• USD: Higher, supported by safe haven demand, Empire Manufacturing rises more than expected
  • JPY: Higher, Japan's economy emerges from recession, capital spending falls for the fifth straight quarter
  • EUR: Lower, tracking weak equity markets, trade balance widens exports rise
  • CHF: Lower, retail sales rise, import and producer prices fall the most in 34 years
  • GBP: Lower, tracking equities and risk sentiment, UK home prices fall
  • CAD and AUD: AUD & CAD lower, commodity prices plummet pressured by doubt about the global recovery

USD traded sharply higher to start the week supported by fresh safe haven demand as global equity markets tumble on concern about the outlook for the global recovery. Late Friday, US regulators closed five US lenders. This brings the total of US bank failures to 77 for the year. The latest news of US bank closings generated concern about the outlook for financial markets. Asian equity markets traded sharply lower with the Shanghai index closing over 5% down. Last week China announced restrictions on the expansion of the Chinese steel industry, placed a cap on construction lending and warned of overcapacity. There are concerns about a possible bubble in China's economic recovery. Japan's economy emerged from recession in Q2 but equity markets continued to weaken as there are doubts about the outlook for recovery in Japan and for the global economy. JPY traded higher supported by safe haven flows as the Nikkei closed at 328 points lower. Commodity prices also traded sharply lower with crude oil trading below $66 a barrel pressured by concern about global demand. Commodity currencies were hit hard by the decline in commodity prices. There was little reaction to report that Swiss retail sales rose more than expected. EU trade balance came in weaker than expected and GBP experienced additional selling pressure in reaction to report a falling UK house prices. USD was also supported by demand for US bonds and report of better than expected Empire Manufacturing Index. There is an interesting report from Bloomberg news which says that international investors bought a record amount of US three year notes last week, took the biggest share of the 10 year note auction since 2005 and bought almost half of the 30 year notes sold. The demand for US bonds by the international investors suggests that the US is not yet finding it difficult to fund growing US deficits or to pay for the US stimulus plan. In addition the CFTC commitment of traders released Friday for the IMM showed speculators sharply reduced short USD positions last week. The Bloomberg report on foreign demand for USD and the liquidation of short USD positions by speculators on the IMM may be a sign of underlying support for the USD.

If equity markets continue to drop from recent highs the USD is likely to strengthen. Uncertainty about the outlook for the global recovery is emerging as the main driving factor in FX trade. Last weeks release of weaker than expected US retail sales drop in consumer confidence coupled with Friday's news of more US bank failures sparked concern about the outlook for the US and global recovery. Investors continue to try to balance safety versus risk appetite. There is concern that the recent run-up in equities and recovery in global economy is related to stimulus spending and once the stimulus is withdrawn the global economy may weaken. 

Today's US data:
August Empire Manufacturing Index rises to 12.8 versus -0.55 in July. The Empire Employment Index rose to -.45 from -20.83 in July. New orders index rises 7.54 points to 13.43. The rise in new orders was the highest since November of 2007.

Upcoming US data:
On August 18th July housing starts will be released expected to rise to 600k from 582k last month with July building permits expected to rise to 580k from 563k last month. Also on August 18th July PPI will be released expected to fall by 0.2% compared to a 1.8% rise last month. On August 20th initial claims for August 15th will be released expected at 540k compared to 558k last week. Also on August 20th July leading indicators will be released along with the August Philly Fed. Leading economic indicators expected to rise 0.4% compared to 0.7% last month. The Philly Fed survey is expected to fall to -3 from -2 last month. On August 21st July existing home sales will be released expected at 4990k compared to 4890k last month.

JPY traded higher supported by safe haven demand as the Shanghai index traded over 5% lower and global equity markets follow pressured by doubt about the global recovery. JPY was also supported by report that Japan's economy is emerging from recession with growth returning in the second quarter. Japans Q2 GDP rose 0.9%, the trade had expected a 1% rise. BOJ officials cautioned that the outlook for Japan's economy remains uncertain citing weakness in capital spending and doubts about consumer spending. CAPEX spending fell 4.3%. The trade had expected a decline of 5.9% in CAPEX spending. This marked the fifth straight quarter of declining capital spending in Japan. The BOJ also warned that the economic recovery could lose momentum as the temporary boost from government stimulus fades. Today's news of rising Japanese growth may come a little bit too late to help Japan's ruling of the party in the upcoming August 30th national election. Japan's election polls show that the opposition DJP party will likely win the national election and gain control for the first time in 50 years. JPY price continues to maintain a close correlation to the direction of equity markets and risk sentiment.

