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US$ Weaker on Better US GDP

The US Dollar weakened overnight ahead of this morning’s release of U.S. second quarter GDP and as US equities point to a higher open.  GDP was released better than expected showing that the U.S. economy contracted 1% percent versus an expectation of a 1.5% decline.  This follows a 5.5% drop in the first quarter.  The US economy shrank for the fourth straight quarter making the recession the worst since World War II.  However, expectations are growing that the economy could see a return to growth in the third quarter, fueling risk appetite. Therefore, we could see continued pressure on the dollar unless we see its correlation to risk break as investors become bullish on the U.S. economy.  There is no further economic data scheduled for release today, so expect the dollar to continue to trade within recent ranges as traders digest the implications of the US GDP number.

 

The Euro strengthened against the dollar overnight despite worse-than-expected data out of the Euro-zone.  Euro-zone CPI was released at a 13 year low, which added to deflationary concerns in the region.  Italian CPI fell to its lowest level since 1959 as food and utilities prices fell.  This worse CPI, in addition to a decline in German consumer prices, signaled that prices remain depressed in the Euro-zone, which may force the ECB to consider further easing.  Although it is widely expected that the ECB will not cut interest rates below the current 1%, recent IMF calls for the ECB “to continue its accommodative stance as long as downside risks remain for prices” could lower interest rate expectations and weigh on the EUR.  However, the single currency’s correlation to risk remains and the improving outlook for the global economy has fueled demand for high yielding assets that could continue today after the release of better than expected U.S. GDP.

 

The Japanese yen remains soft against all of its major counterparts as demand for the currency as a haven has waned.  Also weighing on the yen was a renewed focus on poor Japanese economic fundamentals and the possible political unrest as a result of the pending Parliamentary elections.  Goldman Sachs also released a note encouraging investors to buy the US dollar against the Japanese yen with a target rate 10 percent higher than the current level.

 

The pound extended its gains to the best level of the week against the US dollar as risk appetite continued overnight.  Also boosting the pound was a report that showed British consumer confidence held at the highest level since April 2008.  Signs of recovery in the U.K economy have helped the pound advance 13 percent against the dollar in 2009.  Sterling could continue to strengthen should the Bank of England decide when it meets on August 6^th to reduce the scale of its asset-purchase program, which it set up to reduce borrowing costs and stimulate the economy. 

US$ Mostly Unchanged, Slighly Weaker Against Pound

The US$ slipped against British pound overnight, while remaining relatively flat against the Euro and the Japanese yen.  Yesterday saw the dollar trade at its best levels in two weeks against the Euro, as the common currency was unable to break through recent upper ranges and traders took profit.  Also boosting the dollar yesterday was a research note from Goldman Sachs recommending getting out of long Euro positions against the dollar saying “we do not see any near term macro catalyst for an extension of the move in the direction we had hoped for.”  Goldman was previously predicting the dollar to continue to weaken against the EUR.  Initial Jobless Claims were released slightly higher than expected this morning at 584,000 versus 575,000.00.  However, we have seen this level consistently below 600,000, which is a sign of improvement.  Continuing claims were released better than expected, showing a decrease in 54,000 to the lowest level since April.  Tomorrow sees the release of U.S. Second Quarter GDP, which is expected to show a 1.5% contraction in the U.S. economy, following a 5.5 percent drop in the first quarter of 2009. 

 

The Euro was largely unchanged overnight after the release of mixed economic data in the region.  Euro-Zone economic confidence in July rose to 76.0 from 73.2, which was the fourth straight monthly improvement. Consumer confidence for the same period also improved to -23 from -25 as low interest rates and government stimulus has improved the outlook for the economy. However, unemployment in Europe’s largest economy was released worse than expected.  The number of unemployed Germans rose to 3.46 million from 3.41 million, making their unemployment rate 8.3%. Bloomberg Retail PMI figures also crossed the wires showing a decline for the fourteenth month to 47.3 from 47.5. 

