• USD: Higher, supported by speculation that the Fed may begin to withdraw stimulus
  • JPY: Lower, pressured by long liquidation, Japan's Finance Minister Fujii reverses his support for strong JPY
  • EUR: Lower, tracking weaker equities, oil and gold prices
  • CHF: Lower, tracking broad USD gains versus the majors, awaiting Tuesday's 2009 SECO survey
  • GBP: Lower, BOE bulletin states that GBP weakness reflects UK economic imbalances and rising UK debt
  • CAD and AUD: AUD & CAD lower, tracking stocks and commodities, Can. net foreign investments lower

 

Overview     
USD traded near a three-week high Monday supported by liquidation pressures ahead of Tuesday's FOMC meeting and by fresh safe haven demand as equities, oil and gold prices decline. The FOMC meet Tuesday and Wednesday. There is speculation that the FOMC may begin to signal a withdrawal of stimulus and possibly take a hawkish bias as recent US economic data points to end of the recession. If the FOMC sets the stage for an end to the Fed's easing cycle the USD may experience further gains. Global equity markets were pressured by concern that the current rally from the March lows may be overdone with many analysts comparing the rally to bear market rallies in the 1930s to the 1970s. These rallies failed to hold. Crude oil prices were pressured by concern about weaker global demand and gold traded below $1000 an once in reaction to a report that the IMF will sell 12.5% of its gold holdings. Focus turns to tomorrow's start of the two day FOMC policy meeting and the G-20 meeting on September 24th and 25th. The trade will be looking to see whether the Fed signals an end of its easing cycle and the beginning of withdrawal of stimulus. The G-20 is expected to focus on new global regulation for financial markets and president Obama says he will push the G-20 leaders for a reshaping of the global economy. CFTC commitment of traders for the IMM last week showed that speculators raised short USD and ripe for a technical rebound. The USD bear camp is quite crowded. USD gains were limited as equities erase early losses.

Today's US data:
August leading economic indicators rose 0.6%, a rise of 0.7%% was expected. This marked the fifth consecutive monthly rise for the US LEI.

Upcoming US data:
Two day FOMC meeting will begin on September 22nd. On September 24th initial jobless claims for week of 9/19 will be released expected at 540k compared to 545k last month. On September 24th August existing home sales will be released expected at 5300k compared to 5240k last month. On September 25th August durable goods will be released expected at 1.1% compared to 5.1% last month along with final University of Michigan sentiment for expected unchanged at 70.2%. August new home sales will also be released on September 25th expected 450k compared to 433k last month.

JPY
JPY traded near a three week low versus the USD pressured by profit-taking ahead of the start of a two-day FOMC meeting Tuesday and in reaction to Friday's statement from Japan's Finance Minister Fujii reversing earlier statements which appeared to endorse a stronger JPY. The FOMC meeting has the potential to boost USD demand if the Fed signals it will start withdrawing stimulus. If the Fed signals that it will continue to maintain low yields for a considerable period than the USD may weaken. Japan's new Finance Minister Fujii said that he does not want to be labeled as backing strong JPY. Fujii went on to say that JPY should reflect Japan's economy. For most of last week's trade, Fuji had suggested that a strong JPY would benefit Japan's economy and that he was against intervention to weaken the JPY to support Japan's exporters. The trade will continue to focus on Japanese intervention rhetoric. JPY would likely benefit if the threat of intervention is removed. JPY may also benefit from fresh safe haven flows if equity markets continue today's downturn. According to a Bloomberg survey most analysts expect the JPY to weaken because the economy is too weak to support a stronger JPY. Japanese markets were closed for holiday and trading conditions were thin which may have exaggerated price movements in JPY trade.

This week's Japanese economic calendar includes the September 24th release of August trade balance expected at 125 bln compared to 380 bln last month. Also on September 24th July all industry activity will be released expected at 0.6% compared to 0.8% last month.

Key technical levels to watch in USD/JPY include support at 91.00 the September 18th low with resistance at 93.30 the September 7th high.

