• USD: Higher, stocks struggle despite improvement in pending home sales and manufacturing ISM
  • JPY: Lower, Hayashi warns of high risk of deflation and calls for continued accommodative BOJ policy
  • EUR: Lower, EU manufacturing PMI rises and unemployment hits a 10 year high
  • GBP: Lower, manufacturing PMI contracts and consumer credit turns negative, mortgage approvals rise
  • CAD and AUD: AUD & CAD lower, RBA statement less hawkish, China's PMI rises, crude rallies

Overview     
After an unusual day Monday which saw the USD, stocks and commodity prices all trade lower in tandem USD rebounded Tuesday. USD was supported by weaker equity market trade in Europe and the US, report of a fall in UK manufacturing PMI and the RBA decision to hold rate policy steady. USD pared gains midsession pressured by a rally in US equities sparked by report of better than expected US pending home sales and ISM manufacturing data. These reports helped to temporarily boost risk sentiment and partly reverse the pullback in risk appetite in overseas trade. Stocks failed to hold the data inspired gains, turned lower and the USD traded to the day's highs. JPY was pressured by a statement from Japans economics minister warning of the high risk of deflation in Japan. Asian equities traded marginally higher despite a warning from a former Morgan Stanley analyst that the Shanghai Index may fall another 25% because of uncertain outlook for China's economy. China's PMI was fairly impressive rising to a sixteen month high, but the data failed to allay fears about China's economic outlook. CHF traded mixed with downside limited by report of better than expected Swiss Q2 GDP and report that Swiss manufacturing PMI rose above 50 in August. Swiss Q2 GDP declined by just 0.2% EUR drifted lower as EU unemployment rate rises to highest level in 10 years. EUR downside was limited by report of expanding EU manufacturing PMI. September has historically been one of the worst months for US equities. This may spark a pullback in risk appetite and demand for USD

Today's US data:
July construction spending declined by 0.2% a flat reading was expected. August ISM rose to 52.9 compared to 48.9 last month, a reading of 50.5 was expected. July pending home sales rise 3.2% and 12% from last year.

Upcoming US data:
On September 2nd ADP employment will be released expected -263k compared to -371k last month. Q2 final productivity and unit labor costs will be released along with July factory orders on September 2nd. Productivity is expected at 5.9% compared to 6.4% in the preliminary report. ULC is expected at -5.3% compared to the original report 5.8%. Factory orders are expected to rise 1% compared to 0.4% last month. On September 3rd initial jobless claims for the week ending 8/29 will be released expected 556k compared to 570k last month along with August manufacturing PMI expected 48 compared to 46.4 in July. On September 4th August unemployment rate would be released expected at 9.5% compared to 9.4 last month with nonfarm payrolls -220k compared to -247k in July.

JPY
JPY traded lower with downside limited by safe haven demand as equity markets decline in Europe and the US. JPY was pressured by a statement from Japan's Economics Minister Hayashi that there is a high risk of deflation in Japan and the BOJ must maintain accommodative policy for a while. AUD/JPY traded lower with the AUD pressured by less hawkish RBA policy statement, EUR/JPY traded mixed as EU economic data was mixed. EU manufacturing PMI posted additional games, but EU unemployment rose to a 10 year high. GBP/JPY traded lower with GBP pressured by report of a contraction in UK manufacturing PMI and weaker than expected consumer credit demand. The trade continues to digest the impact of Sunday's landslide victory for the DPJ party and what this may mean for Japan's economy, budget and relations with the US and Asia. The initial reaction to the change in power in Japan has been mostly positive for Japanese markets and the JPY as the DPJ party is expected to focus on measures to boost domestic demand. Hayashi also said that the DPJ will have to carefully consider next year's budget in Japan. There is concern that DPJ spending plans will increase Japan's budget deficits. The big risk is that JPY may be vulnerable to concern about expanding budget deficit in Japan as the DPJ controls a majority of the parliament and could pass major new spending legislation with little opposition. There was the reaction to report that Japan's domestic auto sales rose for the first time this year.

Thursday Japan will release in Q2 capital spending expected at -23% compared to -25.3 and Q1.

Key technical levels to watch in USD/JPY include support at 91.85 the July 13th low with resistance at 94.06 the August 28th high.

EUR
EUR traded lower pressured by mixed economic data from the EU and Germany and weaker equity market trade. EU August manufacturing PMI rises to 48.2 compared to the original report of a rise to 46.3. EU July unemployment rate rose to its highest level in 10 years at 9.5%. In contrast, German unemployment rate was unchanged at 8.3% last month and total German jobless dropped in August. The EU and German employment data suggest that consumer spending will likely remain weak. These reports are unlikely to encourage any change in ECB policy at Thursday's policy meeting. The ECB meet Thursday and no policy change is expected as rising unemployment will limit consumer spending and inflation remains near record lows. The ECB is likely to hold rates steady at 1%, repeat its expectation that the EU economy will recover in 2010 and restate that inflation will turn positive as the economy recovers. Investors will look for clues to the timing of when the ECB will elect to hike interest rates in the months ahead. EUR has traded in the same range for the last eight days and the trade is watching closely to see if the EUR attempts to test the upside or downside parameters of this range.

