Daily Forex Report - USD decline slows ahead of next week’s FOMC meeting

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• USD: Mixed, supported by profit taking and UK banking fears resurface
• JPY: Lower, Japan’s Finance Minister Fujii reverses his support for strong JPY
• EUR: Lower, German producer prices rise and EU current account surplus widens
• GBP: Lower, Lloyds Bank fails FSA stress test, UK public-sector borrowing widened
• CAD and AUD: AUD & CAD lower, tracking stocks and commodities, Canada’s wholesale sales rise

Overview     
After weakening for most of the week and trading at a new low versus the EUR for 2009, the USD rebounded Friday. The rebound in the USD is attributed to fresh banking concern as UK’s Lloyds Banking Group fails to pass the FSA stress test. Failure to pass the stress test may hinder the UK recovery. GBP traded at a four-month low versus the EUR and weakened versus the USD. There was limited impact from report that UK August public-sector borrowing widened by slightly less than expected. German producer prices rose last month and the EU current account surplus widened. EUR drifted lower. Japan’s new Finance Minister Fujii downplayed his recent statements favoring stronger JPY. Fujii said he did not want to be labeled as favoring a strong JPY and JPY should reflect economic conditions in Japan. JPY traded lower pressured by Fujii’s JPY comments. Commodity currencies weakened as stocks, oil and gold traded lower in overseas trade with downside limited by a reversal of overseas looses in commodities and equities in the US session. Canada’s wholesale sales for July came in stronger than expected. The wholesales sales report limited CAD downside. No major US economic data was released in today’s trade but there was a report that US household wealth increased by trln in Q2 mainly reflecting the rebound in equity markets. The gain in household wealth may boost consumer spending and optimism about the US recovery.

Focus turns to next week’s FOMC meeting. The trade will look to the FOMC meeting for clues to when the Fed may hike interest rates and exit from quantitative ease. According to the a Washington-based think tank Medley Global Advisors the Fed is divided over how quickly to raise interest rates once the economy show sustainable recovery. Medley suggests that two Fed members would support raising rates next week and some members are calling for an early exit from the Feds extraordinary accommodative policy measures. The FOMC meet on September 22nd. Fed rate hike speculation may help limit USD downside but majority consensus is that at FOMC rate hike is a long way off.

Today’s US data:
No major US economic data was released in today’s trade.

Upcoming US data:
Next week’s US economic calendar includes the September 21st release of August leading indicators expected 0.7% compared to 0.6% last month. FOMC meeting will be held 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 lower in reaction to comments from Japan’s new Finance Minister Fujii 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 the week Fuji has 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 JPY has been strengthening during the week. As the new Japanese government tries to make the transition from an export led economy to focus on improving domestic demand a rapid strengthening of the JPY could derail the Japanese economic recovery. This may help explain the U-turn by Fujii in regard to his comments about a strong JPY and intervention. JPY was also pressured by comments from Japan’s Deputy Governor Yamaguchi. Yamaguchi indicated that there still uncertainties to the outlook for the Japanese economy and he expressed concern about the BOJ maintaining nonconventional monetary policy for too long. Yamaguchi’s comments may signal that the BOJ is nearing an exit from credit market support. We wrote a special report on this issue Thursday. JPY is trading near a seven-month high versus the USD and is expected to be well supported on breaks by the improving global economic outlook.

Next 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 89.70 the February 11th low with resistance at 91.80.

EUR
EUR traded lower Friday with downside limited by report of rising German producer prices, widening of EU current account surplus and gains in cross trade to the GBP and JPY. EUR rallied to its highest level for 2009 Thursday supported by improving risk sentiment and report of a sharp rise in EU exports. The sharp rise in EU exports confirms that the EU and global economy are showing signs of recovery. EU July current account surplus widened to 8.8 bln from 0.8 bln the last month. German producer prices rose 0.5% in August. The widening of the EU current account surplus and rising German producer prices confirm improving outlook for the EU economy. Germany’s Merkel said she expects 5 to 6% growth in Q3 2009 for Germany. Today’s EU economic data and Merkel’s comments may contribute to increased speculation that the ECB will need to move up its timetable for a rate hike and exit from unconventional monetary policy measures. 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. EUR gains in cross trade to the GBP are attributed to fresh concerns about UK banking troubles as UK Lloyds Bank fails the FSA stress test. EUR cross gains versus the JPY are attributed to comments from Japan’s Finance Minister Fujii reversing his earlier support for strong JPY. EUR will likely remain well supported on breaks by speculation about the global recovery and the possibility of an earlier than expected tightening by the ECB.

Next 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 positive as EUR trades above 1.4700. Expect EUR support at 1.4560 the September 15th low with resistance at 1.4800 and 1.4910 the August 22nd high.

GBP
GBP traded lower and weakened to a four-month low versus the EUR pressured by fresh concern about the UK banking system and widening of the UK public sector borrowing. Lloyds Banking Group failed the FSA stress test. This means that Lloyds will have to take more action to clean up its balance sheet and rid the bank of toxic assets. Lloyds will have to continue to receive support from the UK government. The continued trouble at Lloyds clouds the UK recovery outlook. 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 £175 bln. There is an interesting article in today’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. We noted yesterday that it is now cheaper to borrow in USD than JPY and this may soon be the case for the GBP. The UK August public-sector borrowing rose to 10.27 bln from 5.09 bln last month reflecting lower tax receipts. Although today’s 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. EUR/GBP traded above 90.00 for the first time in four 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 technical outlook for GBP is mixed as GBP falls below 1.6400. Expect near-term support at 1.6320 the September 8th low with resistance at 1.6570 the September 17th high.