EUR
EUR traded lower pressured by broad USD gains sparked by liquidation ahead of Tuesday's start of a two-day FOMC policy meeting. There is speculation that recent improvement in US economic data will encourage the FOMC to begin to withdraw stimulus and signal an end to its easing cycle. A statement last week from Fed Chairman Bernanke that the US recession has likely ended encourages speculation that the FOMC may vote to begin to withdraw economic stimulus measures. EUR was also pressured by an uptick in risk aversion as global equity markets, crude prices and gold trade lower. In addition, the German finance minister warned that German job losses may intensify next year as government stimulus ends. There is emerging debate as to what type of global recovery can be expected once fiscal and monetary stimulus begins to fade. Lack of job creation in all the industrialized nations is a major risk to the sustainability of the global recovery. The IMF revised its forecast for the EU up by 0.5% for 2009 and 2010 but warned that there remain uncertainties about the global recovery and that now is not the time for the ECB to exit nonconventional monetary policy. Last week the EUR reported that investor confidence is at its highest level in three years and the EU trade surplus widened by the most in seven years. These reports may encourage speculation that the ECB may move its timetable forward for hiking interest rates. Focus turns to this week's release of EU manufacturing and services PMI and German IFO. The trade will be looking at these reports for clues to whether the EU economic recovery is sustainable.

This week's EU economic calendar includes September 23rd release of September flash manufacturing and services PMI. The manufacturing PMI is expected at 49 compared to 48.2 last month and the services PMI is expected at 50.1 compared to 49.9 last month. Also on September 23rd of July industrial orders will be released expected at 2.5% compared to 3.1% last month. On September 24th German September IFO index will be released expected 90.8 compared to 90.5 last month. On September 25th EU August M3 will be released expected 3.4% compared to 3% last month

The technical outlook for the EUR is mixed as EUR fails to hold above 1.4700. Expect EUR support at 1.4560 the September 15th low with resistance at 1.4714 the September 21st high.

CHF
CHF rallied to its highest level versus the USD in over a year last week. CHF traded lower Monday pressured by a spike in risk aversion and ongoing threat of intervention. Last week the SNB elected to hold interest-rate policy steady and raised its inflation/growth forecast. The SNB also reaffirmed commitment to take action to prevent CHF appreciation versus the EUR. The SNB went on to say that interest rates could not remain at low levels for the next three years. This week's Swiss economic calendar includes Tuesday's release of August trade balance which is expected to show modest deterioration reflecting weaker export sales. The August trade balance is expected at 2.2 bln. Last week Switzerland reported that industrial production fell to a record low in Q2. The decline in Swiss industrial production reflects weak demand for Swiss exports. On Tuesday, the State Secretariat for Economic (SECO) will release its 2009 economic survey and forecast of growth and inflation. The trade will be looking to see if SECO agrees with last week's SNB upgrade of Swiss inflation and growth outlook. Deutsche Bank analysts expect the CHF to decline versus the EUR because of SNB intervention and expect the global recovery to fuel demand for higher yielding currencies at the expense of the CHF. Expect USD /CHF support at 1.0140 the July 2008 low with resistance at 1.0465 the September 10th high.

