US Morning Notes - USD lower, China wealth fund selling USD for gold

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FX Highlights

• USD is opening lower as the OECD says the recession has ended and recovery may be faster than expected, China’s wealth fund is rumored to be selling USD for gold and other investments, gold is trading at its highest level since June, crude prices rise, US and European equities higher contributing to improving risk appetite, US retailers Home Depot and Target post better than expected sales, FOMC says risks to US economy have eased considerably, Australia’s trade deficit widens more then expected, ECB holds rates policy unchanged as expected, waiting for the ECB press conference, UK services PMI rises more than expected, Britain, France and Germany tell the G-20 that governments should stick to current stimulus plans
• Focus turns to today’s release US jobless claims and services PMI
• Australia’s July trade deficit widens to 1.5 bln, a reading of 850 mln was expected, exports fall 1% imports rise 4%, August new vehicle sales fell 6.9%, AUD higher
• EU July retail sales fell 0.2%, August services PMI rises to 49.9 from 45.7 last month, EUR higher
• MOF flows data for week ending August 29th show that foreigners were net buyers of Japanese stocks, DPJ official says strong JPY is good for Japan’s economy, JPY lower on improving risk appetite
• UK August services PMI rises to 54.1 compared to 53.2 last month, GBP higher
• Fed’s Plosser says economy in transition expects growth in the second half of the year, sees risk of higher inflation, exit strategy must be carefully set, interest rates may have to rise rapidly
• Dow Jones reports that China is preparing to buy bln IMF notes
• Goldman Sach’s analysts raises AUD forecast to 8700 in three months from the prior forecast of 8200 because of strong Australian Q2 GDP
• FOMC minutes for August state the recession is ending but see uncertainty about the strength of the recovery and expressed concern about jobs
• Treasury Secretary Geithner to outline principles to constrain excessive leverage by banks at this weekend’s G-20 meeting and says the US seeks a globally coordinated exit strategy from stimulus policies, Geithner says it’s too early to begin removing economic stimulus, G-20 meet in London this weekend
• US equity markets set to open higher, European equities 1% higher, Nikkei closed 65 points lower

Upcoming Events

• US- Thursday, jobless claims for week ending 8/29 will be released expected at 556k compared to 570k last month along with August services PMI expected at 48 compared to 46.4 last month
• CAN- Thursday, no major Canadian economic data is scheduled for release today

EU Morning Report – ECB to hold interest rates at record low at 1%

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ECB President Trichet may keep interest rates at a record low and state there is no rush to exit emergency stimulus measures as the economy shows signs of recovery.

• The ECB announces its rate decision at 11:45 GMT and Trichet will release the revised economic forecasts during a press conference 45 minutes later.  The bank is expected to raise its forecasts for economic growth today after Germany and France unexpectedly exited their recessions in the second quarter.
• However, rising unemployment and the expiry of government rescue packages may damp expansion next year.  Therefore the ECB will be cautious of constricting the emerging euro-region recovery by tightening policy too soon.
• The FOMC Minutes released yesterday for the meeting held in August, indicate that the Fed felt that the recession came to an end in August.  The Fed repeated a prediction that the economy would start growing again in the second half of this year and expected the pace of the recovery to pick up in 2010.
• However, uncertainty on how consumers will behave resulted in a range of views from the Fed officials over the economic recovery.  In summary, they all agreed that the downturn in economic activity was ending and a turn around was just beginning.
• Gold rallied 2.3% yesterday, the biggest gain since March 18, as decline in equities and the dollar helped push demand for the precious metal as an alternative investment.  To date this year gold rallied 11% while the US dollar declined 3.6%.

Currency to watch out for: EURUSD & GBPUSD

• The EURUSD pivot point is at 1.4320 with a preference to enter into short positions at 1.4310
• The GBPUSD pivot point is at 1.6325 with a preference to enter into short positions at 1.6315

Today’s calendar and market movers:

• EU Retail Sales month on month expected to rise to 0.2%
• EU Minimum Bid Rate expected to remain unchanged at 1% with the Press Conference to follow 45 minutes later.
• US Unemployment Claims expected to drop slightly to 563,000
• US Non-Manufacturing PMI expected to rise to 48.3

Stocks:

• US stocks ended down for a 4^th straight day with the Dow and S&P lower by 0.3% and the NASDAQ down 0.1%.
• Over in Asia, the markets are mixed with the Nikkei trading at -0.48% and the Hang Seng at 0.99% as of 06:00 GMT.

Daily Forex Outlook - Gold Shines as Risk Returns

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CURRENCY TRADING SUMMARY - 3^rd September (00:30GMT)

U.S. Dollar Trading (USD) was surprisingly soft as the market continued to trade with ‘risk off’. The USD gave back some of the gains from Tuesday night. Gold led the charge higher over an ounce and the Aussie started the ball rolling in the Asian session with strong GDP numbers. ADP Unemployment in August fell -298k vs. -250k Forecast and added weight to the stock market. FOMC minutes were relatively dovish as the FED warned about the market getting ahead of themselves and that slow growth was forecast for the short term. Crude Oil was unchanged to close at .05. In US share markets, S&P ended -3 points (-0.33%) at 994, NASDAQ ended -2 points (-0.01%) at 1967 and DOW JONES ended -29 points (-0.32%) at 9280. Looking ahead, ISM non manufacturing forecast at 48 vs. 46.4 previously. Also released, Weekly Jobless Claims forecast at 560k vs. 570k previously.