CAD
CAD traded lower Friday pressured by a decline in the price of gold, oil and stocks. CAD downside was limited by report of much stronger than expected Canadian wholesale sales. Canadian wholesale sales for July rose 2.8%, well above an expected a 0.8% rise. The rise in wholesale sales reflects improved demand for auto parts and building materials. There was a drop in the inventory to sales ratio which suggests improving demand. The wholesale sales report contributes to optimism about the Canadian economic recovery. The wholesale sales report follows Thursday’s report of a sharp rise in Canada’s August leading economic indicators and report of strong manufacturing shipments from Canada in July reported earlier in the week. These data suggest that the Canadian economy is improving. At last week’s BOC policy meeting 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%.  The CPI data is unlikely to change the outlook for steady BOC rate policy. CAD has benefited from rising gold prices and improving outlook for the US and global economy. Optimism about the US and global recovery fuels demand for growth linked currencies.

Next week’s Canadian economic calendar includes September 21st release of international security transactions expected at 11bln compared to 10.51 bln last month. 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 1.0550 the October 1st low with resistance at 1.10805 the September 15th high.

AUD
AUD traded lower tracking weaker commodity prices and a 3% decline in the Shanghai Index. The rally global equity markets appears to be set to take a breather and this is being used as an excuse to book some profits in the AUD. There was limited reaction to a statement from Chinese officials reaffirming commitment to maintain stimulus. AUD price direction remains closely correlated to the outlook for China’s economy and the Shanghai Index. AUD of society is also limited by threat of intervention. The RBA aggressively sold the AUD in August. The RBA sold A6 mln in August. This compares to sales of A5 mln in July and A.94 bln in June. The RBA has been less aggressive in intervening to try to weaken the AUD. The RBA selling of AUD is more of a smoothing operation than an effort to try to weaken the AUD. 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. A number of analysts expect the AUD to trade above 9000 in the months ahead. Main risk to the AUD is the rally in equities and commodity markets may be stalling.

Next week’s Australian economic calendar includes the September 21st release of August new car sales expected -1% compared to -6.9% last month. 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 positive as AUD rallies above 8700. Expect AUD support at 8640 and 8545 the September 10th low with resistance at 8820 the August 28th high.

US Morning Notes - USD higher, UK Lloyds Bank fails FSA stress test

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FX Highlights

• USD is trading higher as equity markets fall in Asia with the Shanghai Index down 3% and banking concerns re-emerge, GBP falls to a four month low versus EUR in reaction to news that Lloyds Banking Group failed to raise enough capital to meet the FSA stress tests - UK banks will need to do more to improve their balance sheets, Japan’s new Finance Minister Fujii reverses his support for strong JPY, UK public borrowing widens by less than expected in August, EU current account surplus widened in July and German producer process rise, the commodity currencies pressured by a setback in the price of gold, weaker crude and a spike in risk aversion as equity markets slide
• Focus turns to today’s release Canada’s wholesale sales, and quadruple witching for US equity markets
• Japan’s Deputy Governor Yamaguchi says the global recovery is likely to continue for some time, still uncertain outlook for Japanese economy, he is concerned about the BOJ maintaining nonconventional monetary policy for too long, Yamaguchi’ comments signal that the BOJ may be nearing an exit from credit market support
• Japan’s new Finance Minister Fujii says he does not want to be labeled as backing a strong JPY and said that JPY should reflect the Japanese economy, JPY lower
• IMF to revise up its EU forecast by 0.5% for 2009 and 2010, IMF says there remain uncertainties about the global recovery and now is not the time for the ECB to exit nonconventional monetary policy
• EU July current account surplus widened to 8.8 bln from 0.8 bln last month, producer prices in Germany rise 0.5% in August, Germany’s Merkel expects 5 to 6% growth in Q3 2009, EUR lower
• UK August public sector borrowing rises to 10.27bln from 5.09bln last year, a rise of 12 bln was expected, Lloyds Banking Group fails to meet capital requirements of the FSA will need to do more to clean up its balance sheet, GBP lower
• US household wealth increase by 2 trln in Q2, the gain in household wealth may boost consumer spending
• US equity markets set to open lower, European equities 0.5 % higher, Nikkei closed 73 points lower

Upcoming Events

• US - Friday, no major us economic data is due for release today
• CAN - Friday, July wholesales sales will be released expected at 0.8% compared to 0.6% in June

EU Morning Report – GBP declines for a second day against the greenback

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The sterling falls for a second day against the greenback on renewed concern the financial crisis in Europe will be prolonged.

• The cable slid against most of its major counterparts after reports showed that Lloyds Banking Group had been forced to abandon a move to withdraw from the UK government’s asset protection plan.
• Mervyn King, the Governor of Bank of England said this week that policy makers may lower the interest rate paid to hold reserves at the central bank.  According to the British Bankers’ Association the cost of three-month loans in sterling between banks fell for a 13^th day spurring speculation that traders sold the pound to fund investments in higher-yielding assets.
• The pound fell to as low as 1.6356, over 200 pips from yesterday’s high of 1.6567 against the dollar and is remains under selling pressure today below the pivot point at 1.6450.
• The US dollar made a comeback against 15 of the 16 most-active currencies, renewing demand for the greenback as a safe haven currency, as Asian stocks declined.  The decline in Asian equities came after Aiful Corp., Japan’s third-largest consumer lender by revenue, sought to reschedule debt payments and lower metal prices.
• The euro fell from near a one-year high against the dollar, ahead of next week’s G-20 meeting in Pittsburgh, as proposals on restructuring the banking sector are being pushed onto the agenda.  Jose Barroso, European Commission President, said yesterday that Europe needs continued low interests rates and government stimulus measures to keep the recovery on track.

