PMI and rising UK money supply. UK July construction PMI rose to a 16 month high at 47 compared to 44.5 last month. UK Q2 money supply growth was faster than expected at 3.7% compared to 3.3% in Q1. Monday the UK reported that manufacturing PMI rose above 50. These reports suggest that the UK economy has stabilized and the recession is nearing an end. This week's main focus will be Thursday's Bank of England policy meeting. Based on UK manufacturing and construction reports the Bank of England will likely elect to hold rate policy steady and maintain the current level of asset purchases. Extension of quantitative ease seems unlikely in light of UK manufacturing and construction PMI data. GBP continues to benefit from improving risk appetite and speculation that the UK economy is nearing a bottom. 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 August 5th release of July consumer confidence index expected at 60 compared to 58 last month along with July services PMI expected at 51.8 compared to 51.6 last month. Also on August 5th June industrial production will be released expected flat compared to 0.6% last month. On August 6th the BOE meet, no policy change is expected. On August 7th, July PPI will be released expected at 0.2% compared to-0.8% last month.

The technical outlook for GBP is positive as GBP trades above 1.6800. Expect near-term support at 1.6697 the August 3rd low with resistance at 1.7110.

 

CAD
CAD traded lower pressured by profit-taking and weaker crude prices. The CAD is correcting from a 10 month high as crude prices drop below $71 a barrel and the rise in global equity markets stalls. The recent rally in the CAD was sparked by improving risk sentiment, rising equity markets and higher commodity prices. The improvement in risk appetite and global economic outlook coupled with last week's report that Canada's raw material prices rose 6.2% in June has encouraged speculation that the Bank of Canada's next policy move will be to hike interest rates sometime within the next 12 months. Focus turns to Friday's release of Canada's July unemployment. The unemployment rate is expected to rise to 8.8% from 8.6% in June. This would be the highest level for Canada's unemployment in eleven years. The net change in job creation is expected at -20k compared to -7.14k last month. A weak Canadian unemployment report could limit short-term gains for the CAD generating concern that the Canadian economic recovery will be moderate because of continuing loss of jobs. The rally in the CAD may also increase the risk of intervention rhetoric from BOC officials. BOC officials have expressed concern that strong CAD may limit economic recovery in Canada. 

On August 6th June building permits will be released expected -4.2% compared to a 14.8% rise last month.

The technical outlook for CAD is positive as USD/CAD falls below 1.0700. Look for near-term support at 1.0550 the October 1st low with resistance at 1.0795 the August 3rd high.

 

AUD
AUD traded at a fresh 10 month high versus the USD supported by positive Australian housing data and the RBA's decision to shift policy bias to neutral. Australia's Q2 house price index rose 4.2%. The RBA elected to hold interest rates steady at 3% and said that it was dropping its easing bias. According to the RBA, downside risks for the Australian economy have diminished, the US economy is nearing a bottom and China's economy is strong. The RBA went on to say that the central bank has more room to move on monetary policy than other nations and that interest rates will rise as the global economy recovers. The most significant development from today's RBA policy meeting was the RBA dropped language in its statement that suggested that low inflation offered room for further rate cuts if needed. The RBA dropped this language from the statement and has shifted policy bias from accommodative to neutral. The trade will begin to monitor the possible timing of RBA rate hikes as the global economy recovers. The shift in RBA monetary policy bias was telegraphed last week by RBA Governor Stevens and was the major reason for the surge in the AUD above 8400 since last Friday. AUD traded lower in US session pressured by profit taking as the rally in stocks and commodities stalled. The main risks to further AUD gain is the possibility of intervention and potential that the global equity market rally and rebound in commodity prices is getting ahead of the fundamental news. The RBA aggressively intervened selling AUD in June. RBA officials have expressed concern that strengthening AUD could hurt the recovery. Today's RBA statement made no reference to the strength of the AUD. Unemployment data is due for release from the US, Canada and Australia this week. These reports will be an important for risk sentiment.

This week the Australian economic calendar includes the August 4th release Q2 house prices expected at -1 compared to -2.2% last quarter. June retail sales will also be released on August 4th expected to rise 0.8% compared to 1% last month. On August 5th, June trade balance will be released expected at -350 mln compared to -556 mln last month. On August 6th July unemployment will be released expected at 5.9% compared to 5.8% last month with jobs growth expected at -15 k compared to -21.4 k last month.

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 8525 the September 22nd high.