On August 18th revised leading indicators will be released expected at 3.5% compared to 0.9% in the prior report. On August 19th June all industry activity will be released expected at 0.4% compared to 0.7% last month.

Key technical levels to watch in USD/JPY include support at 94.05 the July 28th low and 93.50 the July 23rd low with resistance at 96.50 the August 13th high.


EUR traded sharply lower pressured by a spike in risk aversion sparked by falling global equity markets and renewed uncertainty about the outlook for the global economy. Concern that China's economy may be nearing a top, fresh concerns about US financial markets on news that five US lenders were closed late Friday and concern that the recent rally in equities and commodities markets have reached overbought combined to send equity markets lower and the USD higher. In addition, the ECB's Weber says it's too early to say if the financial crisis is over. Webber went on to say that EU Q3 GDP may be better than expected. The trade show limited reaction to report that EU trade balance widened by more than expected. EU June trade surplus widened to 4.6 bln from 2.1 bln last month. The focus turns to Tuesday's release of German ZEW index. The ZEW index is a gauge of investor sentiment. EUR may continue to weaken if concern grows about the global recovery and investors become wary about taking on risk. Last week the EU reported that growth returned to Germany and France but investors remain skeptical about the outlook for sustained recovery in the EU. The direction of equity markets and risk appetite will be key to the direction of the EUR.

On August 18th German ZEW index will be released expected at 41.5 to 39.5 last month. On August 19th German July PPI will be released expected flat compared to -0.1% last month. On August 21st EU August manufacturing and services PMI's will be released. The manufacturing PMI is expected to approve the 46.6 from 45.7 last month and services PMI is expected to improve to 46 from 45.7 last month.

The technical outlook for the EUR is negative as the EUR breaks below 1.4100. Expect EUR support at 1.3965 the July 15th low with resistance at 1.4330 the August 17th high.


The CHF traded lower Monday pressured by broad USD gains sparked by a spike in risk aversion. CHF traded lower despite report of better than expected Swiss June retail sales and a comment from the Swiss economics minister that the Swiss economy bottomed in Q1. Swiss June retail sales rose 0.9% compared to -1.4% in May. Last week, Switzerland reported that import and producer prices fell 6.1%. This marked the largest decline in producer and import prices in 34 years. Despite the fact that the Swiss economy may be showing signs of bottoming the risk of deflation will increase the risk of SNB intervention. SNB officials have pledged to intervene if the CHF continues to strengthen because of concern that stronger CHF contributes to lower inflation and is a threat to Swiss exports. The only remaining economic data on the Swiss calendar this week is Thursday's release of Swiss July trade balance expected at 1.7 bln compared to 1.57 bln last month. Also on Thursday Swiss August ZEW survey will be released expected to rise by 2 compared to flat last month. The trade will also be monitoring developments in regard to UBS and the bank row with the US over alleged tax cheats. UBS is expected to soon disclose the names of a number of accounts suspected of tax fraud. Investors will be trying to gauge whether the UBS news is a threat to Swiss bank secrecy laws Expect USD/CHF support at 1.0585 the August 7th low with resistance at 1.0935 the July 30th high.  


GBP traded lower pressured by weak equity markets and report of falling UK home prices. Global equity markets traded sharply lower pressured by a concern about global growth outlook. UK August Rightmove house prices declined 2.2%. This was the biggest monthly decline in house prices this year. The decline in UK house prices suggests that the UK recession is continuing. GBP was also pressured in cross trade with significant losses to the JPY. JPY was supported by a spike in risk aversion and report that Japan's economy is emerging from recession. GBP/JPY cross traded more than 1.5% lower as growth differential and risk sentiment favors the JPY. GBP remains one of the currencies most sensitive to the direction of equities and risk sentiment. GBP has experienced selling pressure sparked by last week's surprise decision from the BOE to expand quantitative ease and last week's dovish BOE quarterly inflation report. Last Thursday, the BOE elected to extend quantitative ease by £50 bln to a total of £175 bln and elected to hold rates steady at 0.5%. In its quarterly inflation report the BOE warned that inflation could fall below 1% and that UK economic recovery will be slow. GBP may experience additional selling pressure if UK inflation data is weak. UK inflation data is due for release Tuesday. Last week, BOE Governor King said that inflation will probably fall below the BOE's target. UK inflation outlook is a key factor that the BOE will look to for determining when to end quantitative ease.