The Euro (EUR) enjoyed gains on broad USD weakness as the 1.4200 held firm and traders continued to square up positions before today’s ECB meeting and tomorrows US non Farm Payrolls risk event. EUR/JPY plumbed new lows but found solid support and settled into a tight range. Q2 GDP remained unrevised at -0.1%. Overall the EUR/USD traded with a low of 1.4190 and a high of 1.4295 before closing at 1.4270. Looking ahead, July Retail Sales forecast at 0.1% vs. -0.2% previously. Also ahead, ECB Rate announcement forecast to remain at 1.0% but the focus will be on Trichet’s post meeting comments.

The Japanese Yen (JPY) Nikkei losses and risk aversion combined to push the USD/JPY through supports at 92.50 to plumb new multi-month lows. Key level on the downside is 91.60. GBP/JPY went though 150 Yen but found support below. EUR/JPY kept to a tight range below 132. Overall the USDJPY traded with a low of 92.09 and a high of 93.06 before closing the day around 92.25 in the New York session.

The Sterling (GBP) some large buy orders in Europe helped reverse direction and the pair surged back above 1.62 to briefly touch 1.63. News of a massive Oil find from BP helped keep the mood positive although GBP/JPY selling capped the rally. Overall the GBP/USD traded with a low of 1.6115 and a high of 1.6300 before closing the day at 1.6270 in the New York session. Looking ahead, August PMI Services forecast at 53.9 vs. 53.2.

The Australian Dollar (AUD) performed extremely well on the back of strong GDP figures for the second quarter. Q2 GDP forecast at 0.2% came in at 0.6%. The number increases the chance of aggressive rate rises sooner rather than later. AUD/JPY recovered from fresh multi-month lows although is struggling to eek out gains in the current risk environment. Overall the AUD/USD traded with a low of 0.8240 and a high of 0.8373 before closing the US session at 0.8345. Looking ahead, July Trade Balance forecast at -850mn vs. -441mn previously.

Gold (XAU) broke higher as large fund buying pushed the pair past 0 an ounce to quickly run up and touch 0. Overall trading with a low of USD1 and high of USD0 before ending the New York session at USD2 an ounce.

TECHNICAL COMMENTARY

Euro - 1.4275
Initial support at 1.4178 (Sept 1 low) followed by 1.4046 (AUG 17 low). Initial resistance is now located at 1.4407 (Aug 27 high) followed by 1.4447 (Aug 5 high)

Yen - 92.15
Initial support is located at 91.74 (July 13 low) followed by 90.54 (February 13 low). Initial resistance is now at 94.07 (August 28 high) followed by 95.06 (Aug 14 high).

Pound - 1.6275
Initial support at 1.6114 (Sept 1 low) followed by 1.6034 (Jul 13 low). Initial resistance is now at 1.6381 (Aug 28 high) followed by 1.6546 (Aug 24 high).

Australian Dollar - 0.8345
Initial support at 0.8239 (AUG 27 low) followed by the 0.8156 (AUG 17 low). Initial resistance is now at 0.8478 (Aug 14 high) followed by 0.8519 (Sept 22 high).

Gold - 978
Initial support at 944 (Aug 31 low) followed by 939 (Aug 24 low). Initial resistance is now at 980 (Sept 2 high) followed by 990 (Jun 3 high).

Special FX Report - Preview of US August unemployment report

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US August unemployment and nonfarm payrolls (nfp) will be released on Friday, September 4th at 8:30 ET. A recent drop in jobless claims, a modest dip in the July unemployment rate and a smaller than expected decline in July nonfarm payrolls encourage speculation the US labor market is stabilizing. Despite signs of stability, the US labor market remains weak. Based on the August ADP report that the August nfp may show little improvement.  ADP reported August job cuts of 298k down from 360k last month. The consensus forecast for the August ADP report was a decline of 250k. The August ADP employment decline was the smallest since September 2008. Challenger reports that job cuts were down 14% from a year ago and planned layoffs fell 21% in August. The ADP and Challenger reports and recent jobless claims data suggest that job losses are likely to slow in the coming months. First-time jobless claims declined to a four-month low last week confirming that layoffs have eased. Jobless claims fell to 570k from 580k the prior week. Jobless claims remain well above levels associated with a healthy recovery. The recent improvement in US labor market may not be as positive as advertised because discouraged workers and those part-time employed are not included in the in the labor statistics.

Discouraged and part time workers not counted

The Bureau of Labor Statistics does not count people discouraged by the labor market that have stopped looking for a job or those who have been forced to work part-time as unemployed. According to the Fed’s Lacker the real unemployment rate is closer to 16% if persons who have dropped out of the labor pool and those working part-time are counted. This is 7% higher than the official unemployment rate of 9.4%. The number of people that have given up on finding work has been steadily rising over the past few months estimated at 796k in July. According to the Bureau of Labor Statistics the number of persons working part-time was 8.8 mln in July and the number of such workers rose sharply last fall and winter but has been little changed for the last four months. The number of workers who wanted full time jobs but could only find part time work was 1.8 mln in July.