On September 2nd EU PPI will be released expected -5.9% y/y along with EU GDP expected at -2.5% q/q and 0.3% m/m. On September 3rd EU retail sales would be released expected at -0.1% along with services PMI expected at 47.2.

The technical outlook for the EUR is mixed as the EUR rally stalls above 1.4400. Expect EUR support at 1.4209 the August 21st low with resistance at 1.4405 the August 27h high.

GBP
GBP traded lower pressured by report of an unexpected contraction in UK manufacturing PMI and weaker than expected consumer credit. UK August manufacturing PMI declined to 49.7 from 50.2 last month. Consumer credit declined by 0.2 bln, this marks the first negative reading for UK consumer credit since 1993. Consumer credit report points to weak recovery outlook and less consumer demand. GBP downside was limited by report that mortgage applications rose to a 15 month high. July mortgage applications rose by 50.1k compared to 47.9 K. last month. M4 money supply rose by 1.5% reflecting the impact of increased funding activity in the UK generated by the BOE's quantitative ease policy. The BOE meet on September 10th and there remain concerns that the BOE may elect to again expand quantitative ease to support the UK economy. GBP has been underperforming with selling pressure attributed to ongoing concern about the outlook for the UK economy and in response to the BOE's recent decision to expand quantitative ease. In addition, GBP has been pressured by report of a record budget deficit in July and concern that rising deficit spending will force the UK government to issue more debt and eventually raise taxes to cover the spending shortfall. If the BOE decides to again expand quantitative ease would increase the UK government debt burden. At the last BOE policy meeting the policy board was split with three members including BOE Governor King calling for a wider expansion of quantitative ease. UK markets were closed for holiday limiting price action. On balance UK economic data points toward stabilization of the UK economy with Q2 GDP contracting by a smaller amount than expected and home prices rising at the fastest in two and a half years but the fact that UK manufacturing PMI is below 50 suggest that the recovery will be weak and the BOE may have to take additional measures to boost growth.

On September 2nd construction PMI will be released expected at 48 compared to 47 last month. On September 3rd services PMI will be released expected at 53.9 compared to 53.2.

The technical outlook for GBP is mixed as GBP falls below 1.6300. Expect near-term support at 1.6150 the August 27th low with and 1.5983 the July 8th low with resistance at 1.6382 the August 28th high.

CAD
CAD extended Monday's decline pressured by weaker equity market trade and concern that the Canadian recovery may be weaker than expected. Monday the CAD traded sharply lower as Canada reported GDP contracted a faster pace in the second quarter. The June GDP however posted a modest rise of 0.1% which suggests could fall by another 25% added additional selling pressure to the CAD on concern about the outlook for China in the global economy. Threat of intervention will continue to rise if the Canadian resumes its recent rally. The BOC's Lane last week expressed concern about the impact of CAD strength on the Canadian economy. Lane's comments increase the risk of intervention. CAD downside was limited by report that PetroChina plans to buy a stake in the two Canadian oil sands projects and by a rebound in US equities the price of crude. CAD direction will remain closely correlated to speculation about the global recovery and risk sentiment. This week's key focus is Friday's release of Canada's unemployment for July. The trade expects the July unemployment to show that the rate of job losses slowed in Canada.

On September 4th August unemployment rate will be released expected at 8.6% and employment growth expected at -22.7. August IVEY manufacturing PMI will also be released on September 4th expected at 53 compared to 51.8 last month.

The technical outlook for CAD has turned negative as USD/CAD rises above 1.1100. Look for near-term support at 1.0872 the September 1st low with resistance at 1.1125 the August 17th high.

AUD
AUD traded sharply lower pressured by the RBA's decision to hold rate policy steady and refrain from signaling when rates will rise. The RBA elected to hold policy steady at 3% and failed to lay out a timeline for rate hikes. The AUD was pressured by perception that the RBA policy statement was more dovish than expected. Monday, AUD traded higher despite declining equities and weaker commodity prices with support mainly from RBA rate hike speculation. Many analysts expect the RBA hike rates before year end. Australian economic data was mixed with the Q2 current account rising more than expected, manufacturing PMI at its highest level in 17 months and building approvals stronger than expected. Q2 current account deficit widened to 13.35 bln, a 10.6 bln deficit was expected. August manufacturing PMI rose 17.2 points to 51.7. July building approvals rose 7.7%. AUD failed to gain much support from a modest rebound in the Shanghai Index or report will better than expected Chinese PMI. A former Morgan Stanley analyst warns that the Shanghai Index could fall another 25%. AUD price direction has been closely tracking the direction of the Shanghai Index. Many analysts are warning that September is an historically weak month for stocks.

On September 2nd Q2 GDP will be released expected at 0.6% compared to 0.4% last quarter. On September 3rd July trade balance will be released expected to improve 6.9 bln from 6 bln last month.

The technical outlook for the AUD is positive as AUD holds above 8300. Expect AUD support at 8239 the August 27th low with resistance at 8480 the August 15th high and 8525 the September 22nd high.