• USD: Mixed, jobless claims higher than expected, service ISM as expected, rumor of China SWF selling
  • JPY: Lower, risk sentiment improves, MOF flows confirm foreign demand for Japanese equities
  • EUR: Lower, EU services PMI rise, retail sales fall, ECB holds policy steady maintains accommodation
  • GBP: Higher, UK services PMI rises to a two year high, libor rates fall to record low
  • CAD and AUD: AUD higher & CAD lower, Australian imports rise, political uncertainty in Canada

Overview     
USD traded mostly lower Thursday pressured by improving risk appetite as equity markets and commodity prices rise on global recovery hope. Recovery hopes are fueled by an upgrade in US economic outlook from the Fed and of the global economic outlook form the OECD, along with better earnings from US retailers. The FOMC minutes for August state that US recession is ending and risks to the US economy have eased considerably. The OECD says the global recession is ending and the recovery may be faster than expected. Home Depot and Target reported better than expected sales. USD was also pressured by a rumor that China's sovereign wealth fund is selling USD for gold and other investments. This generates concern that China may be diversifying out of the USD. GBP and the EUR were supported by report of better than expected services PMI data for August. The ECB elected to hold monetary policy unchanged as expected. In the press conference following the ECB policy decision ECB President Trichet said the ECB will continue to inject funds over one year at 1%. This means that the ECB is not yet signaling an exit strategy from accommodative policy. EUR turned lower as the ECB offers no signal when stimulus will be withdrawn. Trichet also said he sees signs of economic stabilization in the EU and the ECB upped its 2009 and 2010 growth forecast. Commodity currencies were supported by improving global growth outlook and rising commodity prices. AUD rallied despite report of the much wider than expected July trade deficit. CAD gains limited by political uncertainty in Canada and threat of intervention. US economic data was mixed with jobless claims falling less than expected and services PMI in line with forecast. In the August FOMC meeting minutes the Fed specifically expressed concern about the jobs outlook as possible roadblock to the recovery. USD edged a bit higher after the release of higher than expected jobless claims and the ISM report as equities trim early gains.

Today's US data:
Jobless claims for the week ending 8/29 fell 4K to 570k a decline to 560k was expected. August services PMI rose to 48.4 compared to 46.4 last month, a reading of 48 was expected.

Upcoming US data:
On September 4th August unemployment rate will 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 pressured by improving risk sentiment and firmer European and US equity market trade. JPY has been firming since the Japanese election last week which ushered in the DPJ party. The DPJ party is expected to focus on promoting domestic growth and to move the Japanese economy away from dependence on export led growth. Optimism about improving domestic economic outlook in Japan has encouraged demand for the JPY and stocks. In addition, a member of the DPJ party says that strong JPY is good for Japan's economy. If DPJ party can shift Japan's economic growth focus away from exports Japanese officials will be less inclined to seek a weaker JPY to boost export competitiveness. This partly explains why the JPY is trading near a seven week high even as investors are moving to riskier assets as risk appetite improves. MOF flows data for week ending August 29th showed that foreigners were again net buyers of Japanese stocks. Foreign purchase of Japanese stocks had been on the rise ahead of the election as well and it looks like investors are starting to rebuild positions in the Nikkei. JPY held up well versus USD despite significant pressure cross trade with the AUD/JPY supported by sharp rise in the price of gold and RBA rate hike speculation, GBP/JPY and EUR/JPY supported by  report of better than expected services PMI data from the UK and the EU and improving risk sentiment. JPY price direction will continue to focus on equity markets and risk sentiment.

Key technical levels to watch in USD/JPY include support at 91.75 the July 13th low with resistance at 93.55 the August 31st high.

