• USD: Lower, existing home sales rise more than expected, the report may confirm end of recession
  • JPY: Lower, erases early gains as equity markets surge
  • EUR: Higher, EU services and manufacturing PMI's rise signaling end of recession in Europe
  • GBP: Mixed, tracking equity markets and hope for EU recovery, gains limited by UK economic uncertainty
  • CAD and AUD: AUD & CAD higher, supported by rising equity markets and higher crude prices

Overview     
USD traded sharply lower Friday pressured by higher equity markets, firmer crude prices and report that EU manufacturing and services PMI rose to their highest level in 15 months. USD extended its losses after the release of much better than expected rise in US July existing home sales. US existing home sales for July rose 7.2%, well above market expectations of a 2% rise. The report fueled further gains for US equities and speculation that the recession in the US has ended. A consensus is emerging that the US and global recession is ending supporting equity markets and improving risk sentiment. The rise in EU manufacturing and services PMI is further confirmation that the recession in Europe is ending. It's interesting to note in today's early trade that the USD decline was broad based with the JPY rising along with the other major currencies. The JPY was supported by safe haven flows inspired by weaker Nikkei trade and continued uncertainty about the outlook in China. Report that the Chinese government will audit China's bank loans sparked volatile trade in the Asian equity markets and the Nikkei closed 145 points lower. JPY erased overseas gains and traded lower pressured by a sharp rise in risk appetite and a spike in bond yields after the release of US existing home sales. There was little reaction to a Wall Street Journal report that warned that the US banks entering into a new phase of the financial crisis as more US banks are failing. Regulators may seize Guaranty Financial. The closing of Guaranty Financial would mark the 10th largest bankruptcy in US history. In addition, the MBA says that the percentage of mortgages in foreclosure or at least one payment past due has hit a record 13.16% in Q2. This could present more trouble for US banks.

Today's US data:
Existing home sales for July rose to 7.2% to 5.24 mln units, a reading of 500 mln and a 2% rise was expected for the July existing home sales.

Upcoming US data:
Next week's US economic calendar includes the August 25th release of June Case-Shiller home price index expected at -16.8 compared to -17.1 last month. Also on August 25th August consumer confidence will be released expected at 48 compared to 46.6 last month. On August 26th durable goods and new home sales for July will be released. Durable goods are expected to rise 1.7% compared to -2.2% last month and new home sales are expected to rise to 390k from 384k last month. On August 27th jobless claims for week ending August 22nd will be released expected at 550k compared to 576k last week. Q2 GDP will also be released on August 27th expected at -1.4% compared to -1% last quarter. 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 64.5 compared to 63.2 last month.

JPY
JPY traded higher in overseas trade despite firming European and US equity market trade and improving risk sentiment. As best we can tell, the JPY was supported by uncertainty about the outlook for China's economy and equity market, weaker Nikkei, and political developments in Japan which show the DPJ opposition party expanding its lead in the run-up to the August 30th national election. Asian equity markets traded mixed in volatile trade with the Nikkei closing 145 points lower. A report that the Chinese government will audit China's banks and tighten capital requirements contributes to uncertainty about the outlook for China's recovery. The Shanghai Index ended a volatile week of trade closing slightly higher Friday. According to the Nikkei press the DJP party may win more than 300 lower house seats in the August 30th election and gain power for the first time in over 50 years. A victory for the DJP party may be seen as a mild positive for Japan's economic outlook as the DJP has pledged to take actions to boost growth and put more money in the hands of the Japanese consumer. The trade will be watching closely to see if the close correlation of JPY to the direction of equity markets continues to break down as it did in Friday's trade. This could be a signal that the USD is on the verge broader-based decline in JPY is headed for bigger rally. JPY turned lower after the release of better than expected US existing home sales re- linking to an inverse correlation to equity markets and risk sentiment. 

Next week's Japanese economic calendar includes the August 27th release of July trade balance expected at 507.5. On August 27th Japan's unemployment rate will be released expected at 5.4% along with household spending expected to rise to 0.2% along with July CPI expected to fall 1.8%. On August 28th July CPI will be released along with July retail sales and industrial output.

Key technical levels to watch in USD/JPY include support at 92.70 the July 14th low with resistance at 95.30 the August 18th high.

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EUR
EUR traded higher supported by report that EU manufacturing and services PMI rose more than expected. EU August services PMI rose to 49.5 from 45.7 last month and manufacturing PMI rises to 47.9 from 46.3 last month. EU manufacturing PMI is at its highest level in 15 months. More impressively, German services PMI rose to 54.1 and French manufacturing PMI rose to 50.2. A reading above 50 is considered an indication of expansion for manufacturing and services in the German and French economies. Last week Germany and France reported an unexpected rise in Q2 GDP which confirmed that the recession in these countries has ended. The rise in EU PMI's suggests that the EU economy is expanding and that the recession has ended. Today's data contributes to speculation that the recovery will be sustainable and may change speculation about ECB policy outlook. The ECB is expected to hold monetary policy steady. EU PMI data may encourage speculation about the timing of a possible ECB rate hike as the EU economy recovers.

