Daily Forex Report - USD remains on the defensive, Chicago PMI disappoints

By @ibtimes on
  • USD: Lower, ADP job losses slow, Q2 GDP contracts less than expected, Chicago PMI declines
  • JPY: Higher, Manufacturing PMI hits 3 year high, Fujii says JPY will not be discussed at the next G-7 meeting
  • EUR: Higher, SNB intervention, German unemployment drops, ECB reduces the size of its 12 month auction
  • GBP: Mixed, GFK consumer rise to a 19 month high, gains limited by decline in US equities
  • CAD and AUD: AUD & CAD higher, Australian retail sales rise, IMF raises its 2010 GDP forecast

Overview     
USD traded lower Wednesday pressured by signs of improving global economic outlook as the IMF raises its 2010 growth forecast and economic data from Japan, Europe and Australia show improvement. The IMF raised its 2010 GDP forecast to 3.1% from 2.5%.Japans manufacturing PMI rose to a three year high, UK consumer confidence hit a 19 month high, Swiss KOF index rose sharply in September, German unemployment posts an unexpected drop and Australian retail sales were strong. AUD traded at a new high for 2009. USD was also pressured by comments from Japan's Finance Minister Fujii that the Japanese government plans to boost domestic demand and there is no plan to discuss the JPY rise at the upcoming G-7 meeting. Fujii's comments are seen as an endorsement of stronger JPY and reduce the risk of intervention. US economic data was mixed with ADP job losses the smallest since last July, final Q2 GDP was revised up and Chicago PMI unexpectedly declined. USD experienced a modest recovery after the release of the much weaker than expected Chicago manufacturing PMI as stocks tank. The SNB intervened to stop CHF appreciation. The intervention limited USD losses versus the EUR and CHF and rallied the EUR/CHF cross above 1.5200. The Chicago PMI raises a red flag that the US recovery may be weak.

Today's US data:
ADP September unemployment came in at -254k down from -277k last month. The trade had expected a reading of -212k. This was the smallest decline in the ADP report since July of 2008.The ADP says employment will likely continue to drop for several months. Final Q2 GDP was revised up to -0.7% from -1% reflecting an upward revision in non-residential fixed investment. Chicago Purchasing Managers Index for September falls to 46.1 from 50 in August.

Upcoming US data:
On October 1st initial claims for the week ending 9/26 will be released expected at -525k compared to -530k last week. August personal income and consumption will also be released on October 1st expected at 0.1% and 1% respectively. August construction spending, September ISM index and pending home sales index will also be released along with September domestic auto sales on October 1st. Construction spending is expected unchanged  at -0.2%, the ISM index is expected 54 compared to 52.9 last month, pending home sales are expected at 99.1 compared to 97.6 in July. On October 2nd September unemployment will be released expected 9.8% compared to 9.7% with nonfarm payrolls at -188k compared to -216k last month. August factory orders will also be released on October 2nd expected at 1.1% compared to 1.3% last month.

JPY
JPY traded higher supported by improving Japanese economic data and more rhetoric from Japan's finance minister. Japan's September manufacturing PMI rose to a three year high reported at 54.5 compared to 53.6 in August. August industrial production rose by 1.8%, housing starts declined by 38.3% and construction orders were down 25.2%. Japan's Finance Minister Fujii said that the new Japanese government will seek to boost domestic growth and that the JPY rise would not be discussed at the upcoming G-7 meeting. The Japanese government's plan to shift focus from export led growth to domestic growth means that the Japanese government will rely less on weak JPY policy to stimulate export competitiveness and in turn appear to be more willing to accept a stronger JPY. JPY was supported by reduced threat of intervention. Since Japan's new government came to power at the end of August there have been numerous and conflicting statements from Japanese officials about JPY intervention policy. The previous Japanese government had relied on a weak JPY policy to help support Japan's export competitiveness. The new Japanese government plans to shift Japan's dependence on export led growth to domestic. This transition would require less of a need for a weak JPY. Investors sensing that Japan was abandoning weak JPY and JPY intervention policy have rallied the JPY to an eight-month high versus USD.  JPY was all supported by repatriation flows ahead of Japan's fiscal half-year end on September 30th and a press report that the Bank of Japan is considering to let its corporate bond purchase plan expire. If the BOJ lets its corporate bond purchase plan expire it would be the start of the BOJ's exit from quantitative ease and a sign of the BOJ's increased confidence in the Japanese and global recovery. Focus turns to Thursday's release of the Tankan business sentiment survey. The Tankan report is the key barometer of business confidence.

On October 1st the September Tankan Index will be released expected at -35 compared to- 48 last quarter with CAPEX spending expected at -11%. August retail sales will also be released on October 1st expected at 0.4% compared to -0.2% in July. On October 2nd August unemployment and household spending will be released. The unemployment rate is expected to rise to 5.8% from 5.7% and household spending is expected to rise by .3% compared to a 1.3% decline last month.

Key technical levels to watch in USD/JPY include support at 88.24 the September 28th low with resistance at 91.63 the September 24th high.