The unemployed continue to have a hard time finding a job

Since the recession began in December 2007 the US has lost a net total of 6.7 mln jobs. Despite some signs of stability in the unemployment situation the chance of getting a new job is low. Federal statistics indicate that there were more than five times as many people seeking jobs in the US during June than positions available. In addition, the number of long-term unemployed, those jobless for 27 weeks, increased to 4.9 mln from 4.4 mln in June. 35.5% of total unemployed have been looking for work for over a year. Some unemployment benefits will soon be exhausted. Despite a number of extensions of the unemployment compensation program, 1.5 mln people are expected to exhaust their benefits by year’s end. 540k are expected to lose their benefits in September according to the National Employment Law Project. Jobs creation remains elusive. The White House expects the unemployment rate to rise to 10% by year end before declining to 9.7% by fourth quarter of 2010. It looks like the US faces a jobless recovery. This means that the recovery will likely be weak.

August Unemployment and non farms payrolls forecast

The August unemployment rate is expected to rise 0.1% to 9.5% with nfp expected at -220k. Politicians and pundits may hail Friday’s report as another positive for the US economy but when you scratch below the surface of the data the US labor market remains weak and the US is still loosing jobs. Investor sentiment may be reaching an inflection point as questions emerge about whether the recent recovery in commodities and equity markets since March is supported by fundamentals. Risk aversion seems to be creeping back as investors become more cautious about the outlook for the global recovery and if the global rally was anything more than a rally in a bear market. The direction of equity markets and risk sentiment remain the main drivers for FX trade. Because September is historically one of the worst months for equities a weaker than expected August employment report could be the catalyst for further downside pressure in US stocks. This may contribute to a pullback in risk appetite and modest safe haven demand for USD.

Figure 1 US nonfarm payrolls

Daily Forex Report - USD lower, factory orders beat expectations

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•  USD: Lower, ADP falls more than expected, planned layoffs decline, labor costs decline, productivity rises
• JPY: Higher, rising risk aversion as global equity markets decline, DPJ supports USD reserve status
• EUR: Higher, EU producer prices fall at record pace, GDP as expected
• GBP: Higher, UK construction PMI rises to an 18 month high
• CAD and AUD: AUD higher & CAD lower, Australian GDP strong, political uncertainty in Canada

Overview     
USD traded lower Wednesday with the AUD leading the way supported by stronger than expected Australian Q2 GDP and GBP supported by higher UK construction PMI. JPY traded at seven week high supported by risk aversion sparked by report of worse than expected ADP jobs report, a sharp drop in the Nikkei and weaker equity market trade in Europe. The impact of the ADP report was partly offset by a report that US nonfarm labor costs posted their biggest decline since 2000 and nonfarm labor productivity posted its biggest gain since 2003. EUR traded mixed initially pressured by report that EU producer prices declined at a record pace in June. CAD traded lower pressured by political uncertainty in Canada as Canada’s Liberals say they will no longer support the minority government and by report of weak auto sales. Investors are trying to gauge whether recent data which shows the global economy improving is sustainable. Caution about the global economic recovery limits USD downside as risk aversion re-emerges. Equity markets and investor sentiment are approaching a key inflection point. It’s unclear whether the re-emergence of risk aversion will be short-lived or begin to trend higher. Economists declared that the US recession ended after Tuesday’s release of ISM manufacturing data which rose above 50, but it’s not clear whether there will be solid evidence of economic recovery until later in the year. An uneven US and global economic recovery may lead to more choppy price action and FX markets.

Today’s US data:
August ADP employment falls by 298k, the trade expected a decline of 250k. Q2 productivity rises 6.6% and labor costs declined by 5.9%. July factory orders rise 1.3%, a 0.8% rise was expected. USD drifted lower post release of the factory orders report as stocks stabilized.

Upcoming US data:
On September 3rd initial jobless claims for the week ending 8/29 will be released expected 556k compared to 570k last month along with August services PMI expected 48 compared to 46.4 in July. On September 4th August unemployment rate would be released expected at 9.5% compared to 9.4 last month with nonfarm payrolls -220k compared to -247k in July.

JPY
JPY traded at a seven week high supported by safe haven demand as the Nikkei closes 250 points lower and risk appetite falls. There was little reaction to report that Japan’s incoming government says there will not be any dramatic change in US Japanese relations, and that the new government does not plan to interfere with BOJ policy or JGB purchases. JPY also benefited from DPJ statement that the economy will benefit from stronger JPY if the new government boosts domestic led growth. There is expectation that the new Japanese government will be less inclined to intervene to try and weaken the JPY as focus shifts away from export led growth to domestic. JPY extended its early rally after the release of weaker than expected August ADP employment report. Japan’s monetary base rose 3.6% in August. JPY price direction will continue to focus on equity markets and risk sentiment.

Thursday Japan will release Q2 capital spending expected at -23% compared to -25.3 in Q1.

Key technical levels to watch in USD/JPY include support at 91.75 the July 13th low with resistance at 94.06 the August 28th high.