 

The Japanese yen fell against most of its major counterparts as a government report showed Japanese manufacturers boosted production for a fourth straight month, limiting demand for the currency as a safe-haven.  Industrial production increased 2.4 percent from May.  The Bank of Japan also raised its assessment of the economy this month, citing rebounds in trade and production as reasons their economic conditions have “stopped worsening.”  U.S. equity markets are pointed towards a higher open this morning, which continues to put pressure on the yen. 

 

The British Pound gained significantly overnight after a report showed a rise in U.K. housing prices.  The Nationwide Building Society reported that prices rose for a third straight month in July, gaining 1.3% as home inventory levels have started to fall. The increase in home values exceeded median estimates of 0.2%, which builds upon yesterday’s improvement in mortgage approvals showing progress in the sector. It is widely viewed that a recovery for the U.K. economy is dependent, among other factors, on a rebound in the housing sector. 

 

 

US$ Continues to Erase Recent Losses

The dollar gained broadly overnight, recovering from recent losses while investors took profits on currencies such as the Euro and commodity-linked currencies, like the Australian dollar that were trading near the highs of recent ranges.  Hopes that the global economy is recovering were dented on Tuesday after data showed a worse than expected drop in U.S. consumer confidence.  Also, declines in U.S. equity futures and steep drop in Chinese equities overnight has added to this risk aversion sentiment and boosted the dollar.  This morning saw the release of worse-than-forecast U.S. durable goods orders, depressed by declines in demand in such industries and as automobiles, aircraft and defense equipment.  This afternoon sees the release of the Fed Beige book.  Ahead of tomorrow’s Jobless Claims numbers and Friday’s GDP release, look for the dollar to continue to trade in lock step with equity markets.

 

The Euro traded lower overnight as risk appetite waned.  However, the Euro found some support as European economic data was released pointing to signs of recovery.  French producer prices unexpectedly rose by 0.6% in June versus an expected drop of 0.1 percent.  Also, Italian business confidence rose to 71.7 from 69.8, which is the highest reading this year.  Rising confidence among businesses should translate into a slowdown in job losses and increased capital investment, which could lead to the region returning to growth by the end of the year.

 

The Japanese yen traded in ranges overnight as both Asian and U.S. equity markets weakened.  A government report showed that Japanese retail sales fell for a 10^th straight month, adding to concerns that the country’s recession will be prolonged.  Also weighing on the yen was a report that Sumitomo Trust and Banking Co has agreed to buy Citigroup's  Nikko Asset Management.  However, expect the yen to benefit from its safe-haven status, as the risk aversion sentiment appears to have re-entered the market as equity markets decline. 

 

The pound remained soft overnight, but has seen losses slowed by the mortgage approvals release, which showed lending rose to its highest level in fourteen months. Banks gave out 47,584 loans that surpassed median estimates of 47,000 and marked the fifth straight month of improvement. However, net lending to consumers missed expectations, as banks remain reluctant to part with funds. These results were inline with a BOE lending report that showed an improvement in mortgage lending but that consumers and small businesses continue to face challenges in obtaining funds.  Chancellor Alistair Darling stated that it is vital that banks loosen credit standards in order to stimulate growth. If conditions don’t improve then we could see the growth outlook for the country dim and the sterling trade lower.

US$ Poised to Rally on Lower Equities

The US$ Index, which tracks the dollar versus six major trading partners, weakened to its lowest level of 2009 overnight on speculation the global economy is emerging from the recession.  However, the dollar rallied back in early morning trading to leave the greenback largely unchanged from yesterday’s close.  Today’s economic calendar includes the release of Consumer Confidence, Richmond Fed manufacturing and S&P Case Shiller Home report.  Consumer sentiment is forecasted to fall for a second month to 49.0 from 49.3 as mounting job losses have weighed on optimism.  However, the recent surge in equity markets and signs of a stabilizing housing market could brighten consumer’s outlook.  Manufacturing in the Richmond area is expected to improve to 8 from 6.  If the outlook for the global economy continues to improve, the dollar could remain under pressure.  However, with US equities expected to open lower this morning, the dollar could see gains in the near-term.