Currency to watch out for: EURGBP & USDCAD

• The EURGBP pivot point is at 0.8937 with a preference to enter into long positions above 0.8937.  Some analysts believe that we could see 0.9800 by year’s end and parity by in the first quarter of 2010.
• The USDCAD pivot point is at 1.0640 with a preference to enter into long positions at 1.0650.

Today’s calendar and market movers:

• EU Current Account expected to rise to -4.3 billion
• UK Public Sector Net Borrowing expected to rise to 17.5 billion
• Canada Wholesale Sales month on month expected to rise to 0.8%

Now onto Stocks:

• US stocks edged lower after a three-day run-up on concern that recent gains were overextended despite the latest round of solid economic data.  The major indexes finished lower 0.08% to 0.3%.
• As of 06:05 GMT the Nikkei is trading at -0.7% and the Hang Seng at -0.3%.

Daily Forex Outlook - USD rebounds after Fresh lows

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CURRENCY TRADING SUMMARY - 18^th September (00:30GMT)

U.S. Dollar Trading (USD) finally hit a bottom as the stock market rally stalled in the US and profit taking set in for the rest of the day. USD/JPY rallied and the Euro fell back from Fresh year highs. Weekly Jobless Claims improved to 545k vs. 557k previously. August Housing Starts were at 0.60m as forecast. Crude Oil was down -{content}.04 closing at .47. In US Stocks, DJIA -7 points closing at 9783, S&P -3 points closing at 1065 and NASDAQ -6 points closing at 2136.

The Euro (EUR) traded at fresh year highs at 1.4768 going into Europe but was quickly reversed as the USD found buyers and profit taking set in. When US stocks slipped the market extended losses but 1.4700 continued to support. News that S&P was considered downgrading 8Bn in CDO’s prompted the market to halt taking on risk. Overall the EUR/USD traded with a low of 1.4689 and a high of 1.4767 before closing at 1.4730. Looking ahead, August PPI forecast at 0.2% vs. -1.5% previously. Also released, July current Account forecast previously at -5.3bn.

The Japanese Yen (JPY) strengthened at the start of Europe but failed once again on the downside at 90.50 this time before reversing towards 91.50 resistance. Weak stocks and stalling crosses capped the topside with the USD/JPY ending at 91 supports for the third day. The BOJ held at 0.1% but did upgrade the economic assessment. Overall the USDJPY traded with a low of 90.52 and a high of 91.62 before closing the day around 91.05 in the New York session.

The Sterling (GBP) weakened in a broad based fashion as UK data failed to inspire support. BoE’s comments about possible further expansion of the QE program and general USD strength pushed cable back to 1.6400. August Retail Sales were flat vs. 0.1% forecast. Overall the GBP/USD traded with a low of 1.6403 and a high of 1.6661 before closing the day at 1.6500 in the New York session.

The Australian Dollar (AUD) was strong with the Euro hitting new year highs at 0.8775. Weak US stocks pulled the pair back to supports at 0.8700. The Market is still very bullish and pullbacks are being viewed as correctional. Ongoing high prices in Metals and Oil are underpinning the gains along with hawkish views on Australian Interest Rates. Overall the AUD/USD traded with a low of 0.8690 and a high of 0.8775 before closing the US session at 0.8730.

Gold (XAU) traded to fresh highs above 24 as Gold continued to push higher. Overall trading with a low of USD10 and high of USD24 before ending the New York session at USD15 an ounce.

TECHNICAL COMMENTARY

Euro - 1.4715
Initial support at 1.4516 (Sept 14 low) followed by 1.4467 (Sept 9 low). Initial resistance is now located at 1.4768 (Sept 17 high) followed by 1.4866 (Sept 22 2008 high)

Yen - 91.30
Initial support is located at 90.00 (Big Figure) followed by 89.71 (February 11 low). Initial resistance is now at 91.64 (Sept 15 high) followed by 92.60 (Sept 9 high).

Pound - 1.6380
Initial support at 1.6237 (Sept 3 low) followed by 1.6114 (Sept 1 low). Initial resistance is now at 1.6742 (Sept 11 high) followed by 1.6831 (Aug 7 high).

Australian Dollar - 0.8695
Initial support at 0.8529 (Sept 8 low) followed by the 0.8383 (61.8% retrace 0..9850-0.6009). Initial resistance is now at 0.8813 (Aug 22 2008 high) followed by 0.8943 (76.4% retrace 0.9850-0.6009).

Gold - 1012
Initial support at 992 (Sept 15 low) followed by 982 (Sept 3 low). Initial resistance is now at 1032 (Mar 17′ 2008 high) followed by 1050 (Psychological Figure).

Special FX Report - Which central bank will pull the trigger first?

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Edging towards an exit strategy

As global equities rally to new highs for 2009, the USD falls to new lows for the year and the price of gold rises to near record high, there will be increased focus on which central bank will be the first to exit extraordinary monetary policy accommodation. Central bank implementation of extraordinary liquidity measures has helped to fuel the current rebound in risk appetite, optimism about the global recovery and contributed to an apparent end to the financial crisis. Fed chairman Bernanke’s statement that the US recession is likely over is the latest catalyst fueling speculation that the financial crisis has passed and the US and global economy is set to recover. The global recovery will increase pressure on central banks to withdraw stimulus.