EUR
EUR opened lower pressured by report that EU producer prices declined at a record annual rate and by selling a cross trade to the GBP. EU June producer prices fell 0.8% m/m and 8.5% y/y. There was limited reaction to report that EU Q2 GDP was revised at -0.1%. The decline in EU producer prices may increase the risk of deflation in the EU but the data is unlikely to impact Thursday’s ECB policy meeting.  The ECB meet Thursday and no policy change is expected. The ECB is likely to hold rates steady at 1%, repeat its expectation that the EU economy will recover in 2010 and restate that inflation will turn positive as the economy recovers. Investors will look for clues to the timing of when the ECB will elect to hike interest rates in the months ahead. The trade will also be looking for ECB comments on an possible timing of the exit strategy from its bond purchase plan The EU’s Almunia said that exit strategies from quantitative ease should be internationally coordinated. EUR traded lower in cross trade after the release of better than expected UK construction PMI.EUR turned higher after the release of stronger than expected US factory orders tracking firmer stocks.

On September 3rd EU retail sales would be released expected at -0.1% along with services PMI expected at 47.2.

The technical outlook for the EUR is mixed to negative as the EUR breaks below the low end of its eight day range trade. Expect EUR support at 1.4045 the August 17th low with resistance at 1.4339 the August 28th high.

GBP
GBP traded higher supported by report of better than expected UK construction PMI and gains in cross trade to the EUR. August construction PMI rose to 47.7 from 47 last month reaching its highest level in 18 months. The rise in UK construction PMI is unlikely to encourage any change in BOE policy as BOE officials remain concerned that the signs of UK economic recovery are tentative. The BOE meet on September 10th and there remain concerns that the BOE may elect to again expand quantitative ease to support the UK economy. GBP has been underperforming with selling pressure attributed to ongoing concern about the outlook for the UK economy and in response to the BOE’s recent decision to expand quantitative ease. In addition, GBP has been pressured by report of a record budget deficit in July and concern that rising deficit spending will force the UK government to issue more debt and eventually raise taxes to cover the spending shortfall. If the BOE decides to again expand quantitative ease it would increase the UK government debt burden. At the last BOE policy meeting the policy board was split with three members, including BOE Governor King, calling for a wider expansion of quantitative ease.

On September 3rd services PMI will be released expected at 53.9 compared to 53.2.

The technical outlook for GBP is mixed as GBP falls below 1.6300. Expect near-term support at 1.6150 the August 27th low with and 1.5983 the July 8th low with resistance at 1.6382 the August 28th high.

CAD
CAD traded lower pressured by weaker equity markets, lower crude and political uncertainty in Canada. Apart from a modest improvement in the Shanghai Index equity markets were generally weaker Wednesday. Crude oil prices drifted below a barrel. Late yesterday there was a report that Canada’s Liberals said they would no longer support the minority government. Political uncertainty in Canada contributes to additional selling pressure of the CAD. There were no major Canadian economic reports released in today’s trade but weaker than expected US ADP employment data contributed to diminished risk appetite. Last night Canada reported that August auto sales fell for the 10th straight month at -7.9%. Monday the CAD traded sharply lower as Canada reported that GDP contracted at a faster than expected pace in the second quarter. Concern about the strength of Canada’s may limit CAD demand. CAD direction will remain closely correlated to speculation about the global recovery and risk sentiment. This week’s key focus is Friday’s release of Canada’s unemployment for July. The trade expects the July unemployment to show that the rate of job losses slowed in Canada.

On September 4th August unemployment rate will be released expected at 8.6% and employment growth expected at -22.7. August IVEY manufacturing PMI will also be released on September 4th expected at 53 compared to 51.8 last month.

The technical outlook for CAD has turned negative as USD/CAD rises above 1.1100. Look for near-term support at 1.0872 the September 1st low with resistance at 1.1170 the July 20th high.

AUD
AUD traded higher supported by report of stronger than expected Australian Q2 GDP and positive comments from Australia’s Swan which suggest that at some point interest rates will have to rise. Improving Australian growth outlook and RBA rate hike speculation are the main positives for the AUD. AUD received an additional boost from a slight improvement in the Shanghai Index in last night’s trade. Australia’s Q2 GDP rose by 0.6%, the trade was looking for a 0.2% rise. Australia’s Swan said that the government would need to withdraw stimulus and interest rates will have to be adjusted at some point. Swan went on to warn that unemployment may remain high and growth may moderate as stimulus is withdrawn. The RBA elected to hold policy steady at 3% Tuesday and failed to lay out a timeline for rate hikes. The AUD traded lower after the RBA meeting pressured by perception that the RBA policy statement was more dovish than expected. Many analysts expect the RBA to hike rates before year end. Today’s Australian GDP report supports the conclusion that the RBA will raise rates before year end. AUD price direction has been closely tracking the direction of the Shanghai Index.

On September 2nd Q2 GDP will be released expected at 0.6% compared to 0.4% last quarter. On September 3rd July trade balance will be released expected to improve 6.9 bln from 6 bln last month.

The technical outlook for the AUD is positive as AUD holds above 8300. Expect AUD support at 8239 the August 27th low with resistance at 8480 the August 15th high and 8525 the September 22nd high.

