•  USD: Lower, pressured by improving risk sentiment and economic optimism, Bernanke says recession over
  • JPY: Mixed, Finance Minister Fujii sees benefits of strong JPY, rejects FX intervention to weaken JPY
  • EUR: Higher, EU annual inflation falls for third month in a row, ECB's Nowotny sees slow recovery
  • GBP: Higher, unemployment rises to 15 year high at 7.9%
  • CAD and AUD: AUD & CAD higher, sharp rise in gold, Canada's manufacturing shipments surge

Overview     
USD traded at a new 2009 low versus the EUR and the JPY traded near 90 Wednesday. The USD is pressured by improving risk sentiment rising equity and commodity prices and economic optimism as Fed Chairman Bernanke says the recession is likely over and US economic data points to recovery. JPY traded higher supported by comments from Japans new Finance Minister Fujii that a strong JPY has merits for Japan's  economy and that he is against intervention unless FX swings are excessive. A statement from former Fed Chairman Greenspan added pressure to the USD. Greenspan said that a significant issuance of new U.S. Treasury debt would put pressure on the USD. Investors are concerned about rising deficits as the US debates health care reform. The Senate Finance Committee unveiled its $880 bln health care plan today. Commodity currencies traded higher supported by improving risk sentiment and rising price of gold. The rally in the European currencies was limited by report that EU annual inflation declined for the third month in a row and UK unemployment rate rose to its highest level in 14 years. CHF drifted lower despite report of a sharp improvement in Swiss investor sentiment for September which rose to 58 from 18.6 last month. US economic data was mixed with CPI rising close to expectations, US Q2 current account deficit narrowing less than expected, treasury flows data showing a sharp net capital outflow in July, industrial production and capacity utilization rising more than expected. Today's US economic data supports recovery optimism and the downtrend in the USD, uptrend in stocks and gold look set to continue.

Today's US data:
August CPI rose 0.4%, a rise of 0.3% was expected. Core CPI rose 0.1%. August capacity utilization improved to 69.6, a reading of 69 was expected. August industrial production rises by 0.8%, reading of 0.6% was expected. Q2 current account deficit falls to 98.8 bln a reading of -92 bln was expected.

Upcoming US data:
On September 17th initial jobless claims for week ending 9/12 will be released expected at 645k compared to 650k last week. August housing starts and building permits along with the September Philly Fed will also be released on September 17th. Housing starts are expected at 590k compared to 581k last month, building permits are expected at 580k compared to 560k last month and the Philly Fed is expected to improve to 6 from 4.2 in August.

JPY
JPY traded higher approaching 90.00 versus the USD supported by comments from Japan's new Finance Minister Fujii that strong JPY has merits for the Japanese economy and that he is against intervention in currency markets unless FX swings become excessive. The new Japanese government is expected to focus on promoting domestic growth and to reduce Japan's reliance on exports. Because the new government plans to rely less on exports the new government will be less inclined to seek to weaken the JPY to promote export demand. This is a major shift in Japan's FX intervention policy which in the past has encouraged weaker JPY to boost Japan's export competitiveness. Tuesday Fujii said the Japanese government should not take action to weaken the JPY to benefit exporters. Fujii's statements are not an all out green light to buy the JPY as he noted that the Japanese government would act against excessive fx market swings. It will become important for the trade to determine what the new Japanese government sees as excessive price level for the JPY. The trade showed limited reaction to a statement from Japan's new PM Hatoyama that Asia will not exclude the USD and that the outlook for Japan's economy remains unclear. During the election campaign Hatoyoma made statements to the effect that his government would be less inclined to buy US debt and would focus more on developing relations with Asian trading partners. Hatoyoma's recent statements have been directed at trying to reduce concern that the new Japanese government would turn away from the USD and USD assets. BOJ policy meeting concludes Thursday, no change expected.

On September 18th revised July leading indicators will be released expected at -8.3% compared to -10.7% at the first release.

Key technical levels to watch in USD/JPY include support at 89.70 the February 11th low with resistance at 91.20 the September 16th high.

EUR
EUR traded at its highest level versus the USD in nine months rising above 1.4700 supported by improving risk sentiment as US equities trade at new highs for 2009 and Fed Chairman Bernanke says the US recession is likely over. Tuesday's release of much stronger than expected US retail sales fuels hope that the US recovery will be stronger than expected. FX price direction has re-linked with risk sentiment and economic optimism. EUR gains were limited by report of falling EU inflation and concern about the strength of the EU recovery. EU annual rate of inflation declined for the third month in row reported at -0.2% in August. ECB's Nowotny said that EU economic activity is expected to stabilize at a low-level in 2010 and that the economic expansion will not be strong enough to stop rising unemployment. Tuesday EUR struggled after the release of weaker than expected German investor sentiment but caught a late bid sparked by rising US equity prices. It's becoming an open question of whether or when improving US growth outlook may benefit the USD but based on today's price action risk appetite remains the main driver for FX trade.