 

The Euro rose to the highs of the recent ranges as European equity markets soared to an eight-month high.  The common currency has maintained a strong correlation to risk appetite and risk assumption.  As long as this relationship holds, the Euro should continue to trade in tandem with stock indexes.  However, we have seen the Euro weaken against the Yen, which could be a sign that risk appetite is waning.  A light economic calendar saw the French business survey for overall demand rise to -43 from -58 as expectations for future demand saw a significant improvement. Italian consumer confidence also improved to 107.5 from 105.4.  Deutsche Bank, Germany’s largest bank, reported better than expected rise in net profit, but raised their bad-loan expectations sharply. This led traders to believe that many European banks may have more under-performing loans on their books than initially thought which could weigh on the Euro moving forward.   

 

The Japanese Yen strengthened early morning as U.S. equities pointed to a lower open in New York.  Caution over the domestic Japanese growth outlook and growing deflation fears will eventually weigh on the yen once there is a weakness in the correlation between equity markets and the safe-haven currency.

 

The pound consolidated its overnight gains against the dollar, but saw a steep drop against the Yen as U.S. equity markets appear poised to pare their gains today. We may be seeing profit taking as the pound traded near the highs of the recent range.  A report released by the U.K.’s Land Registry reported that housing prices in the U.K. rose for the first time in 17^th months.  Also, the CBI distributive trades reading rose less than expected to -15 versus -9, which could be a sign, that last month’s strong retail sales figures could be unsustainable.  The U.K. economic calendar is light this week with Wednesday’s credit reports possessing the only market moving potential which could cause the pound to stay within recent ranges. 

US$ Remains Under Pressure on Higher Global Equities

The US$ remains under pressure as Asian and European equity markets extended their gains overnight.  Today the Obama administration will begin two days of economic talks with China in Washington.  These discussions will cover the Asian countries massive holdings of U.S. government bonds, and China’s intentions surrounding continued purchases of this debt. These discussion could have implications for the dollar, should China signal it no longer views the greenback as the world’s  primary reserve currency.  10 a.m. sees the release of New Home sales and could provide evidence that the U.S. housing market is rebounding.  The expected improvement to 352K from 342K could fuel risk assumption and weigh on the dollar.  However, a U.S. economic recovery will eventually end the dollar’s correlation with risk, allowing positive fundamental data to push the dollar higher.  Wednesday sees the release of Durable Goods Orders and MBA Mortgage Applications.  Initial and Continuing Jobless claim will be released Thursday.  Friday sees the release of U.S. Second Quarter Gross Domestic Product and is expected to show that the US economy contracted 1.5 percent.  This will be the fourth consecutive quarter of negative growth.

 

The EUR extended its gains as risk assumption prevails in the markets.  Adding to the bullish sentiment of the Euro was better than expected data out of Germany.  The GFK Consumer Confidence-reading, a survey of 2,000 Germans, rose for a third straight month from 3.5 from 2.9.  Additionally, import prices in the Euro-zone rose for the first time since July 2008 by 0.4%, helping neutralize deflation concerns.

 

The Japanese yen declined as global stocks continued to rally on speculation the global economy is shaking off the worst recession since World War II, increasing demand for riskier assets.  Risk assumption, poor economic fundamentals in Japan and possible political turmoil in the aftermath of the upcoming election will likely put pressure on the safe-haven currency.

 

The pound strengthened overnight despite tough talk from U.K Chancellor Alistair Dariling, casting some doubt on U.K. recovery.  The Chancellor reprimanded banks for not making credit available for small businesses, saying that they needed to live up to promises made and that the government bail out as was not an act of charity. Meanwhile, Hometrack LLC reported that housing prices remained flat in July, but improvement in other metrics added to signs that the housing-sector is stabilizing.  The number of weeks that houses were on the market before selling dropped to nine weeks which was the lowest in a year.