US Morning Notes - USD lower, AUD rallies on strong Q2 GDP

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FX Highlights

• USD is opening mixed to lower and JPY rises as investors are cautious and fear recent rise in stocks and commodities is ahead of the economic news, AUD outperforms supported by strong Australian Q2 GDP, EU producer prices decline at a record pace, UK construction PMI declines
• Focus turns to today’s release ADP employment, productivity unit, labor cost and factory orders
• Australia’s Q2 GDP rises 0.6%, a 0.2% rise was expected, Australia’s Swan says the government stimulus will be withdrawn and interest rates will have to be adjusted at some point, unemployment to remain elevated, AUD higher
• JPY trades at a seven week high supported by rising risk aversion, Japanese officials try to reassure the US about US and Japanese relations, DPJ party says they will not interfere with BOJ policy
• EU GDP falls 0.1% in Q2, producer prices decline at a record annual rate of 8.5% in June, EUR higher
• UK construction PMI comes in weaker than expected, GBP higher
• CAD lower, pressured by report that Canada’s Liberals said they will no longer support the minority government
• Libor euro and sterling rates at record lows
• Challenger says job cuts were down 14% lower than a year ago
• International Financial Services says currency trading volume slumped by 25% form the same month last year from a record high, FX trading nearly doubled from April 2005 to April 2008
• August auto sales up 1% above 14.1 mln for the first time since 2008, Ford sales rise 17% in August but Chrysler and GM sales lag as the cash for clunker program ends
• Economists declare the recession has ended as ISM rises above 50, S&P says it may not be until Q4 before we see solid evidence of recovery
• US equity markets set to open mixed, European equities 0.5% lower, Nikkei closed 250 points lower

Upcoming Events

• US- Wednesday, ADP employment will be released expected at -250k compared to -371k last month along with Q2 final productivity and unit labor costs expected at -5.9% and -5.8% respectively and July factory orders expected at 1.8% compared to 0.4% last month,
• CAN- Wednesday, no major Canadian economic data is scheduled for release today

EU Morning Report – Uncertainty over the health of US financials boosts USD

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Uncertainty over the health of US financial institutions and concerns that the rally since March may have risen too far, too fast boosts the US dollar.

• To name a few, Wells Fargo, Bank of America, American Express and Citigroup all declined leading the Dow Jones Industrial Average lower.
• The fear over bank losses and concern over more losses overshadowed manufacturing and housing data that topped economist estimates.  According to the Institute of Supply Management, manufacturing expanded in August for the first time in 19 months and the National Association of Realtors said contracts to buy pending homes increased more than forecast in July.
• The VIX, a benchmark index for US stock options, which measures the cost of using options as insurance against declines in the S&P 500, increased 12% and closed at 29.15, the highest level since July 9^th.
• The Japanese yen traded near a seven-week high against the euro prompted by a sell-off in stocks which renewed demand for the relative safety of the yen.  The currency was already close to its strongest level versus the dollar in more than a month after Asian shares slumped.
• The Australian dollar climbed from near a one-week low against the US dollar after a government report showed economic growth unexpectedly increased by 0.6% in the second quarter.

Currency to watch out for: AUDUSD & EURUSD

• The AUDUSD pivot point is at 0.8340 with a preference to enter into short positions below 0.8340
• The EURUSD pivot point is at 1.4275 with a preference to enter into short positions at 1.4265

Today’s calendar and market movers:

• US ADP Non-Farm Employment Change expected to rise to -250,000 from -371,000
• US Factory Orders month on month expected to rise to 2.3%
• US Crude Oil Inventories expected to drop to -0.8 million from 0.2 million barrels
• US FOMC Meeting Minutes

Stocks:

• Wall Street falls 2%, closing negative for a third straight day on Tuesday, due to concerns over the US banking sector and financial institutions.  This marks the three major indexes worst percentage loss since August 17^th.
• As of 06:05 GMT the Nikkei is trading at -2.55% and the Hang Seng at -1.58%

Daily Forex Outlook - US Stocks Tumble

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CURRENCY TRADING SUMMARY - 2^nd September (00:30GMT)

U.S. Dollar Trading (USD) gained heavily in the US session as risk appetite took a massive shift for the worse. Very strong US August Manufacturing PMI data was overlooked at 52.9 vs. 48.9 previously. September is a traditional bear month for equities with the first day not inspiring much confidence. Crude Oil fell .91 to close at .05. In US share markets, S&P ended -22 points (-2.2%) at 998, NASDAQ ended -40 points (-2.00%) at 1968 and DOW JONES ended -185 points (-1.96%) at 9310. Looking ahead, August ADP private Employment Report forecast at -250k vs. -371k previously. Crude Oil Inventories forecast at -0.8m vs. 0.2m previously.

The Euro (EUR) bank rumors swirled in New York and the market tumbled from the relatively high levels of the recent range to test support at 1.4200. EUR/JPY is poised at key levels and could pull the major lower although a break of the lower end of the range is also unlikely with solid support expected from 1.4000-1.4100. EUR/GBP Overall the EUR/USD traded with a low of 1.4178 and a high of 1.4378 before closing at 1.4220. Looking ahead, Q2 EU GDP is fore4cast at -0.1% vs. -2.5% q/q.

The Japanese Yen (JPY) had a volatile day trading to day highs on a bounce in Asia stocks before falling back below 93 Yen in the US session as the mood darkened considerably. Supports at 92.50 and 91.50 will stem the speed on the downside decent on any major stock falls. Also adding to support on the downside verbal FX intervention comments from the Japanese government expected on any approach towards 90 Yen. Weighing on the USD/JPY is the continued heavy selling on EUR/JPY and AUD/JPY crosses. Overall the USDJPY traded with a low of 92.51 and a high of 93.44 before closing the day around 93.05 in the New York session.