Fed

There appears to be a rift at the Fed over how quickly to hike rates and scale back quantitative ease as the US economy recovers. The FOMC will meet on September 22nd and the policy meeting is a key event risk for the financial markets and USD. A Washington think tank Medley Global Advisors says that at least two members of the FOMC board want to hike rates next week and a number of the members of the FOMC are discussing the potential timing for an exit from quantitative ease. Over the past few weeks there have been a string of better than expected US economic reports which suggest that the US recession has ended and the recovery may be stronger than expected. Fed officials will debate whether a continuation of accommodative policy will fuel inflation versus the risk that too soon a withdrawal of accommodation could derail the recovery. Premature hikes and withdrawal of liquidity in the 1930’s in the US, and in Japan in 1990s, are blamed for choking off economic recoveries that emerged after the Great Depression and the 1990’s recession in Japan. The 1990’s Japanese recession was triggered by a build up of debt and the impact of cheap money that inflated property values. The 1990’s Japanese recession was similar to the recent global financial crisis which was sparked by easy credit and the collapse in the housing market. Actions by the BOJ to prematurely withdraw liquidity and the government’s failure to rid Japan of insolvent banks led to a lost decade for Japans economy. It is hard to predict when the Fed will begin to withdraw stimulus but we suspect that the Fed will err on the side of caution. The current straight-line rise in equities and the price of gold may make a number of Fed officials nervous about impact of continued central bank stimulus. Despite the fact that the price of gold is trading at 14 month high Fed officials seem to see limited inflation risk and US officials do not appear to be overly concerned about weaker USD as long as the decline is orderly. A more rapid fall in the USD and an uptick in inflation could quickly change Fed policy outlook and the FX landscape.

BOJ

The BOJ concluded two-day meeting Thursday and elected to hold rate policy unchanged at 0.1% and upgraded Japan’s economic outlook. According to the BOJ, Japan’s economic outlook is improving. Confidence at the BOJ is attributed to rising Japanese exports and improving global growth outlook. The BOJ has enacted unconventional extraordinary measures to boost credit liquidity buying corporate and commercial paper. At Thursday’s meeting the BOJ appeared to be moving closer to an exit strategy from extraordinary liquidity measures. BOJ Governor Shirakawa said that the central banks intervention in the credit markets was designed to deal with severe crisis that has passed. Shirakawa’s comments suggest that there is now less need for the BOJ to purchase bonds to boost liquidity. In July, the BOJ announced that it would extend its liquidity measures that were due to expire in September through December. Today’s comments from Shirakawa suggest that the BOJ might be closer to allowing the liquidity measures to lapse after December, provided the Japanese and global economy continues to exhibit potential for sustainable economic recovery. The BOJ must also consider how the new Japanese government plans to increase spending to boost the domestic economy may impact Japan’s economic outlook and the governments GDP debt ratio. It could be argued that the BOJ may become less generous with stimulus if the central bank board senses the new government will dramatically increase spending to boost growth.

RBA

The RBA is widely expected to be the first central bank to raise rates. The RBA did not adopt quantitative easing measures but at the start of the financial crisis last year the RBA cut interest rates aggressively. Australia’s central bank cut interest rates by 425 bps between September 2008 and April 2008 and lowered the overnight interest rate to 49 year low at 3%. At the September RBA policy meeting the RBA left its cash rate unchanged at 3% and gave an upbeat assessment of the Australian economic outlook. According to the RBA minutes for the September policy meeting the RBA expects interest rates to rise when the economic recovery to sustainable. The minutes indicate that the RBA will need to counterbalance the risk of overstaying accommodative policy stance versus prematurely tightening. The RBA said that if growth continues to meet the RBA forecast the board will have to hike rates. Many analysts expect the RBA to hike rates before the end of the year. RBA rate hike decision will be dependent on upcoming data with reports on inflation and growth key. The RBA is not expected to tighten until the recovery is secure.

BOC, BOE and ECB

The BOC has pledged to maintain the current record low overnight interest rate of 0.25% until mid-2010, provided inflation remains in check. The BOC is generally upbeat about Canadian economic prospects and central bank has refrained from implementing quantitative ease. Therefore the BOC does not need to prepare an exit strategy from quantitative ease and unless inflation spikes above the BOC’s  2% inflation target the BOC will be on hold until mid-2010. The BOC expressed concern about the strength of the CAD choking off recovery. BOC concern about CAD strength is an additional factor that will limit the BOC’s decision to hike rates. BOC rate hike speculation could fuel further CAD gains. Strong CAD tightens credit.

BOE officials are divided over whether the BOE should expand quantitative ease. At the September policy meeting the BOE elected to hold rate policy steady at 0.5% and maintain the current level of bond purchases at £175 bln. The September BOE policy minutes indicate that the BOE board is split because of uncertainty about the UK economy as to whether or not there is a need to expand quantitative ease. The BOE is likely to be the last central bank to exit from quantitative ease. GBP should continue to underperform.

The ECB has tied exit from unconventional monetary measures to inflation risk. At the last ECB policy meeting the ECB elected to hold rate policy steady at 1% and indicated there was no rush to remove liquidity. The ECB has taken action to boost bank lending offering lenders cash (a record 629 bln in June) and expanding bank auctions to 12 months from 6. This contrasts with the FED and BOE’s purchase of bonds to pump money directly into the economy. The ECB is expected to allow unconventional liquidity measures to expire naturally as long as prices remain stable.

Conclusion

The timing of Fed rate hikes and withdrawal of stimulus will be crucial to USD outlook and how far the USD may decline. Until the Fed signals the beginning of a tightening cycle the dollar may find limited support. Fed rate hike speculation may help limit USD downside but majority consensus is that a FOMC rate hike is a long way off. JPY will likely continue to benefit as the BOJ edges toward an exit strategy. JPY will also find support from the recent shift in intervention policy by the new Japanese government and by the fact that it is now cheaper to borrow in USD than JPY. The USD has become the preferred funding currency. The AUD is likely to continue to outperform and benefit from speculation the RBA will be the first central bank to raise interest rates. The key issue will be, once the RBA starts hiking rates will we see liquidation pressures of AUD. Investors will need to watch carefully how the Australian economy responds to higher rates. The ECB will likely remain on hold for some time with limited pressure to expand or withdraw unconventional monetary policy measures as the EU economy posts a slow recovery and inflation remains subdued. EUR price direction will remain closely correlated to risk sentiment. The BOC says interest rates will remain unchanged until mid 2010. CAD will continue to track commodity prices and recovery hopes. Growth linked currencies should outperform. The BOE will likely be the last central bank to pull the trigger which is negative for the GBP.