US$ Remains Under Pressure as Equities Soar

The dollar continues to be pressured as risk appetite has soared with U.S. equity markets erasing all of their losses for the year and breaking above 9,000 yesterday for time since January.  After the bell yesterday, blue chips Microsoft, American Express and Amazon.com all reported disappointing earnings.  Nevertheless, U.S. futures remain positive this morning and continued strength today could keep the dollar near the low of the recent ranges.  However, yesterday afternoon saw signs of a possible decupling of the inverse correlation between US dollar strength and equity markets, which should be watched today.  Today at 10 a.m. sees the release of University of Michigan consumer confidence final reading for July that is expected to be revised higher to 65.0 from 64.6 but still lower from June’s 70.8.  A decline in optimism could limit expectations for domestic growth and add support for the US currency.

 

The Euro strengthened steadily overnight to near a seven-week high on better than expected data in the Euro-Zone.  German business sentiment rose to 87.3 from 85.9, which was the highest reading since October.  Euro-Zone PMI also rose to 46.8 against expectations of 45.3 as both service and manufacturing sectors showed a slower rate of contraction.  Also bullish comments from two ECB policy makers, Ewald Nowotny and Athanasios Orphanides helped buoy the common currency.  Orphanides said, “Concerning prospects for 2010, after a period of stabilization, a gradual rebound is anticipated in the euro zone.” This could be a sign that the central bank is done with their efforts to revive the economy and we could see them officially cap their quantitative easing at the current 60 billion euros.  This could start to raise interest rate expectations and lend further support for the single currency.

 

The JPY sold off broadly yesterday as the U.S equity markets climbed over two percent.  Risk assumption continues to prevail in the market, causing traders to abandon long JPY positions.  Overnight saw the yen consolidate its loses, but look for the JPY to continue to be under pressure as traders start to focus on the poor outlook for the Japanese economy and possible political unrest surrounding the upcoming Parliamentary election. 

 

The pound fell sharply after data showed that the U.K. economy shrank more than twice as much as economists forecast.  The preliminary second quarter GDP showed the British economy contracted by 0.8% versus the expectation of 0.3%.  The depth of the contraction will make it formidable for the economy to return to growth in the near-term.  Although there are signs that the economy may be stabilizing, the Bank of England may be forced to provide additional quantitative easing efforts, which they could announce at their August policy meeting. 

US$ Remains Soft Against It's Major Counterparts

The US$ was largely unchanged overnight against the Euro and Pound, while gaining against the Japanese Yen.  The dollar remains soft as demand for riskier, higher yielding assets persist.  Earnings season, for the most part, has been positive outside of Morgan Stanley’s loss yesterday that has limited downside risks. Today we will have several blue chip names report including 3M, AT&T and McDonald’s which could impact sentiment.  Regardless, jobs and housing data today will likely steer trade, as they are critical elements to the economy’s recovery.  Initial jobless claims were in line with forecasts showing that applications rose to 554,000, up from 524,000 the week before which could dampen optimism as unemployment is expected to continue to rise until the end of the year. However, the continuing claims number continues to move lower registering 6.225 million vs. expectations of 6.39 million. These lower readings could show the early signs of some jobs improvement.  At 10 a.m. the release of Existing Home sales could show signs that the housing market is stabilizing with an expected increase of 1.5% in June.

 

The Euro remains strong against the US dollar and the yen, but has been unable to break out of recent ranges, as traders appear reluctant to become too bullish.  There is a great deal of uncertainty pertaining to a global recovery, although there have been signs of improvement.  However, broad-based unemployment has limited expected potential for a rebound in growth, causing traders to not completely shun safer-assets.   Adding to the Euro strength was French business confidence, which rose for a fourth straight month to 78 from 77. 

 

The JPY fell as the U.S. equity futures advanced, prompting investors to purchase higher yielding assets.  The yen also declined after the Japan’s Finance Ministry said that the nation’s exports contracted to 35.7 percent in June from a year earlier.  Expect to the yen to continue to trade in lock step with equity markets as traders continue to jockey between risk aversion and risk assumption.

 

The pound traded near its highs for the month as better than expected data has buoyed the currency.  U.K. retail sales jumped 1.2 percent and the U.K. housing market also saw sign of improvement with home loans rising to the highest level since March 2008, according to the British Banker’s Association.  In addition, consumer consumption rose after an unexpected fall in May as apparel sales increased by 4.7%.