The Sterling (GBP) followed the Euro although in a much more volatile fashion testing resistance at 1.6360 before crashing with US stocks to new multi-month lows below 1.6160 supports. GBP/JPY was very heavy testing 150 Yen supports. Overall the GBP/USD traded with a low of 1.6113 and a high of 1.6375 before closing the day at 1.6160 in the New York session.

The Australian Dollar (AUD) was under pressure before the risk aversion selling surfaced after the RBA kept hawkish comments to a minimum. A break in the AUD/JPY to fresh multi-month lows is the main catalyst although the continued weakness in commodities is also weighing. The long term daily rising trend-line was also broken at 0.8280 causing Bulls further headaches. Overall the AUD/USD traded with a low of 0.8244 and a high of 0.8458 before closing the US session at 0.8280. Looking ahead, Q2 GDP is forecast at 0.2% vs. 0.4% previously q/q.

Gold (XAU) held up well as the banking inspired risk aversion caused safe haven demand to compete with the stronger Dollar. Overall trading with a low of USD6 and high of USD7 before ending the New York session at USD2 an ounce.

TECHNICAL COMMENTARY

Euro - 1.4210
Initial support at 1.4178 (Sept 1 low) followed by 1.4046 (AUG 17 low). Initial resistance is now located at 1.4407 (Aug 27 high) followed by 1.4447 (Aug 5 high)

Yen - 92.80
Initial support is located at 92.55 (Aug 31 low) followed by 91.74 (July 13 low). Initial resistance is now at 94.07 (August 28 high) followed by 95.06 (Aug 14 high).

Pound - 1.6135
Initial support at 1.6114 (Sept 1 low) followed by 1.6034 (Jul 13 low). Initial resistance is now at 1.6381 (Aug 28 high) followed by 1.6546 (Aug 24 high).

Australian Dollar - 0.8260
Initial support at 0.8245 (Sept 1 low) followed by the 0.8239 (Aug 27 low). Initial resistance is now at 0.8478 (Aug 14 high) followed by 0.8519 (Sept 22 high).

Gold - 953
Initial support at 939 (Aug 17 low) followed by 930 (July 29 low). Initial resistance is now at 961 (August 6 high) followed by 971 (Jun 3 high).

Special FX Report - Shanghai Index drops, is China’s recovery at risk?

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China’s Shanghai Index rallied 90% since November 2008 supported by the Chinese government’s massive stimulus plan and a record expansion of bank lending. The Chinese government stimulus plan totaled 6 bln and was adopted to ensure the Chinese economy would grow by 8% in 2009.The Chinese central bank pumped a record amount of liquidity into China’s markets as well to try and boost GDP growth.  The Shanghai Index recently experienced significant selling pressure and the stock market decline generates concern about China’s economic recovery.  In early August, the Chinese government announced a plan to curb lending, cap steel production and reduce overcapacity. The Shanghai Index declined 22% in August pressured by concern that the plan to cap lending and reduce overcapacity could choke off the Chinese recovery.

The Shanghai Index dropped 6.7% Monday and many analysts suggest that the Shanghai Index has entered a bear market. The Shanghai Index is vulnerable to concern that slower lending will hurt Chinese growth. According to Bloomberg, a former Asian economist with Morgan Stanley, Xie, predicts that the Shanghai Index will fall another 25% because of concern about China’s economic outlook. Xie says the Chinese economic recovery is unsustainable and the recent economic recovery was fueled by government stimulus not a change in fundamentals. Not all analysts agree with Xie. Economists at Goldman Sachs have raised their growth forecast for China to 9.4% in 2009 from an original estimate of 8.3%. Goldman Sachs sees potential that China’s GDP could increase by 11.9% in 2010. Last month, China’s Premier tried reassure the markets and said that the government will continue with stimulus and easy credit to fuel growth. Part of the rationale for the Goldman Sachs upgrade of China’s GDP outlook is that the Chinese government has limited room to tighten credit and raise interest rates. The government clamp down on growth therefore should be limited.

China’s manufacturing economy continued to expand in August

Asian markets posted a modest rebound Tuesday supported by report of continued rise in China’s manufacturing PMI in August. China’s August Manufacturing PMI came in at 54, beating the July reading of 53.3. China’s manufacturing PMI rose at the fastest rate this year in August and has risen for the last six months. A reading above 50 means that the Chinese economy continues to expand. New orders, imports and employment all posted gains in August .The PMI report suggests that the Chinese recovery remains on track and the Shanghai Index decline may not reflect this fact. The price movements of the Shanghai Index are often driven by speculation. This makes a number of analysts’ question why investors are so sensitive to the movements of the Shanghai Index. The fact of matter is that of late global equity, financial markets and FX trade have been closely tracking the Shanghai Index trying to gauge what the recent selloff in the index means for the global recovery.

The major question facing China’s economy is how much liquidity will be taken away by the government and if this will contribute to a major slowdown in manufacturing output into year end. The direction of the Shanghai Index will be key to the outlook for risk sentiment and in particular for the direction of global growth linked currencies like the AUD and CAD. Based on today’s PMI report from China, investors may want to reassess fears about the outlook for China’s and the global recovery but, if the Shanghai Index continues to slide it may take the global markets and the recovery with it.

