• USD: Mixed, Q2 GDP beats expectations and jobless claims decline, stocks struggle
  • JPY: Higher, US borrowing costs drop below Japan, repatriation flows
  • EUR: Mixed, German consumer confidence rises to a 15 month high, retail demand falls
  • GBP: Lower, pressured by weaker than expected retail sales, home prices rise most than three years
  • CAD and AUD: AUD & CAD higher, Aus. CAPEX spending rises, China to increase overseas investment


USD traded mixed to lower with the AUD trading sharply higher in reaction to report of stronger than expected Australian Q2 CAPEX spending, the EUR supported by report that German consumer confidence rose to 15 month high and JPY supported by a Wall Street Journal report which says that it is now cheaper to borrow in USD then the JPY. GBP continues to underperform as UK retail sales posted an unexpected decline in August and Q2 business investment was weak. GBP traded lower despite report that UK house prices rose the most since 2006. The USD remained on the defensive and rebounded versus JPY after the release of better than expected US Q2 preliminary GDP and report of a drop in US jobless claims. These reports suggest that the US recession is ending and contributes to improving risk sentiment. Fed's Lacker says it's premature to consider a rate hike and he expects lackluster US recovery with protracted unemployment. Lacker's comments capture the current uncertainty about the outlook for the US and global recovery. This uncertainty contributes to FX range trade as investors are not sure whether the USD will be supported by US economic recovery or pressured by improving risk appetite. Because the recovery is mainly supported by government spending and aggressive accommodation from the Fed there is a risk that once government spending is withdrawn and the Fed cuts quantitative ease the US economy may fall back on its own weight and could experience a double dip recession.

 As the global economy recovers currencies linked to growth will likely outperform. US equity rally continues to struggle despite improving US economic data. This may generate broader concern about recent improvements in risk sentiment and outlook for the global recovery as investors remain concerned about whether the recent improvement in economic data is sustainable. Early withdrawal of quantitative ease and the winding down of fiscal stimulus may present major headwinds for the global recovery. The Feds Lacker hinted that the Fed may soon be reducing quantitative ease and said the US may not need all planed Fed stimulus. Equities turned lower along with crude prices and USD rebounded.

Today's US data:
US preliminary Q2 GDP was reported un-revised -1%, the trade had expected a reading of -1.4%. Jobless claims for week ending August 22nd decline by 10k to 570k dropping to a four month low. USD experienced a modest rebound after the release of these reports as equities trade lower.

Upcoming US data:
On August 28th July personal income and personal consumption will be released with both reports expected to rise by 0.2%. Final University of Michigan consumer confidence will also be released on the 28th expected at 64.5 compared to 63.2 last month.

JPY traded higher initially supported by light safe haven flows as the Nikkei closed 165 points lower. Asian markets remain vulnerable to report of China's plan to cap lending and reduce overcapacity. JPY was also supported by a Wall Street Journal report titled USD now cheaper to borrow than JPY and another Wall Street Journal report which says that DPJ party plans to move towards improving relations with Asia possibly at the expense of relations with the US. USD borrowing costs dropped to the lowest level in 16 years relative to JPY rates. The narrowing of the yield gap may generate less incentive to borrow in JPY to fund investments. JPY upside was limited by selling in cross trade to AUD and EUR with the AUD supported by report of stronger than expected Australian CAPEX spending and report that China plans to increase overseas investment. The EUR was supported by report of improving German consumer confidence. GBP/JPY traded lower with GBP pressured by report of weaker than expected UK retail sales and Q2 business investment. JPY was also supported by the report that China plans to increase investment tenfold targeting Japan among other nations and by anticipation of repatriation flows as Japanese companies take advantage of tax exemption on dividends from overseas profits. JPY drifted off the day's highs after the release of better than expected US preliminary Q2 GDP and report of a drop in US jobless claims. Positive news for US recovery tends to dampen safe haven demand for the JPY. JPY re-rallied as US equities trade lower post release of US Q2 GDP and jobless claims.

On August 28th July CPI will be released along with July retail sales and industrial output. CPI is expected to fall 0.2%, retail sales are expected to rise 0.3% and industrial output is expected at 0.5%.

Key technical levels to watch in USD/JPY include support at 92.70 the July 14th low with resistance at 95.10 the August 24th high.

EUR traded mixed initially supported by report of improving German consumer confidence. German consumer GFK confidence rose to a 15 month high increasing to 3.7% from .3.4 % in August. EUR gains were limited by report of the drop in EU retail demand and the release of better than expected US preliminary Q2 GDP and report of a decline in US jobless claims for the week ending August 22nd. EU retail PMI fell to 47.1 from 47.3 last month. EU July M3 was reported at 3% and the July leading economic index rose 1.6%. Today's EU economic data generally confirms stabilizing of the EU economy. Wednesday Germany reported better than expected rise in the August IFO. EUR rallies have been limited despite improving EU economic outlook mainly because of questions about whether the economic recovery is sustainable. Positive US data is beginning to support the USD as well.