EUR
EUR traded mixed initially supported by report of an unexpected decline in German unemployment and improving global economic outlook. German September unemployment improved to 8.2% from 8.3% last month. EUR gains were limited by selling in cross trade to the GBP and JPY, report of SNB intervention and weaker than expected EU September CPI. GBP gains in cross trade were attributed to report a sharp Improvement in UK consumer confidence. JPY cross gains were attributed to improving Japanese manufacturing PMI, repatriation flows and diminished risk of intervention. The SNB was reported to have intervened in the EUR/CHF cross in early US trade as the CHF had strengthened after the release September KOF indicator which improved to 0.85 from -0.04 last month. Last week the SNB repeated its pledge to take decisive action against CHF appreciation. USD/CHF reversed overseas losses and the USD spiked higher after the SNB intervened. EUR came off of overseas highs pressured by spillover from the SNB intervention. The EUR/CHF rallied back above 1.5200. EU September CPI declined by 0.3%. The EU CPI report confirms limited near-term risk of inflation pressure. Tuesday ECB President Trichet's said that the EU growth outlook is surrounded by uncertainty and recovery will come at a gradual pace. Trichet went on to say that interest rates are appropriate and that the ECB will not exit monetary support measures until inflation risks emerge. ECB's Weber says that will be no trade-off between price stability and financial stability. The EUR was also supported by report that the ECB will lend banks less money at the 12 month auction that had been expected. The ECB will be flooding the EU financial system with less money than had originally been expected; a sign a less aggressive ECB accommodative policy. EUR turned lower after the release of weaker than expected Chicago PMI.

On October 2nd EU PPI will be released expected at -0.6% compared to -0.8% last month.

The technical outlook for the EUR is mixed as EUR fails to hold last weeks rally above1.4700. Expect EUR support at 1.4515 the September 14th low with resistance at 1.4728 the September 25th high.     

GBP
GBP initially traded higher versus the USD and rallied in cross trade supported by report that UK consumer confidence rose to its highest level in 19 months. September GFK consumer confidence improved to -16 from -25 last month. The improvement in UK consumer confidence is further confirmation that the UK recession is ending. The improvement in UK consumer confidence follows Tuesday's report of much better than expected CBI retail sales and rising mortgage approvals. Monday the UK reported that house prices rose at their fastest pace of two years. UK July service sector output was unchanged and Q2 productivity rose by 0.3%. UK PM Brown says there is a strong sense that the UK is coming out of recession. The BOE's Miles says there is evidence that the quantitative ease is having an impact on the UK economy. The comments by Brown and Miles may reduce the risk that the BOE will expand quantitative ease or reduce its remuneration rate that it pays on commercial bank holdings. GBP has underperformed pressured by speculation that the BOE is considering lowering its remuneration rate for commercial banks. GBP gains were limited by report of a smaller than expected decline in ADP employment and an unexpected decline in Chicago PMI. Today's report on improving UK consumer confidence sparked demand for the GBP in cross trade to the EUR. Focus turns to Thursday's release of UK manufacturing PMI.

On October 1st September CIPS PMI manufacturing index will be released expected at 50.2 compared to 49.7 last month.

The technical outlook for GBP is negative as GBP trades below 1.6000. Expect near-term support at 1.5825 the September 29th low with resistance at 1.6140.

CAD
CAD traded higher supported by optimism about global recovery as the IMF upgrades its 2010 global GDP growth forecast and cut its projected estimate of global write-downs . The IMF cut its estimate on write-downs on loans and investments by 15% to 3.4 trln and raised its 2010 GDP forecast to 3.1% from 2.5%. Canadian economic data was mixed with GDP reported much weaker than expected and raw material and producer prices reported above expectation. Canada's July GDP came in well below expectations at flat, the median expectation for the GDP report was for rise of 0.4%. August IPPI rose by 0.5% and RMPI by 3.7%. The IPPI was expected to rise by 0.4% and RMPI by 2.7%. The rise in Canada's raw materials and producer prices reflects higher energy and metals prices. CAD was also supported by a modest rise in energy prices and a slight improvement in global equity markets. CAD traded lower Tuesday pressured by concern about the global recovery and threat of intervention. Tuesday BOC Governor Carney warned that the recovery may be at risk when the stimulus runs out and he repeated his warning that strong CAD could hurt growth and limit inflation. Carney's comments suggest that the Canadian recovery may be fragile. Last week Canada's PM Harper said the Canadian economic recovery remains extremely fragile and he is concerned that the weak labor market will weigh on economic activity. CAD will continue to track the direction of equity and oil markets. CAD maintained gains despite weaker US equity markets with support from month and quarter end flows.

The technical outlook for CAD is mixed as USD/CAD trades back below 1.0800. Look for near-term support at 1.0660 the September 23rd low with resistance at 1.10925 the September 29th high.

AUD
AUD traded at 13 month high supported by strong Australian economic data and improving optimism about the global recovery. Australia's retail sales rose 0.9%, a 0.5% rise was expected. The rise in Australia's retail sales will likely fuel increased RBA rate hike speculation as the data confirms improving Australian domestic growth outlook. Earlier in the week RBA Governor Stevens said that interest rates will eventually need to rise and RBA watcher in the McCrann aid he expects the RBA hike rates in November or December.  Australian August building approvals declined by 0.1% and private sector credit rose by 0.1%. These reports were overshadowed by the strong retail sales report. As noted above the IMF reduced its estimate of expected global write-downs and raised its 2010 GDP forecast. The IMF news coupled with a string of better than expected economic reports from Japan, the UK and Switzerland combined to encourage demand for commodity and growth linked currencies. AUD gains were limited by report of much weaker than expected Chicago manufacturing PMI as US equities turned lower.  The Chicago PMI report injects a note of caution to today's optimism about global economic recovery.

On October 1st August trade balance will be released.

The technical outlook for the AUD is positive as AUD trades at a new high for 2009. Expect AUD support at 8734 the September 30th low with resistance at 8950 the August 11th high.

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