US$ Stronger in Overnight Trading

The Dollar has been firm overnight slightly gaining against its major counterparts while falling against the Japanese yen.  The market has started to see profit taking as risk appetite has started to wane. Earnings season has continued to generate direction for the dollar as we saw several Dow components beat earnings estimates yesterday including Caterpillar. Watch for results from Boeing, Eli Lilly and Wells Fargo today to gauge sentiment. Additionally, Fed Chairman Ben Bernanke will again be speaking in front of the Senate Banking Committee, which could also generate volatility. The central bank leader’s remarks yesterday saw equity markets react negatively to his warnings of continued rising unemployment levels and challenges for credit markets, but end on a positive note as the overall outlook was optimistic. The dollar continues to trade in an inverse correlation with US equity markets as traders jockey between risk assumption and risk aversion.  MBA mortgage applications and the House Price Index today will provide insight on the housing sector.  Tomorrow sees the release of Initial and Continuing Jobless at 8:30 a.m. followed by Existing Home Sales at 10 a.m.

 

The Euro remains near the highs of the recent range despite an unexpected drop in Euro-Zone industrial new orders. Demand in May fell 0.2% versus expectations of a 1.9% gain as orders for durable consumer goods fell 1.5%. However, a 0.4% increase in capital goods orders is a sign that the outlook from businesses is improving. Also, French consumer spending in June jump 1.4% versus expectations of 0.3%.  With mixed data released out of the Euro-zone, risk sentiment will continue to drive the EUR.  With U.S. futures pointing toward a lower open the EUR could be put under pressure.

 

The JPY advanced overnight as risk aversion has re-entered the market.  Morgan Stanley reported a third straight quarterly loss causing concern that the banking industry may take longer to recover than expected.  Expect the JPY to take its cue from equity markets as trader’s appetite for risk continues to drive trade.

 

The pound fell overnight as the National Institute of Economic and Social Research said U.K. housing prices would continue to decline until 2012.  The Institute also said that U.K.’s Gross Domestic Product (GDP) would keep falling until the fourth quarter of 2009.   Also weighing on the pound were comments from Bank of England Deputy Governor Charles Bean. He said that the central bank hadn’t put its quantitative easing program on hold, which led to speculation that further measures would come at their August.  However, he also said that credit conditions will improve as banks regain confidence and that the economy shows signs of improvement.  Look for the sterling to remain choppy as the outlook for growth continues to be cloudy. 

US$ Pushes Lower on Improving US Economic Data

The US$ continues to push lower as traders focus on improving US economic data, while uncertainty continues to permeate trade. This morning the US released better than expected weekly jobless claims registering 522,000 vs. expectations of a 553,000 reading. More surprising was the significant drop in continuing claims registering 6.273 million vs. 6.850 million forecast. This strong jobs report could perhaps be an early bellwether that the jobs outlook is improving. However, this good news could be tempered by the expected announcement that commercial finance giant CIT Group is poised to file for bankruptcy protection. Any such bankruptcy could reintroduce a new level of risk into credit markets, which might support the US$ as risk aversion takes hold. Also providing worrying news to the economy was a report released by RealtyTrac yesterday showing that 1.5 million properties in the US moved into auction or foreclosure during the first six months of 2009. That is a 15.0% jump for last year, and reveals that the US housing market is far from recovering. Later today at 9:00 a.m. TIC data is to be released revealing total capital outflows of $11.2 billion in May. At 10:00 a.m. the Philly Fed survey is to be released expected to register a –4.5. Ultimately, the US$’s direction will be determined today by whether traders embrace better than expected US data as a rationale for adopting more risk in their portfolios and as result abandon US$ positions. Or will this strong data begin to show a turnaround in the US outlook ultimately attracting capital and in turn supporting the greenback. Overall, however, it will be choppy trade that dominates markets in the short-run until such a direction takes place.