Daily Forex Report - USD at new lows, Philly Fed Manufacturing Index soars

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• USD: Lower, jobless claims decline, housing starts at nine month high, Philly Fed surges
• JPY: Lower, BOJ holds rate policy steady, says the economy is improving, endorses stronger JPY
• EUR: Higher, EU trade balance widens as exports rise 4.1%
• GBP: Higher, CBI factory orders rise to the highest level since January
• CAD and AUD: AUD & CAD higher, Australia’s imports fall, Canada’s LEI surged, CPI flat

Overview     
USD traded at a new 2009 low versus the EUR and rebounded versus the JPY Thursday with the EUR supported by report of a sharp rise in EU exports and JPY pressured by selling in cross trade. The rise in EU exports suggests that the global economy continues to recover encouraging demand for higher yielding assets. JPY drifted lower despite report that the BOJ held rate policy steady and upgraded its economic assessment of Japan’s economy. In addition, BOJ governor Shirakawa says that a stronger JPY may be beneficial in the long run for Japan. Shirakawa’s comments follow recent statements from Japan’s new Finance Minister Fujii that he is against intervention to weaken the JPY to benefit Japanese exporters. CHF traded mixed as the SNB elects to hold rate policy steady as expected. There was limited reaction to the SNB statement that the central bank will continue to counter the rise of CHF versus EUR. The SNB statement increases the risk of intervention to try and weaken the CHF. GBP edged higher despite report that UK retail sales were flat in August. Commodity currencies were mixed as the rally in gold slows. AUD experienced light selling pressure in reaction to report that the RBA was an aggressive seller of the AUD in August and Australia’s August merchandise imports declined. CAD edged higher despite report that Canada’s August CPI came in close to expectations with core rate up just 0.1%. Canada’s LEI rose for the second month in a row. US economic data was mixed with initial jobless claims falling more than expected, housing starts rising less than expected, and the September Philly Fed reported well above expectations. Today’s US economic data confirms improving outlook for the US labor market and economy but that the data also suggest that the recovery may be weak. The 8k credit for first-time homebuyers will expire next month and this may help explain why single family housing starts were weaker than expected.  USD edged higher after the release of today’s US housing and jobless claims reports and turned lower after the release of much better than expected rise in the Philly Fed Manufacturing Index.

USD it is expected to remain on the defensive as the trade continues to price US and global recovery. As the US and global economy improves debate is beginning to emerge over when the FOMC will consider to hike rates and exit quantitative ease. According to the a Washington-based think tank Medley Global Advisors the Fed  is divided over how quickly to raise interest rates once the economy shows sustainable recovery. Medley suggests that two Fed members would support raising rates next week and some members are calling for an early exit from the Feds extraordinary accommodative policy measures. The FOMC meet on September 22nd. Fed rate hike speculation may help limit USD downside but majority consensus is that at FOMC rate hike is a long way off.

Today’s US data:
Jobless claims for the week ending 9/12 fall 12k to 545k, a decline of 555k was expected. Continuing claims however continue to rise. US August housing starts rise 1.5% to 598k, housing starts were expected at 600k. August building permits rise 2.7%. Philly Fed came in much better than expected at 14.1, a reading of 6 was expected.

Upcoming US data:
No major US economic data is due for release Friday.

JPY
JPY traded lower pressured by selling in cross trade cross and in reaction to report that that Fed is divided over when to hike interest rates. JPY cross selling is attributed to positive export data from the EU which sparked demand for the EUR/JPY cross. A Washington-based think tank says that the Fed  is divided over how quickly to raise interest rates once the economy shows sustainable recovery and that a number of FOMC board members are discussing the possible timing for exit from quantitative ease. Fed rate hike speculation limits USD selling versus JPY. The BOJ elected to hold interest rate policy steady at 0.10% as expected and upgraded its assessment of the Japanese economy and the financial market outlook. The BOJ said the Japanese economy is showing “signs of recovery.” The BOJ also appeared to be moving closer towards an exit strategy from bond purchases. BOJ officials are becoming more confident about the recovery in the Japanese and global economy. BOJ Governor Shirakawa said that the central banks intervention in the credit markets was designed to deal with severe crisis that has passed. Shirakawa’s comments suggest that there is now less need for the BOJ to purchase bonds to boost liquidity. Shirakawa went on to say that the strong JPY may be positive for Japan in the long run. His comments echo comments from Japan’s new Finance Minister Fujii that he is against intervention to weaken the JPY to benefit exporters. Japanese officials are signaling a significant shift away from previous intervention policies favored by the former government to weaken the JPY to support exports. The shift may embolden the trade to buy the JPY because the reduced threat of intervention. Today’s Japanese economic data was mixed with Q2 Manufacturing sentiment showing improvement but CAPEX spending declined by 22%. The July tertiary activity index rose by 0.6% and the Reuters Tankan manufacturing index came in at a one-year high at -33 compared to -22 in August. The trade is expected to continue to buy JPY on breaks. According to an analyst at BNP Paribas JPY will trade to 8500 as investors borrow in low-cost currencies like the USD to buy higher yielding assets. It is now cheaper to borrow in USD than in JPY and the USD may emerge as the favored funding currency for carry trades. This could quickly change if the Fed elects to hike rates sooner than 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 a new high for 2009 supported by improving risk sentiment and report of a sharp rise in EU exports. EU July trade balance improved to 12.6 bln from 5.4 bln last month. Exports rose 4.1%. The rise in EU exports is further confirmation of improving EU and global economic outlook. There was limited reaction to the SNB decision to hold rate policy steady and reaffirm commitment to take action to weaken the CHF versus the EUR. The SNB left its inflation outlook unchanged and indicated that expansionary monetary policy could not be maintained for the next three years. EUR/CHF cross traded steady around 1.5180 after the SNB policy announcement. EUR drifted lower in US session after the release of mixed US economic data which confirmed the US labor market and housing market continues to stabilize but continuing jobless claims rose last week and single-family housing starts were less than expected. EUR rallied to the days high after the releases of much stronger than expected Philly Fed manufacturing index report. In addition, the trade is digesting a think tank report which suggests that some members of FOMC are looking to hike interest rates soon. The major catalyst for the latest decline in the USD has been improving risk appetite as Fed Chairman Bernanke said earlier in the week that the US recession is likely over. As the US economy recovers the trade would be trying to determine whether the US recovery is sustainable which would open the door for Fed rate hikes and an exit from quantitative ease. It’s unclear if improving US growth outlook will benefit the USD because low US yields and improving risk appetite  have made the USD the preferred funding currency. The timing of Fed rate hikes will be crucial to USD outlook and how far the USD may decline. Despite the fact that the price of gold is trading at 14 month high Fed officials seem to see limited inflation risk and US officials do not appear to be overly concerned about weaker USD as long as the was declined is orderly. A more rapid fall in the USD and an uptick in inflation could quickly change the FX landscape and Fed policy outlook. US bond yields edged higher today which may have limited USD downside.