EUR
EUR opened higher supported by report of better than expected EU services PMI and improving risk appetite as speculation mounts that the global recession is ending. The FOMC minutes for August said that the worst has passed for the US economy and the OECD suggests that the recovery may be faster than expected. EU August services PMI rose to 49.9 from 45.7 last month. The rise in the services PMI is another piece of EU economic data that suggest the EU recession is ending. There was little reaction to report that EU July retail sales declined by 0.2% or the ECB's decision to hold interest rate policy steady. The ECB confirmed that it will continue to provide liquidity over one year period at 1%. This means that the ECB is not yet signaling an exit strategy from stimulus. Officials from the UK, France and Germany have written a letter to the G-20 stating that they should stick to current stimulus plans. Central bankers and government officials are trying to discourage speculation that they will quickly exit quantitative ease and withdraw stimulus fearing that too quick an exit would put the global recovery at risk. The G-20 meets this weekend and US Treasury Secretary Geithner is expected to seek a globally coordinated exit strategy from stimulus policies and to state that it's too early to begin removing economic stimulus. This is fairly positive for risk sentiment and may boost recovery hope, demand for equities and selling of the USD. Trichet went on to say that he sees signs of economic stabilization and ECB boosted growth forecasts for 2009 and 2010. The ECB expects the EU economy to grow at 0.2% in 2010, up from original forecast of a contraction of 0.3% made in June. EUR turned lower midsession as equities trim early gains.

The technical outlook for the EUR is improving as the EUR rises back above 1.4300. Expect EUR support at 1.4175 the September 1st low with resistance at 1.4380 the September 1st high.

GBP
GBP traded higher supported by report of better than expected UK services PMI and a rebound in risk sentiment. UK August services PMI rose to a two year high at 54.1. This compared to 53.2 last month. Business expectations also rose from last month with sentiment supported by improving credit markets as the BOE's quantitative ease helped to send sterling libor rates to a record low. Global credit markets continue to thaw. The rise in UK services PMI follows Wednesday's report of better than expected UK construction PMI. UK August construction PMI rose to its highest level in 18 months. GBP was also supported by rising gold prices which helped to boost equity markets. The rise in UK construction and services PMI is unlikely to encourage any change in BOE policy. The BOE meet on September 10th and are expected to hold rate policy and the level of quantitative ease unchanged. 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. GBP firmed in cross trade versus EUR supported by speculation that today's UK services data confirms that the UK recession is nearing and end.

The technical outlook for GBP is mixed as GBP rises back above 1.6300. Expect near-term support at 1.6150 the August 27th low with resistance at 1.6445 the August 25th high.

CAD
CAD traded mixed and continues to underperform despite sharp gains in metals prices and improving risk appetite. CAD gains have been limited by increased political uncertainty in Canada as the Canadian Liberal party said late Tuesday that they would no longer support the minority government. The Liberal party has called for a no-confidence vote. CAD gains were also limited by concern that the Canadian recovery will not be as robust as had been expected because Canada's Q2 GDP was weaker than expected. The threat of intervention also limits demand from the CAD. BOC's Lane expressed concern last week about the strength of the CAD and the impact on Canada's recovery. Lane's comments increase the risk of intervention to limit CAD gains. There were no major economic reports in today's trade. 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 1.0890 the August 25th low with resistance at 1.1125 the August 17th high.

AUD
AUD traded higher supported by improving risk sentiment and rising commodity prices. Gold prices have surged over the last couple of days in reaction to report that the sovereign wealth fund of China is selling some of China's USD reserves for gold. The Shanghai Index closed 4.8% higher and European and US equity markets rallied as well. AUD price action is closely correlated to risk sentiment and the direction of equity markets in particular Shanghai Index. The global equity markets are supported by recovery hope and there is talk that the Chinese government may be taking action to boost its stock market. AUD rallied despite report above much worse than expected widening of Australia's July trade deficit. July trade deficit widened to 1.5 bln, a deficit of 850 mln was expected. Exports declined 1% and imports rose 4%. The import rise suggests higher domestic demand and the report may contribute to increased RBA rate hike speculation. Wednesday, Australia reported much stronger than expected Q2 GDP. Stronger than expected GDP encourages speculation that the RBA will hike interest rates at the next policy meeting. Some analysts suggest that the RBA is actually falling behind the rate hike cycle and a number of analysts expect the RBA to raise rates before year end. The RBA elected to hold policy steady at 3% Tuesday and failed to lay out a timeline for rate hikes. Goldman Sachs analysts have raised their AUD forecast to 8700 in three months from a prior forecast of 8200 because of strong Australian GDP and RBA rate outlook.

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.