On August 28th EU business and economic sentiment is due for release. The business climate index is expected -2.71 and economic confidence index expected 76.

The technical outlook for the EUR is mixed as the EUR rally stalls above 1.4300. Expect EUR support at 1.4209 the August 21st low and 1.4045 the August 17th low with resistance at 1.4375 the August 21st high.

GBP traded lower pressured by report of a drop in retail sales, weaker Q2 business investment and continued selling in cross trade. UK August CBI retail sales declined to -16 from -15. The CBI retail sales were expected to improve to -13. Q2 business investments declined 10.4%. A decline of 3.6% was expected for business investment. The decline in business investments will raise more doubts about UK economic recovery. GBP downside was limited by report that UK August house prices rose by 1.6% and at the fastest pace in three years. A rise of 0.5% was expected for August house prices. GBP remains vulnerable to uncertainty about the UK recovery and speculation that the UK recovery will lag behind the US and the EU. GBP continues to weaken with selling pressure attributed to the BOE's recent decision to expand quantitative ease and from concern about expanding UK budget deficit. The BOE expanded quantitative ease by £50 bln earlier in the month UK reported a record budget deficit in July. The UK government plans to raise a record 220 billion GBP this year and may have to increase debt issuance to cover the budget gap. Positive US Q2 GDP and jobless claims data failed to boost demand for GBP or stocks. The close correlation of GBP price direction to improving the sentiment has been breaking down. GBP traded to the day's lows in reaction to weaker US equity market trade. Focus turns to Friday's release of UK GDP for further clues to whether the UK economy is emerging from recession along with the rest of Europe.

On August 28th UK GDP will be released expected at -0.8% for the quarter.

The technical outlook for GBP is negative as GBP trades below support at 1.6275. Expect near-term support at 1.6025 the July 10th low with resistance at 1.6356 the August 26th high.

CAD traded mixed and failed to match gains of the other commodity currencies with upside limited by weaker equity market trade and threat of intervention. US equity markets traded both sides of settlement despite report of better than expected Q2 preliminary GDP and a drop in US jobless claims. US equity market response to yesterday's report of a sharp jump in US new home sales and strong durable goods orders was also muted. The action in US equity markets may be a sign that investors remain cautious about outlook for the US and global recovery. CAD has been weakening since Tuesday's statement by the BOC's Lane expressing concern about the impact of CAD strength on the Canadian economy. Lane sees end of Canada's recession but he expressed concern about strength of the CAD. According to Lane, Canada's economy is expected to start to grow this quarter along with the global economy but the recovery will be muted. Lane's comments increase the risk that the BOC may take action to weaken the CAD. CAD direction will remain closely correlated to speculation about the global recovery and risk sentiment. Report that China plans to increase overseas investment limits CAD downside. The Canadian economic recovery will be dependent on global demand and increased Chinese global investment could help boost global growth outlook. Global equity markets are struggling to maintain the current rally and this may limit demand for the CAD.

On August 28th the current account balance will be released expected at -9.1 bln along with industrial products price expected at 0.7% and the raw materials price index at 6.2%.

The technical outlook for CAD has turned mixed as USD/CAD rises back above 1.0900. Look for near-term support at 1.0831 the August 26th low with resistance at 1.1125 the August 17th high.

AUD traded sharply higher supported by report of stronger than expected Australian Q2 CAPEX spending and report that China plans to increase overseas investment tenfold. AUD gains were cut in half during the US session with selling attributed to weaker US equity markets. Australia's Q2 CAPEX spending was reported at 3.3%. The trade had expected a - 5% reading for Q2 CAPEX spending. CAPEX spending is the fuel for business investment and the report suggests that the Australian economy may begin to expand supported by increased business spending. The impact of China's growth outlook and global investment is key to the global recovery. The Australian economy is highly dependent on exports and global demand particularly from China. The fact that China plans to increase global investment should be a net positive for the Australian economy and may contribute to investor demand for growth linked currencies like the AUD. AUD price action has been choppy with uncertainty about the outlook for China's economy a key factor. According to Chinese press China will take steps to curb excess capacity and wasteful investment in certain sectors. Fear that China would continue to limit lending generates uncertainty about the Chinese economic outlook and global recovery. AUD price direction is the most sensitive to developments in the China as China is a major export destination for Australian goods. The trade is closely monitoring the Shanghai Index and is wary of the threat of intervention. The Shanghai Index traded higher Thursday adding support to the AUD. AUD gains were limited as US equity markets traded lower after the release of US Q2 GDP and jobless claims.

The technical outlook for the AUD is mixed as AUD rallies fail above 8400. Expect AUD support at 8239 the August 27th low with resistance at 8388 the August 26th high.