GBP
GBP traded lower and weakened to a five -month low versus the EUR pressured by concern about UK economic imbalances and rising UK government debt. GBP traded lower in reaction to the release of the BOE's quarterly bulletin which stated that the GBP's long-run sustainable exchange rate may have fallen because investors are concerned about financing UK debt. Friday, the UK reported a sharp rise in net public-sector borrowing. The UK August public-sector borrowing rose to 10.27 bln from 5.09 bln last month reflecting lower tax receipts. Although the UK public sector borrowing report was less than the 12 bln economists had expected the number still represents a significant widening of UK debt burden. GBP has underperformed partly because of concern about rising UK debt and the issue of how the UK will be able to finance the debt. There is concern that the UK may be forced to raise taxes to fund the debt and that the continued expansion of deficit spending could lead to higher interest rates. Higher interest rates would be an additional threat to the UK economic recovery. GBP was also pressured by Friday's report that Lloyds banking group failed the FSA stress test. The Lloyds news may have implications for BOE monetary policy. If the UK financial system remains under strain the BOE may be forced to expand quantitative ease once again. The GBP has been underperforming since the BOE's surprise decision in August to expand quantitative ease to £175bln. There is an interesting article in Friday's Wall Street Journal which raises the question of whether the GBP will emerge as the new funding currency and vehicle for carry trades replacing the JPY. It is now cheaper to borrow in USD than JPY and this may soon be the case for the GBP. EUR/GBP traded above 90.50 for the first time in five months. Analysts at BNP Paribas look for EUR/GBP to trade at parity as investors look to borrow in low yield currencies like the GBP to finance the purchase of higher yielding assets. The GBP failed to gain much support from report that September Rightmove house prices rose 0.6%. The rise in Rightmove house prices suggests that UK housing market is stabilizing and that  it will likely continue to prove that the year-end. Apart from focus on this week's FOMC meeting the trade will be looking at Wednesday's release of BOE minutes for the September policy meeting for clues to whether the BOE may consider expanding quantitative ease.

BOE minutes for the September policy meeting will be released on September 23rd.

The technical outlook for GBP is negative as GBP falls below 1.6200. Expect near-term support at 1.6030 the July 9th low with resistance at 1.6375 the September 18th high.

CAD
CAD traded lower pressured by weaker stocks, crude and gold prices and in reaction to report that foreigners cut net purchases of Canadian securities in July. Canada's net foreign investment for July was just CAD351mln compared to CAD10.5 bln last month, a reading of 8.07 bln was expected. The decline in the price of crude and gold reflects concern about global demand and report that the IMF plans to sell 12.5% of its gold holdings. CAD was also pressured by a statement from Canada's Finance Minister Flaherty late Friday warning that Canada's recovery remains fragile and unemployment is likely to continue to rise. Flaherty's comments suggest that the BOC will continue to maintain accommodative policy. Last week the BOC reaffirmed its commitment to hold interest rates at 0.25% until mid-2010 provided inflation remains in check. Canada's August CPI rose 3% m/m, and 1.6% y/y. The core inflation rate rose by just 0.1%. BOC inflation target is 2%. CAD price direction will continue to focus on commodity prices and the outlook for the global economy. Focus turns to Tuesday's release of retail sales and the start of the FOMC policy meeting.

On September 22nd retail sales will be released expected at 1.4% compared to 1% last month.

The technical outlook for CAD is positive as USD/CAD falls below 1.1070. Look for near-term support at 1.0678 the September 21st low with resistance at 1.10930 the September 15th high.

AUD
AUD traded at a one year high of 8778 last week mainly supported by RBA rate hike speculation improving optimism about the global economic recovery and rising commodity prices. AUD traded lower Monday tracking weaker equities, crude and gold. The Shanghai Index closed 3% lower. AUD price direction remains closely correlated to the outlook for China's economy and the Shanghai Index. The rally in global equity markets appears to have stalled and this is being used as an excuse to book some profits in the AUD. There was little reaction to report that Australia's new motor vehicle sales for August rose 0.3%. Last week Australia reported an unexpected decline of 3.7% in net dwelling starts and Westpac leading index rose to its highest level in seven months. The RBA policy minutes for the September meeting were also released last week. The minutes did not give any clues about the potential timing of an RBA tightening. AUD upside is also limited by threat of intervention. The RBA aggressively sold the AUD in August. The RBA sold A$576 mln in August. This compares to sales of A$705mln in July and A$1.94 bln in June. The RBA has been less aggressive in intervening to try to weaken the AUD. Main risk to the AUD is the rally in equities and commodity markets may be stalling. AUD may experience additional selling pressure in front of this week's FOMC policy meeting and the G-20 summit at the end of the week

On September 23rd Australia's skilled vacancies will be released expected at 1.2% compared to 1% last month. On September 24th new home sales for these expected at 0.3% compared to 0.1% last month.

The technical outlook for the AUD is mixed as AUD fails to hold above 8700. Expect AUD support at 8525 the September 8th low with resistance at 8735 the September 18th high.