 

The euro continues to remain firm as traders embrace the common currency amidst increased risk assumption. Yesterday’s surge in US equity markets prompted by a strong earnings outlook from chip maker Intel and expected strong earnings from US banking giant JP Morgan Chase, led traders to purchase the common currency. However, with ranges dominating trade the euro could be at the upper end of its recent levels and be poised for a correction.

 

The yen gained modestly overnight, prior to this morning’s release of strong US economic data, as the Japanese currency’s role as a proxy for risk continues to be reinforced. The announcement by CIT Group that it will likely file for bankruptcy led traders to purchase the yen as the appeal of riskier assets faded. Also helping support the yen was the announcement by Fitch Ratings that it was cutting its long-term outlook for New Zealand. Citing a large deficit and saying that a “stronger fiscal adjustment may be necessary than currently planned,” New Zealand’s ratings were reduced. This downward revision led traders to purchase the yen as a hedge against risk. This pattern of trade will almost certainly dominate markets over the next few months, until some calm and direction returns to markets prompting traders to refocus on Japan’s weak economic outlook, ultimately steering the eyen lower.

 

Sterling continues to remain firm against the US$ as the market begins to adopt the view that the UK economy is recovering. Recent economic releases reveal an improving jobs situation within the country as well as an apparent rebound in housing markets. The huge stimulus package rolled out by the UK government coupled with the massive program of quantitative easing seems to be having the desired effect of improving the economy. As a result sterling continues to remain firm, and will likely stay in these elevated ranges until either the US$ finds its legs or data begins to disappoint.

US$ Weaker on Increased Appetite for Risk

The US$ weakened across the board overnight as investor confidence appears to be returning to the market prompting more risk taking. Yesterday US investment banking giant Goldman Sachs reported much better than expected earnings of $3.44 billion in the 2^nd Quarter vs. an expected gain of $2.55 billion. In addition, US chip maker Intel predicted sales would surpass the $7.86 billion forecast this quarter to levels near $9 billion. These stellar earnings reports reinforce the view that economic recovery could be at hand, reinforcing an optimism based trade which ultimately will weigh on the US$ in its recent ranges. Also hurting the US$ slightly overnight was a report from China stating that the country’s foreign exchange reserves topped $2 trillion for the first time, highlighting the country’s robust US$ holding position and refocuses the market on ultimate sway they could have on US$ direction should they choose to divest from the greenback. The market’s focus will now shift to US economic releases slated for release today. At 8:30 the US released CPI data at a higher than forecast 0.7%, driving home the view that inflation pressures are beginning to surface. This will draw further attention to Fed Chief Bernanke’s testimony next week, as he might indicate the timing of any exit from recent stimulus measures. At 9:15 Industrial Production is to be released expected to register a decline of 0.6% and Capacity Utilization expected to register 67.9. Should this data register better than expected, the US$ could post further losses, however any weakness could promote US$ gains.

 

The euro gained overnight as traders continue to shun the US$ as signs of a global economic rebound lead traders to exit long greenback positions. However, the Eurozone currency remains relegated to ranges as risk assumption and aversion permeate markets. The recent bout of optimism about global recovery has helped bolster the euro, however uncertainty about the health of t Eurozone banks and whether the ECB will inject additional liquidity into markets will likely limit further gains.

 

The yen remains range bound despite disappointing data from Japan and the apparent reintroduction of risk into investor portfolios. The yen fell initially overnight after the release of a report by the bank of Japan stating that the economy will contract 3.4% in the year ending March 2010, more than the 3.1% originally forecast. This would be the worst economic contraction since the end of World War II. Also weighing on the yen were comments from a ruling Japanese officials that a strong US$ is in the country’s best interest due to its large holdings of US Treasuries. Overall, expect ranges to steer trade, with the yen likely to soon begin weakening.

 

The pound gained yet again overnight after the release of better than expected data from the UK. The release of a report showing the number of Britons filing for unemployment claims rose at the slowest pace in more than a year, helped buoy the pound as it appears the worst of the UK recession may have passed. Aggressive UK monetary policy appears to has seemingly helped bolster the economy, leading the pound higher as of late. However, these GBP gains could be limited should any data releases disappoint.