The technical outlook for the EUR is positive as EUR trades above 1.4700. Expect EUR support at 1.4560 the September 15th low with resistance at 1.4720 the December 18th high, 1.4800 and 1.4910 the August 22nd high.

GBP
GBP traded mixed and continued to underperform pressured by Tuesday's report that the BOE may be considering cutting the reserve rate for UK banks and in reaction to report that UK unemployment rate rose to a 14 year high. There remains a great deal of uncertainty about BOE policy outlook and the outlook for the UK economy. This limits the impact of improving risk sentiment which has been driving the USD lower against most major currencies. If the BOE elects to cut the reserve rate that it pays on UK bank funds it would effectively be an expansion of quantitative ease and an indication that the BOE lacks confidence in the UK economic outlook. UK August unemployment rate rose to its highest level since 1995 at 7.9%, the claimant count rose 24,440k and average earnings rose 1.7%. The continued rise in UK unemployment will dampen consumer demand and suggests that UK recovery will be weak. Tuesday, BOE Governor King expressed concern about rising unemployment weighing and future UK economic growth and said he sees continued downside risks for inflation. UK August CPI rose by its smallest amount since January 2005 reported at just over 0.4%. GBP is expected to continue to underperform pressured by concern that the UK faces the risk of a slow recovery and the BOE may have to take further action to ease monetary policy to boost growth.

On September 17th August retail sales will be released expected at 0.6% compared to 0.4% last month along with September CBI orders expected at -52 compared to -54 last month. On September 18th August public sector borrowing will be released expected 8.602 bln compared to 8.016 bln last month.

The technical outlook for GBP is mixed as GBP falls below 1.6500. Expect near-term support at 1.6320 the September 8th low with resistance at 1.6660 the September 15th high.

CAD
CAD traded higher supported by improving risk sentiment and rising equity and commodity markets with gold prices trading sharply higher. Fed Chairman Bernanke's statement Tuesday that the US recession has likely ended coupled with report of much stronger than expected US retail sales boosts risk appetite and demand for higher risk currencies like the CAD. Optimism about the US and global recovery fuels demand for commodity-based currency. It's not clear if the rally in gold reflects inflation fears or the impact of improved outlook for global demand for commodities. As stocks markets and gold prices rally bond yields have been relatively stable. This would suggest that the gold rally is not a reflection of inflation fears. Gold may be benefiting from safe haven flows on fears that rising US debt could lead to potential collapse of the USD. CAD was also supported by strong Canadian manufacturing data. Canada's July manufacturing shipments rose 5.5%, a 2.5% rise was expected. The rise in Canadian manufacturing shipments is further confirmation that the global economy is improving. Improvement in the global economy will help boost demand for Canada's exports. Last week the BOC elected to hold policy steady, refrained from implementation of nonconventional monetary measures and expressed concern about the strength of the CAD. The threat of intervention is the main risk to further CAD gains. CAD price direction will continue to track the direction of equities and commodity prices.

On September 17th August CPI will be released along with the August leading economic indicator. CPI is expected at 0.1% compared to -0.3% last month. The leading index is expected unchanged at 0.4%. On September 18th July wholesale sales will be released expected at 0.8% compared to 0.6% last month.

The technical outlook for CAD is positive as USD/CAD falls below 1.1070. Look for near-term support at 1.0550 the October 1st low with resistance at 1.10850.

AUD
AUD traded sharply higher supported by rising commodity prices and improving global economic outlook. The price of gold rose sharply. Better than expected US retail sales and Bernanke's statement that the US recession has likely ended fuels risk appetite and demand for AUD and commodities. AUD has been one of the best-performing currencies supported by the global recovery theme and speculation that improving economic outlook will encourage the RBA to hike interest rates before year-end. The minutes for the September RBA policy meeting said that the RBA expects rates to rise if the recovery sustained. The RBA went on to say that inflation remains relatively high. The RBA is expected to hold off on a rate hike until Australian economic data confirms the recovery is sustainable. Last week the AUD traded at a new high for 2009 supported by improving outlook for Australia's domestic economy speculation the RBA will be the first central bank to hike interest rates as the global recon economy recovers. A number of analysts expect the AUD to trade above 9000 in the months ahead but uncertainty about the strength of the may limit demand for AUD. There are no major Australian economic reports due for release the remainder of the week. AUD price direction will key on the direction of equities, commodities and speculation about the global recovery.

The technical outlook for the AUD is positive as AUD rallies above 8700. Expect AUD support at 8640 with resistance at 8820 the August 28th high.