• USD: Higher, jobless claims decline sparks risk demand, existing home sales drop sparks risk aversion
  • JPY: Higher, supported by repatriation flows and Yuan revaluation speculation, exports fall 36% y/y
  • EUR: Lower, German IFO business sentiment rises at a slower pace, Fed not prepared to withdraw stimulus
  • GBP: Lower, BOE's King says weak GBP will help rebalance UK economy
  • CAD and AUD: AUD & CAD lower, Australian home sales rise, BOC concern about CAD strength

Overview
USD and GBP opened lower Thursday. USD was pressured by the FOMC policy statement which says that the Fed will keep interest rates low for an extended period. The Fed sees the US economy improving but not enough to withdraw stimulus. GBP was pressured by dovish comments from the BOE Governor King that a weak GBP will help to rebalance the UK economy and that weaker GBP was helping to cushion UK economic downturn. USD downside was limited by report of an unexpected decline in US August existing home sales. JPY traded higher supported by repatriation flows in front of Japan's fiscal half-year end on September 30th and a report that G-20 officials may increase pressure on China to revalue the Yuan to help reduce global trade imbalances. EUR opened higher and rallied to a five month high versus the GBP.EUR gains were limited by report of below expectation German IFO business confidence and a statement from an IFO official that it's not clear if the EU recovery is self sustainable. EUR/CHF cross traded at a three-month low. The weakness in the EUR/CHF increases the risk of SNB intervention. Commodity currencies were mixed rallying in early trade despite weaker crude prices with AUD supported by report of strong Australian home sales. CAD gains were limited by a statement from the BOC warning that strong CAD puts the Canadian recovery at risk. AUD turned lower tracking weaker US equities. US economic data was mixed with jobless claims falling to their lowest level since the week ending July 11th and existing home sales posting an unexpected decline in August. USD turned higher for the day after the release of the unexpected fall in August existing home sales. Stocks dropped in reaction to the home sales report. USD was also supported by report that the Fed may reduce the TSLF facility. Focus turns to the G-20 meeting. The G-20 meeting will be held on September 24th and 25th.The G-20 meeting may spark selling of the USD if the G-20 suggests that exchange rates will need to be adjusted to help correct global trade imbalances.

Today's US data:
A weekly jobless claim for week ending 9/19 declined by 21k to 530k, a decline of 540k was expected. Existing home sales for August dropped by 2.7% to 5.10mln units, a rise to 5.30mln units was expected. USD rebounded after the release the existing home sales report as stocks erase early gains.

Upcoming US data:
On September 25th August durable goods will be released expected at 1.1% compared to 5.1% last month along with final University of Michigan sentiment for expected unchanged at 70.2. August new home sales will also be released on September 25th expected 450k compared to 433k last month.

JPY
Japanese markets reopened Thursday and the JPY traded higher. JPY was supported by repatriation flows in front of Japan's fiscal year-end on September 30th and Yuan revaluation speculation as G-20 nations may increase pressure on China to revalue its currency to help reduce global trade imbalances. There was limited reaction to report that Japan's August trade balance rose by ¥185.7bln and exports declined by 36% y/y. The new Japanese government has pledged to try to shift Japan's economic focus away from an export driven economy and to boost domestic growth. There is an ongoing debate as to whether the new government will abandon the prior government's intervention policy to try and weaken the JPY to help Japan's exporters. The continued weakness in Japan's exports may be partly responsible for the recent reversal of comments by Japan's Finance Minister Fujii in regard to Japan's FX intervention policy. Fuji initially indicated that strong JPY would be good in the long run for Japan's economy and that he was against intervention to weaken the JPY to help exporters. Fuji's more recent statements indicate that he does not want to be labeled as a supporter of a strong JPY and that the JPY should reflect Japan's economic fundamentals. As the new Japanese government tries to make a transition from an export led economy, the continued weakness in Japan's export sales will most likely temper the new government's rhetoric in regard to the JPY. The incoming foreign exchange advisor to Japan's finance minister, Gyohten said Thursday that the Japanese government should not rule out FX intervention and should retain currency market intervention as a policy option to counter rapid foreign exchange movements that could destabilize economies. Gyothen went on to say that Japan should work with other major economies to help the US reduce its current account deficit and to shore up investor confidence in the USD. Gyohten's comments were reported on the Dow Jones newswire. Seasonal repatriation flows in front of Japan's fiscal year end coupled with the Feds pledged to maintain low yields should continue to boost demand for the JPY.