Next week's EU economic calendar includes the August 24th release of EU industrial orders expected at -0.2%. On August 25th German GDP will be released expected -3.8% for the quarter. On August 26th German August IFO will be released expected at 87.3 with expectations index expected at 90.4 and the current assessment expected 84.3. On August 27th German CPI and EU M3 will be released. German CPI is expected flat and EU M3 is expected to rise 3.5% y/y. 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 positive as the EUR rises above 1.4300. Expect EUR support at 1.4209 the August 21st low with resistance at 1.4450 the August 5th high.

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GBP
GBP traded mixed mainly supported by firmer equity market trade and spillover from positive EU and US economic data. As the EU economy emerges from recession it may help to pull the UK economy with it. GBP was supported by a positive EU PMI data and hope that the recession in Europe is ending. There was little reaction to a statement from the UK Chancellor Darling that he is cautious on UK recovery. Darling warned that rising energy prices is a risk to the economy and he noted the impact of positive GDP data from Germany and France. GBP continues to underperform pressured by Thursday's release of a record UK budget deficit for July and weaker retail sales. UK July budget deficit rose to a record of 13.2 billion. The July retail sales rose just 0.4% compared to 1.3% rise in June. The record UK budget deficit means that the UK may be forced to sell more debt and raise taxes to support government spending. The UK government plans to raise a record 220 bln GBP this year and may have to increase debt issuance to cover the budget gap. A smaller rise in retail sales generated concern about UK recovery. Wednesday, GBP was also pressured midweek by the release the MPC minutes for the August meeting which showed that the MPC was split over the expansion of quantitative ease. At the August meeting the BOE elected to expand quantitative ease by £50 bln. According to the MPC minutes BOE Governor King and two other board members argued for an expansion of quantitative ease by £75 bln. The MPC voted 6 to 3 in favor of expanding quantitative ease by £50 bln.

Focus turns to next week's release of UK GDP for further clues to whether the UK economy is emerging from recession along with the rest of Europe. Next week's UK economic calendar includes the August 27th release of GFK consumer confidence expected at -25. On August 28 UK GDP will be released expected at -0.8% for the quarter.

The technical outlook for GBP has improved as GBP rallies back above at 1.6500. Expect near-term support at 1.6370 the July 14th low with resistance at 1.6710 the August 10th high.

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CAD
CAD traded sharply higher supported by speculation that the US and global recession is ending. Report of better than expected manufacturing and services PMI from Europe and an unexpected sharp rise in US July existing home sent equity markets sharply higher and USD lower. CAD struggled midweek pressured by report of weaker than expected Canadian CPI. Canada's July CPI declined by 0.3% m/m and 0.9% y/y. The core inflation rate was flat. The trade had expected a 0.2% decline in CPI with a 0.1% rise in the core inflation rate. Canada's inflation rate sank to the 56 year low. The drop in Canada's CPI reflects lower energy prices. As noted in our special report Tuesday, the BOC says it will keep interest rates at record low 0.25% until June 2010 as long as inflation remains weak. BOC officials are not concerned about deflation but may have to address the fact that the core CPI is falling. Part of the drop in Canada's CPI can be attributed to the strength of the CAD. Canadian CPI report and today's sharp rise in the CAD post-release of US existing home sales data may increase the risk of intervention rhetoric. CAD direction will remain closely correlated to speculation about the global recovery and risk sentiment.

Next week's Canadian economic calendar includes the August 24th release of retail sales expected at 1.2%. 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 positive as USD/CAD falls back below 1.0900. Look for near-term support at 1.0635 the August 4th low with resistance at 1.10994 the August 21st high.

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AUD
AUD traded higher supported by rising equity and commodity markets as economic data from the US and Europe suggests the global recession has ended. AUD gains were somewhat limited by uncertainty about the outlook for China's recovery and fear of intervention. Last night Asian press reported that the Chinese government would audit Chinese bank loans. This could further reduce bank lending in China and slow the Chinese recovery. The Shanghai Index has come under some significant pressure this week with some analysts talking about the market index turning bearish. Over the last few months the RBA has been an aggressive seller of AUD on rallies above 8400. Thursday, the RBA confirmed that it sold A$705 mln in July after selling a record A$194 bln in June. The RBA intervention appears to be targeting AUD rallies above the 8400. RBA officials are concerned that continued strengthening of the AUD could hurt Australian exports and choke off Australia's recovery. AUD price direction is the most sensitive to developments in the China as China is a major export destination for Australian goods China's recovery is key to demand for commodity prices. AUD price direction remains closely correlated to risk sentiment and the direction of equity markets. The trade is closely monitoring the Shanghai Index and is wary of the threat of intervention.

Next week's Australian economic calendar includes August 24th release of July new motor vehicle sales expected at 5.7%.

The technical outlook for the AUD is mixed as AUD rallies are rejected at 8400. Expect AUD support at 8217 the August 21st low with resistance at 8330 the August 17th high.

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