Daily Forex Report - USD rallies as equities slide

Posted by admin as Forex News

• USD: Higher, stocks struggle despite improvement in pending home sales and manufacturing ISM
• JPY: Lower, Hayashi warns of high risk of deflation and calls for continued accommodative BOJ policy
• EUR: Lower, EU manufacturing PMI rises and unemployment hits a 10 year high
• GBP: Lower, manufacturing PMI contracts and consumer credit turns negative, mortgage approvals rise
• CAD and AUD: AUD & CAD lower, RBA statement less hawkish, China’s PMI rises, crude rallies

Overview     
After an unusual day Monday which saw the USD, stocks and commodity prices all trade lower in tandem USD rebounded Tuesday. USD was supported by weaker equity market trade in Europe and the US, report of a fall in UK manufacturing PMI and the RBA decision to hold rate policy steady. USD pared gains midsession pressured by a rally in US equities sparked by report of better than expected US pending home sales and ISM manufacturing data. These reports helped to temporarily boost risk sentiment and partly reverse the pullback in risk appetite in overseas trade. Stocks failed to hold the data inspired gains, turned lower and the USD traded to the day’s highs. JPY was pressured by a statement from Japans economics minister warning of the high risk of deflation in Japan. Asian equities traded marginally higher despite a warning from a former Morgan Stanley analyst that the Shanghai Index may fall another 25% because of uncertain outlook for China’s economy. China’s PMI was fairly impressive rising to a sixteen month high, but the data failed to allay fears about China’s economic outlook. CHF traded mixed with downside limited by report of better than expected Swiss Q2 GDP and report that Swiss manufacturing PMI rose above 50 in August. Swiss Q2 GDP declined by just 0.2% EUR drifted lower as EU unemployment rate rises to highest level in 10 years. EUR downside was limited by report of expanding EU manufacturing PMI. September has historically been one of the worst months for US equities. This may spark a pullback in risk appetite and demand for USD

Today’s US data:
July construction spending declined by 0.2% a flat reading was expected. August ISM rose to 52.9 compared to 48.9 last month, a reading of 50.5 was expected. July pending home sales rise 3.2% and 12% from last year.

Upcoming US data:
On September 2nd ADP employment will be released expected -263k compared to -371k last month. Q2 final productivity and unit labor costs will be released along with July factory orders on September 2nd. Productivity is expected at 5.9% compared to 6.4% in the preliminary report. ULC is expected at -5.3% compared to the original report 5.8%. Factory orders are expected to rise 1% compared to 0.4% last month. On September 3rd initial jobless claims for the week ending 8/29 will be released expected 556k compared to 570k last month along with August manufacturing PMI expected 48 compared to 46.4 in July. On September 4th August unemployment rate would be released expected at 9.5% compared to 9.4 last month with nonfarm payrolls -220k compared to -247k in July.

JPY
JPY traded lower with downside limited by safe haven demand as equity markets decline in Europe and the US. JPY was pressured by a statement from Japan’s Economics Minister Hayashi that there is a high risk of deflation in Japan and the BOJ must maintain accommodative policy for a while. AUD/JPY traded lower with the AUD pressured by less hawkish RBA policy statement, EUR/JPY traded mixed as EU economic data was mixed. EU manufacturing PMI posted additional games, but EU unemployment rose to a 10 year high. GBP/JPY traded lower with GBP pressured by report of a contraction in UK manufacturing PMI and weaker than expected consumer credit demand. The trade continues to digest the impact of Sunday’s landslide victory for the DPJ party and what this may mean for Japan’s economy, budget and relations with the US and Asia. The initial reaction to the change in power in Japan has been mostly positive for Japanese markets and the JPY as the DPJ party is expected to focus on measures to boost domestic demand. Hayashi also said that the DPJ will have to carefully consider next year’s budget in Japan. There is concern that DPJ spending plans will increase Japan’s budget deficits. The big risk is that JPY may be vulnerable to concern about expanding budget deficit in Japan as the DPJ controls a majority of the parliament and could pass major new spending legislation with little opposition. There was the reaction to report that Japan’s domestic auto sales rose for the first time this year.

Thursday Japan will release in Q2 capital spending expected at -23% compared to -25.3 and Q1.

Key technical levels to watch in USD/JPY include support at 91.85 the July 13th low with resistance at 94.06 the August 28th high.

EUR
EUR traded lower pressured by mixed economic data from the EU and Germany and weaker equity market trade. EU August manufacturing PMI rises to 48.2 compared to the original report of a rise to 46.3. EU July unemployment rate rose to its highest level in 10 years at 9.5%. In contrast, German unemployment rate was unchanged at 8.3% last month and total German jobless dropped in August. The EU and German employment data suggest that consumer spending will likely remain weak. These reports are unlikely to encourage any change in ECB policy at Thursday’s policy meeting. The ECB meet Thursday and no policy change is expected as rising unemployment will limit consumer spending and inflation remains near record lows. The ECB is likely to hold rates steady at 1%, repeat its expectation that the EU economy will recover in 2010 and restate that inflation will turn positive as the economy recovers. Investors will look for clues to the timing of when the ECB will elect to hike interest rates in the months ahead. EUR has traded in the same range for the last eight days and the trade is watching closely to see if the EUR attempts to test the upside or downside parameters of this range.