Key technical levels to watch in USD/JPY include support at 90.10 the September 10th low with resistance at 92.55 the September 21st high and 93.30 the September 7th high.

 

EUR
EUR opened higher supported by report of improving German business confidence, gains in cross trade to the GBP and in reaction to the Fed's statement that interest rates will remain low for some time. The German IFO business confidence index improved for the sixth consecutive month in September rising to 91.3 from 90.5 last month. The current conditions component of the IFO improved to 87 from 86.2 last month. The improvement in German business sentiment follows yesterday's report of improvement in EU manufacturing and services PMI and stronger EU industrial production. In overseas trade EUR gains were partly limited by a statement from an IFO official that it is questionable as to whether the recent recovery in the German economy is sustainable and by the threat of SNB intervention as the EUR/ CHF cross trades at a three month low. EUR traded to the day's highs after the release of much better than expected decline in US jobless claims. The decline in US jobless claims confirms the Feds statement that the US economic activity has picked up. Improving US economic outlook helps to boost risk appetite and demand for higher yielding assets. EUR traded lower for the day and erased early gains after the release of an unexpected drop in US August existing home sales. EUR/GBP traded above 9100 with GBP pressured by a statement from the BOE Governor King that a weak GBP will help to rebalance the UK economy. Focus turns to the G-20 meeting. EUR may extend its current rally if the G-20 call for rebalance of global trade requires additional weakening of the USD.

On September 25th EU August M3 will be released expected 3.4% compared to 3% last month

The technical outlook for the EUR is positive as EUR rallies above 1.4800. Expect EUR support at 1.4682 the September 22nd low with resistance at 1.4865 September 8th high.

     

GBP
GBP traded lower versus the USD and at a five month low versus the EUR pressured by dovish comments from the BOE Governor King that a weak GBP will help to rebalance the UK economy. It is clear from Kings comments that the BOE would like to see a weaker GBP to help stimulate UK export growth and boost inflation. GBP was also pressured by a report in the Daily Telegraph that the BOE has called an emergency meeting with major economists for next Tuesday to discuss the UK economic crisis. BOE officials denied that the meeting to be held Tuesday would be a crisis meeting and said that the meeting was to update on the impact of quantitative ease. GBP was also pressured by rumors that the BOE is still considering cutting the rate that it pays to financial institution deposits held by the BOE. The trade took little comfort from Kings comment that UK growth may be beginning to pick up. GBP reversed yesterday's rally that was inspired by the release of the BOE minutes for the September policy meeting which showed that the BOE unanimously voted to maintain the current level of bond purchases. At the August BOE policy meeting the BOE policy the board was divided over whether there should be a larger expansion of the BOE's bond purchases. In September, the BOE voted 9-0 to maintain the current level of bond purchases which means that there is no immediate plan by the BOE expand its bond purchases beyond the current £175bln. GBP has been underperforming in part because of concern that the BOE may expand quantitative ease. UK PM Brown said that continued stimulus is needed for the global recovery and he does not see a quick exit strategy from fiscal and monetary stimulus. Brown's comments are seen as negative the GBP. GBP also remains vulnerable to concern about rising UK government debt. Monday the BOE quarterly bulletin stated that GBP weakness is attributed to concern about financing of UK debt. Last Friday the UK reported a sharp rise in net public-sector borrowing. The UK August public-sector borrowing rose to 10.27bln from 5.09bln last month reflecting lower tax receipts. There is concern that the UK may be forced to raise taxes to fund the debt and that the continued expansion of deficit spending could lead to higher interest rates. Higher interest rates would be an additional threat to the UK economic recovery. EUR/GBP traded at a five month high breaking above 9100 in reaction to Kings weak GBP comment. Near term target for EUR GBP is 9400 with some analysts seeing a target of parity in the months ahead.