This week's UK economic calendar includes the August 18th release of July CPI expected at 0.2% of percent compared to 0.3% last month. On August 19th August CBI orders will be released expected at -57 compared to -59 last month. The minutes for the BOE August 5/6th policy meeting will also be released on Wednesday. On August 20th July M4 will be released along with July net public-sector borrowing and July retail sales. M4 is expected to rise 0.1%% compared to 0.2% last month. Public sector borrowing is expected to fall to -6.25 bln from 19.98 bln last month. Retail sales are expected to rise 0.2% compared to 1.2% last month.

The technical outlook for GBP is mixed as GBP breaks below support at 1.6400. Expect near-term support at 1.6220 the July 14th low with resistance at 1.6540 the August 17th high.


CAD traded sharply lower pressured by falling commodity prices and weaker equity markets sparked by a concern about global economic outlook. As noted above, there is growing fear that the recent recovery in commodities, equity markets and growth was primarily a function of government stimulus plans and quantitative ease by a number of central banks. Recently Chinese officials and the US central bank have been considering possible exit strategies from the stimulus plans and quantitative ease. Last week the FOMC said that it would gradually slow its purchase of bonds and this is seen as the beginning of the exit strategy from the Fed's quantitative ease. The fear is that once the stimulus and quantitative ease is removed the global economy may experience a new downturn. There also is speculation that the global recovery is likely to be weak. It's interesting to note that today's fears about the global economic recovery come on the heels of a report of recessions ending in Germany, France and Japan and after the release of positive data from a number of countries including Canada's release Friday of a sharp rise in manufacturing shipments. The new orders component of the manufacturing shipments rose 18.4%. The Canadian manufacturing shipments report generated speculation that the Canadian recession may be nearing an end. The CAD was mainly pressured by concern about the outlook for growth in China and weaker commodity markets. CAD direction will remain closely correlated to speculation about the global recovery and risk sentiment.

This week's Canadian economic calendar includes the August 18th release of June net foreign investment expected at C$7 bln compared to C$18.8 9 bln last month. On August 19th July CPI will be released expected unchanged at .03% of core inflation expected at 1.8% compared to 1.9% last month.

The technical outlook for CAD has turned negative as USD/CAD rises above 1.1100. Look for near-term support at 1.0985 the August 17th low with resistance at 1.1225 the July 16th high.


AUD traded sharply lower pressured by a spike in risk aversion and concern about global growth outlook. The Shanghai index closed over 5% lower pressured by speculation that the recent recovery in China may be just another bubble and China may be facing an economic boom and bust. Report of overcapacity in China's industrial sector, China's plan to cap lending and China's ban on expansion of steel production all combined to generate fear that the Chinese recovery has run its course. The Australian economy is highly dependent on exports to China and the China's growth outlook is seen key to the global recovery. Last week the AUD rallied to a new high for the year supported by report of a two-year high in business confidence and hawkish comments from the RBA Governor Stevens. Stevens said that there will come a time when the exceptional monetary stimulus in place at present is no longer be needed. At that time it will be appropriate for the RBA to adjust interest rates back towards normal levels. Stevens would not say what the normal level for interest rates should be but he indicated it would be much higher than the present emergency rate of 3%. The RBA will likely be the first central bank to tighten as the global economy recovers.  The fact that he RBA may be laying the foundation for future rate hikes adds to concern about the global growth outlook generating fear that central banks may raise rates too soon which could choke off nascent recoveries in the global economies. AUD should remain well supported on breaks by steady RBA policy. AUD price direction remains closely correlated to risk sentiment and the direction of equity markets.

The technical outlook for the AUD is mixed as AUD fails to hold above 8300. Expect AUD support at 8125 the July 29th low with resistance at 8330 the August 17th high.