On September 2nd EU PPI will be released expected -5.9% y/y along with EU GDP expected at -2.5% q/q and 0.3% m/m. On September 3rd EU retail sales would be released expected at -0.1% along with services PMI expected at 47.2.

The technical outlook for the EUR is mixed as the EUR rally stalls above 1.4400. Expect EUR support at 1.4209 the August 21st low with resistance at 1.4405 the August 27h high.

GBP
GBP traded lower pressured by report of an unexpected contraction in UK manufacturing PMI and weaker than expected consumer credit. UK August manufacturing PMI declined to 49.7 from 50.2 last month. Consumer credit declined by 0.2 bln, this marks the first negative reading for UK consumer credit since 1993. Consumer credit report points to weak recovery outlook and less consumer demand. GBP downside was limited by report that mortgage applications rose to a 15 month high. July mortgage applications rose by 50.1k compared to 47.9 K. last month. M4 money supply rose by 1.5% reflecting the impact of increased funding activity in the UK generated by the BOE’s quantitative ease policy. The BOE meet on September 10th and there remain concerns that the BOE may elect to again expand quantitative ease to support the UK economy. GBP has been underperforming with selling pressure attributed to ongoing concern about the outlook for the UK economy and in response to the BOE’s recent decision to expand quantitative ease. In addition, GBP has been pressured by report of a record budget deficit in July and concern that rising deficit spending will force the UK government to issue more debt and eventually raise taxes to cover the spending shortfall. If the BOE decides to again expand quantitative ease would increase the UK government debt burden. At the last BOE policy meeting the policy board was split with three members including BOE Governor King calling for a wider expansion of quantitative ease. UK markets were closed for holiday limiting price action. On balance UK economic data points toward stabilization of the UK economy with Q2 GDP contracting by a smaller amount than expected and home prices rising at the fastest in two and a half years but the fact that UK manufacturing PMI is below 50 suggest that the recovery will be weak and the BOE may have to take additional measures to boost growth.

On September 2nd construction PMI will be released expected at 48 compared to 47 last month. On September 3rd services PMI will be released expected at 53.9 compared to 53.2.

The technical outlook for GBP is mixed as GBP falls below 1.6300. Expect near-term support at 1.6150 the August 27th low with and 1.5983 the July 8th low with resistance at 1.6382 the August 28th high.

CAD
CAD extended Monday’s decline pressured by weaker equity market trade and concern that the Canadian recovery may be weaker than expected. Monday the CAD traded sharply lower as Canada reported GDP contracted a faster pace in the second quarter. The June GDP however posted a modest rise of 0.1% which suggests could fall by another 25% added additional selling pressure to the CAD on concern about the outlook for China in the global economy. Threat of intervention will continue to rise if the Canadian resumes its recent rally. The BOC’s Lane last week expressed concern about the impact of CAD strength on the Canadian economy. Lane’s comments increase the risk of intervention. CAD downside was limited by report that PetroChina plans to buy a stake in the two Canadian oil sands projects and by a rebound in US equities the price of crude. CAD direction will remain closely correlated to speculation about the global recovery and risk sentiment. This week’s key focus is Friday’s release of Canada’s unemployment for July. The trade expects the July unemployment to show that the rate of job losses slowed in Canada.

On September 4th August unemployment rate will be released expected at 8.6% and employment growth expected at -22.7. August IVEY manufacturing PMI will also be released on September 4th expected at 53 compared to 51.8 last month.

The technical outlook for CAD has turned negative as USD/CAD rises above 1.1100. Look for near-term support at 1.0872 the September 1st low with resistance at 1.1125 the August 17th high.

AUD
AUD traded sharply lower pressured by the RBA’s decision to hold rate policy steady and refrain from signaling when rates will rise. The RBA elected to hold policy steady at 3% and failed to lay out a timeline for rate hikes. The AUD was pressured by perception that the RBA policy statement was more dovish than expected. Monday, AUD traded higher despite declining equities and weaker commodity prices with support mainly from RBA rate hike speculation. Many analysts expect the RBA hike rates before year end. Australian economic data was mixed with the Q2 current account rising more than expected, manufacturing PMI at its highest level in 17 months and building approvals stronger than expected. Q2 current account deficit widened to 13.35 bln, a 10.6 bln deficit was expected. August manufacturing PMI rose 17.2 points to 51.7. July building approvals rose 7.7%. AUD failed to gain much support from a modest rebound in the Shanghai Index or report will better than expected Chinese PMI. A former Morgan Stanley analyst warns that the Shanghai Index could fall another 25%. AUD price direction has been closely tracking the direction of the Shanghai Index. Many analysts are warning that September is an historically weak month for stocks.

On September 2nd Q2 GDP will be released expected at 0.6% compared to 0.4% last quarter. On September 3rd July trade balance will be released expected to improve 6.9 bln from 6 bln last month.

The technical outlook for the AUD is positive as AUD holds above 8300. Expect AUD support at 8239 the August 27th low with resistance at 8480 the August 15th high and 8525 the September 22nd high.