The technical outlook for GBP is negative as GBP trades below 1.6200. Expect near-term support at 1.6026 the July 9th low and 1.5803 the June 8th low with resistance at 1.6389 the September 24th high.

 

CAD
CAD opened higher with gains limited by weaker crude prices and threat of intervention. Crude prices have declined 4% in the last 24 hours pressured by report of increased supply and concern about global demand. CAD turned sharply lower after the release of weaker than expected US August existing home sales. The US existing home sales report sent equities and commodities lower and took a chunk out of risk appetite. The existing home sales report suggests the US recovery will be weak and heightens fears about the Canadian economy. For the second day in a row BOC officials expressed concern about CAD strength warning that the strong CAD is a risk to the Canadian recovery. Earlier in the week Canada's PM Harper said that Canada has a fragile recovery with most of the growth tied to stimulus Harper said that he is not seeing the type of growth to improve the labor market. PM Harper went on to say that the government must make sure that the next wave of growth is built on a sustainable basis and that the global economy cannot hinge solely on the US consumer. BOC's Carney warns that Canada's jobless rate is likely to continue to rise and that it was too early to say if Canada is experiencing self-sustaining growth. BOC Deputy Governor Longworth said that persistent strength of the CAD remains a risk to growth and to the return of inflation to target. No major Canadian economic data was released in today's trade. Focus turns to the conclusion of G-20 meeting Friday. The G-20 is expected to discuss global financial regulation, global imbalances and strategies for withdrawing economic stimulus measures.

The technical outlook for CAD is mixed e as USD/CAD trade above 1.0800. Look for near-term support at 1.0707 the September 24th low with resistance at 1.10930 the September 15th high and 1.1040.

 

AUD
AUD opened higher supported by rising global equities and report of improving Australian housing data. The Shanghai index was mixed and the Nikkei closed 173 points higher. Stocks in Europe also traded higher .AUD erased all of its overseas gains in reaction to report of an unexpected drop in US August existing home sales and a reversal of US stock market gains. Australia's August new home sales rose 11.4% compared to 0.1% last month, a rise of 0.3% was expected. The strong rise in Australian new home sales is further confirmation of improving domestic economic outlook in Australia and the report may encourage RBA rate hike speculation. Investors continue to debate the potential strength of the global economic recovery with government officials from Canada and the EU warning that the economic recovery will likely be muted. Earlier in the week, the Asian Development Bank raised its forecast for China and developing Asia. The Australian economy and AUD should benefit if the ADB forecast is correct. AUD traded at a one year high last week of 8778 supported by RBA rate hike speculation improving optimism. AUD has not taken out the 8778 level with today's high and 8770 at the time of this writing. Failure to take on this level could signal a technical divergence and lack of upside confirmation for the AUD rally. The fact that the AUD rally continues to stall at last week's high may raise suspicions that the RBA is intervening to try to limit AUD gains. AUD price direction will continue to track commodities, equities and risk sentiment with further gains linked to speculation about global economic outlook and the continuation of fiscal and monetary stimulus from the G-20 nations. The Fed indicated Wednesday that the US recovery is not strong enough to begin to withdraw stimulus. G-20 nations are expected to confirm that they will continue to maintain current stimulus plans.

The technical outlook for the AUD is positive as AUD trades back above 8700. Expect AUD support at 8620 the September 22nd low with resistance at 8820 the August 22nd 2008 high.