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 1.4800 and 1.4910 the August 22nd high.

GBP
GBP edged higher despite report that UK August retail sales were flat. UK August retail sales were unchanged m/m and rose 2.1% year on year. Rising UK unemployment is seen as the major drag on UK retail demand. September CBI order book balance rose to its highest level since January at -48 compared to -54 last month. The improvement in the UK factory orders sparked light demand for the GBP. GBP was also supported by improving risk sentiment. The improvement in UK factory orders helped to support the GBP in cross to the EUR.EUR/GBP is trading around 8900. Analysts at BNP Paribas forecast that the EUR/GBP may rise to parity as investors look to borrow in low yielding currencies like the GBP to finance the purchase of higher yielding assets. According to BNP, continued flooding of the financial system with liquidity by the BOE will weaken the GBP and BNP analysts note that GBP will likely continue to underperform. It was reported earlier in the week that the BOE may be considering cutting the reserve rate for UK banks. 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. GBP is expected to continue to underperform pressured speculation the BOE may have to take further action to ease monetary policy to boost growth. Focus turns to Friday’s release of UK public sector borrowing. GBP remains vulnerable to concern about increased UK government debt. A larger than expected rise in public sector borrowing could spark fresh selling of the GBP.

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 Thursday supported by continued improvement in risk sentiment as global equity markets rise to new highs for 2009. CAD was also supported by report of stronger than expected rise in Canada’s leading indicators. Canada’s August LEI rose 1.1%, economists had expected a 0.4% rise. This marked the second consecutive monthly gain for Canada’s LEI. The LEI report follows Wednesday’s report that Canada’s manufacturing shipments rose twice as much as expected in July. These data suggest that the Canadian economy is improving. There was little reaction to report that Canada’s inflation came in as expected. Canada’s August CPI rose 3% m/m, and 1.6% y/y. The core inflation rate rose by just 0.1%. BOJ inflation target is 2%. AT last week’s BOC policy meeting the BOC reaffirmed its commitment to hold interest rates at 0.25% until mid-2010 provided inflation remains in check. Today’s CPI data is unlikely to change the outlook for steady BOC rate policy. CAD has benefited from rising gold prices and improving outlook for the US and global economy. Optimism about the US and global recovery fuels demand for growth linked currencies. 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 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 1.10805 the September 15th high.

AUD
AUD traded mixed consolidating recent gains with upside limited by report of a drop in Australian imports and weaker gold prices. Australia’s Q2 merchandise imports declined by 7%. The decline in imports may be a red flag that the Australian domestic economy is not recovering as quickly as expected. AUD was also pressured by report that the RBA aggressively sold the AUD in August. Although the RBA selling of AUD was less than the prior two months the RBA sold A6 mln in August. This compares to sales of A5 mln in July and A.94 bln in June. Clearly the RBA has been less aggressive in intervening to try to weaken the AUD. This may reflect the fact that the AUD rally is supported by improving fundamentals and the prospect for an RBA rate hike before year-end. In other words, the RBA selling of AUD is more of a smoothing operation than an effort to try to weaken the AUD.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. A number of analysts expect the AUD to trade above 9000 in the months ahead. 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 straight-line rise in equity markets and improvement risk sentiment fuels AUD demand.

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.

US Morning Notes - USD mixed, Fed divided over when to hike rates

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FX Highlights

• USD is trading mixed and the JPY lower in reaction to a think tank report which says that the FOMC is divided about the timing of when to hike interest rates and that some board members favor an early exit from quantitative ease, BOJ leaves monetary policy unchanged as expected and raises its economic outlook, EU trade balance swells on rising export demand and the EUR trades at a new high for 2009, UK retail sales were flat in August, commodity currencies continue to benefit from rising price of gold, CAD mixed despite report that Canadian CPI rose just 0.1%, SNB holds rate policy steady, says it will continue to counter CHF rise versus EUR
• Focus turns to today’s release of US jobless claims, housing starts and Philly Fed and Canada’s CPI
• Medley Global Advisors says that the Fed is divided over how quickly to raise interest rates once the economy shows sustainable recovery, according to the report two Fed members would support raising rates next week, Gold traded at 14 month high Wednesday
• BOJ leaves monetary policy unchanged as expected raises economic and financial assessment and moves closer to exit from bond purchases, Japan’s Q2 manufacturing sentiment index rises by 15.5%, CAPEX spending falls 22%, Reuters September Tankan manufacturing index at -33 compared to -22 in August, July treasury activity index rises 0.6, BOJ Governor Shirakawa says that strong JPY might support the economy in the long run, JPY lower
• RBA sold A6 mln in August compared to A5 mln in July, Australia’s August merchandise imports fall 7%, AUD lower
• EU July trade balance rises to 12.6 bln from 5.4 mln last month, EUR rises to one year high versus USD but set to open flat
• UK August retail sales rise 2.1% in CBI orders for September improved -48 from -54 last month, GBP higher
• NAHB homebuilder index rose for the third straight month to 19 from 18
• Former Fed Chairman Greenspan worries that politics may hamper the Fed’s exit strategy from monetary stimulus and if inflation rears its head it could swamp the bond markets, Greenspan said that Fed may encounter resistance to promote price stability from Congress because of rising unemployment
• US equity markets set to open higher, European equities 1 % higher, Nikkei closed 173 points higher

Upcoming Events

• US - Thursday, initial jobless claims for week ending 9/12 will be released expected at 554k compared to 550k last week along with August housing starts expected at 600k compared to 581k last month and September Philly Fed expected to improve to 6 from 4 in August
• CAN - Thursday, August CPI will be released expected at -0.7% with core CPI at 0.1%, (already released)

EU Morning Report – EURUSD traded to the highest level in almost a year

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The EURUSD traded to the highest level in almost a year on the back of an increase in US industrial production.

• Improved economic data encouraged investors to sell the US dollar and buy higher yielding assets.  The greenback slid over half a percent to 1.4737 against the euro, the weakest level since September 25, 2008.  The euro managed to gain against the dollar as traders pushed prices above 1.4720, a technical level just above the December 18 high.
• US industrial production, which measures output at US factories, mines and utilities climbed 0.8% in August, beating economist’s estimates as data from the Federal Reserve in Washington showed.  The VIX, a benchmark index for US stock options, slid to its lowest intraday level in a year as investors paid less for protection against declines in equities.
• The Dollar Index is at its lowest level since September 23, 2008 after falling as much as 0.5% to 76.17 or 15% from its 2009 high of 89.624 reached in March.  Crude oil advanced higher on Wednesday to over .50 a barrel after the Energy Information Administration reported a supply decrease of 4.7 million barrels.
• In Europe, the sterling fell to a four-month low against the euro as a report showed the UK’s jobless rate rose to the highest level since 1995.  The EURGBP peaked at 0.8934, the weakest level since May 15 while the GBPUSD was little changed trading in a 50 pip range between 1.6470 and 1.6520 as of 05:50 GMT.

Currency to watch out for: EURUSD & EURGBP

• The EURUSD pivot point is at 1.4640 with a preference to enter into long positions at 1.4650.
• The EURGBP pivot point is at 0.8900 with a preference to enter into long positions above 0.8900.

Today’s calendar and market movers:

• UK Retail Sales month on month expected to drop to 0.2%
• US Building Permits expected to rise to 0.58 million
• US Unemployment Claims expected to rise to 554,000
• US Philly Fed Manufacturing Index expected to rise to 8.1

Stocks:

• US stocks rose on Wednesday for the third day, hitting fresh 2009 highs.  The Indexes closed higher from 1.1% to 1.5%.
• As of 06:20 GMT the Nikkei is trading at 1.68% and the Hang Seng 1.82%.

Daily Forex Outlook - USD falls another leg

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CURRENCY TRADING SUMMARY - 17^th September (00:30GMT)

U.S. Dollar Trading (USD) traded at fresh year lows on the Dollar Index going into Europe as the EURO and AUD traded at year highs. August Industrial Output rose 0.8% vs. 0.3% forecast and CPI rose 0.4% vs. 0.3% forecast. US stocks closed at fresh year highs as market optimism continued to blossom. Crude Oil up .58 closing at .51. In US Stocks, DJIA +108 points closing at 9791, S&P +16 points closing at 1068 and NASDAQ +30 points closing at 2133. Looking ahead, Weekly Jobless Claims forecast at 555k vs. 550k previously.

The Euro (EUR) broke above 1.4700 in Early Europe on widespread USD weakness before pulling back to 1.4650 supports at the start of the US session. The market then reversed hard with Oil and broke fresh highs above 1.4740. The Upwards Trend is close to 1.48 targets from which 1.5000 will come into view. EUR/GBP continued to push higher as the Pound floundered. Overall the EUR/USD traded with a low of 1.4641 and a high of 1.4737 before closing at 1.4720. Looking ahead, July Trade Balance forecast at 5.2bn vs. 4.6bn previously.

The Japanese Yen (JPY) Strengthened at the end of the Asian session as the incoming Finance minister talked about aversion to FX intervention and the USD/JPY plummeted. The Pair recovered with the 90 Yen level intact as good US data started to finally support the Dollar. Crosses ended all higher on risk appetite. Overall the USDJPY traded with a low of 90.13 and a high of 91.37 before closing the day around 91.05 in the New York session. Looking ahead, BOJ Rate Announcement widely expected to remain at 0.1%.

The Sterling (GBP) mulled around unable to get much traction against the USD and remaining very weak against other currencies. EURGBP broke above 0.8900 and GBP/AUD broke below 1.9000. August Claimant Count at 24k as forecast. Overall the GBP/USD traded with a low of 1.6403 and a high of 1.6661 before closing the day at 1.6500 in the New York session. Looking ahead, August Retail Sales forecast at 0.1% vs. 0.4%.

The Australian Dollar (AUD) broke to fresh year highs above 0.8700 before pushing on to 0.8750 in the US session as the market continued to express risk through the Aussie. AUD/JPY sits just under the Key 80 Yen level and the market is still poised to make further gains. Overall the AUD/USD traded with a low of 0.8637 and a high of 0.8750 before closing the US session at 0.8730.

Gold (XAU) fresh year highs above 10 an ounce led to the market extending gains hitting a high above 20. Overall trading with a low of USD06 and high of USD20 before ending the New York session at USD16 an ounce.

TECHNICAL COMMENTARY

Euro - 1.4715
Initial support at 1.4516 (Sept 16 low) followed by 1.4467 (Sept 9 low). Initial resistance is now located at 1.4737 (Sept 16 high) followed by 1.4768 (Sept 25 2008 high)

Yen - 91.00
Initial support is located at 90.00 (Big Figure) followed by 89.71 (February 11 low). Initial resistance is now at 91.64 (Sept 15 high) followed by 92.60 (Sept 9 high).

Pound - 1.6470
Initial support at 1.6326 (Sept 8 low) followed by 1.6237 (Sept 3 low). Initial resistance is now at 1.6742 (Sept 11 high) followed by 1.6831 (Aug 7 high).

Australian Dollar - 0.8730
Initial support at 0.8379 (Sept 7 low) followed by the 0.8507 (Sept 4 low). Initial resistance is now at 0.8813 (Aug 22 2008 high) followed by 0.8951 (AUG 11 2008 high).

Gold - 1016
Initial support at 982 (Sept 10 low) followed by 974 (Sept 3 low). Initial resistance is now at 1032 (Mar 17′ 2008 high) followed by 1050 (Psychological Figure).

Special FX Report - First BOJ policy meeting with DPJ in power

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The Bank of Japan (BOJ) will complete a two-day policy meeting on September 17th. This will be the first BOJ policy meeting since the DPJ election victory in August. The DPJ party came to power ousting the LDP party who ruled Japan for the last 50 years. The DPJ Party pledged to boost Japan’s domestic growth and reduce reliance on exports. The first issue is whether the new government will respect BOJ independence? The new Japanese government is expected to respect the independence of BOJ but will likely increase pressure on the BOJ to support the economy and keep interest rates low. Japan’s new PM Hatoyama plans to boost domestic demand by increased spending. This generates concern about rising Japanese debt. According to the OECD Japans debt may surge to 197.3% of GDP in 2009. Japans GDP debt ratio may limit the Japanese governments ability to spend to boost growth. Investors and the BOJ will be monitoring the new government’s plans for debt issuance and to expand the current level of fiscal stimulus. Increased fiscal spending by the new Japanese government may encourage the BOJ to announce an earlier exit from its current bond purchase plan. This could emerge as the first test of the new government’s respect of BOJ independence.

Extend bond purchases or signal exit strategy

One of the key questions concerning the September BOJ policy meeting is whether the BOJ will increase purchase of bonds or set a timeframe for an exit strategy from it bond purchases. The BOJ may be reluctant to continue to purchase bonds if the new government plans to boost growth dramatically increases the size of Japan’s debt and Japan’s economy continues to improve. At the August BOJ policy meeting the BOJ said that economic conditions in Japan have “stopped worsening” as exports improve. The BOJ expects the economy to recover and deflationary pressures to recede into fiscal year-end in March 2009. The DPJ see considerable downside risks to the Japanese economy and are concerned that rising unemployment will hurt domestic demand. Japan’s recession ended in Q2 but the outlook for the recovery is uncertain. The Japanese economy grew by a less than expected 2.3% in Q2 and the unemployment rate rose to 5.7%. The unemployment rate is at its highest level since 1953. Machinery orders remain weak but have bounced off the lows and consumer spending and industrial production have improved. The trade will be looking to see whether the BOJ expresses concern about the risk of rising deficits and the impact of new government spending plans will have long bond yields. The BOJ noted in August that higher bond yields could hurt the recovery.

In July the BOJ extended liquidity measures through December

At the August policy meeting, the BOJ unanimously elected to hold overnight rates unchanged at 0.1% and maintained existing liquidity measures. At the July policy meeting the BOJ extended its liquidity measures that were due to expire in September through December. The BOJ has increased liquidity injections buying commercial paper and corporate bonds. The trade will be looking to see if the BOJ extends unconventional credit measures beyond December or if the BOJ is preparing an exit strategy from its liquidity measures. Dow Jones reports that BOJ board member Suda says that she is considering whether the BOJ should end liquidity measures as the global financial markets and the economy improve.

DPJ JPY intervention policy and deflation

In addition, the new Japanese government is signaling a change in JPY intervention policy. Japan’s new Finance Minister Fujii says that he sees benefits of strengthening JPY and that he does not favor intervention to weaken JPY to help exporters. 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. JPY is trading at its highest level in seven months versus USD approaching 90.00. Stronger JPY will contribute to additional risk of deflation in Japan. The BOJ noted in the August policy meeting that the rate of decline in Japan’s CPI has accelerated. Japan’s August corporate goods prices declined by a record 8.5%. With deflationary pressures intensifying, the new Japanese government endorsing a stronger JPY and deficit spending likely to increase, the BOJ is expected to maintain current monetary policy and are unlikely to expand liquidity measures beyond December. The BOJ is expected to leave the current bond purchase level unchanged and hold rates at 0.1% through 2011. Focus will turn to the BOJ Policy Statement and the press conference following the meeting. The trade will be looking for any change in BOJ economic forecast or plans for an exit strategy from unconventional liquidity measures. The minutes for the September policy meeting will be released on September 25th.