Easy Forex

• USD: Lower, jobless claims fall more than expected, China calls for reserve currency reform
• JPY: Lower, pressured by rising risk appetite, threat of intervention
• EUR: Higher, German officials suggest the German recession ended in Q2,ECB expects recovery mid 2010
• GBP: Higher, BOE elects to hold monetary policy steady and not expand its asset purchase program
• CAD and AUD: AUD & CAD higher, risk appetite improves and commodity prices rebound

Overview

USD and JPY traded lower pressured by an up tick in risk appetite as equity markets rally in reaction to report that the IMF sees the global recession ending. FX markets are closely tracking equities and risk sentiment. The reaction to the IMF report was somewhat muted because the IMF expects a slow recovery. The USD remained on the defensive pressured by report that China has renewed its call for reform of the global reserve currency system at today's G-8 meeting. GBP traded higher in reaction to the Bank of England's decision to hold monetary policy steady and to maintain the current size of its asset purchase program. The Bank of England's decision to not extend its asset purchase program was a surprise. The market had expected the Bank of England to expand the asset purchase program by GBP25 bln. EUR traded higher supported by an upbeat ECB monthly report, and a statement from a high-ranking German official that the German recession may have ended in Q2. Commodity currencies traded higher supported by improving risk appetite and a rebound in commodity prices. AUD rallied despite report rising Australian unemployment. The equity markets, the commodity markets and the FX markets are trading in lockstep with speculation about the outlook for the global economy. The outlook for the global economy continues to shift from concern that the global recession will continue to hope that the global recession may soon end. In Thursday's trade the market was pricing hope for recovery in the global economy. The combination of the IMF upgrade of its 2010 forecast, improving economic outlook in Germany and better earnings at Alcoa fueled recovery hopes in Thursday's trade. Report of the much larger than expected decline in US jobless claims failed to further boost risk sentiment as the report was partly skewed by seasonal factors and auto plant closings. The USD pared overseas losses after the release of US jobless claims as US equities reversed early gains and continuing jobless claims remain at record high. The dominant focus for FX trade is uncertainty about the global economic recovery. There was little reaction to a comment from the White House Press Secretary Gibbs that the US will remain the world’s main reserve currency.

Today’s US data:

Jobless claims fall 52k to 565k in the week ending July 4th. This is the first decline in jobless claims below 600k since January. The surprise decline in last week's jobless claims was exaggerated by the timing of auto plant closings and shortened holiday workweek. The report failed to boost risk sentiment. Continuing claims rose to a new record high which suggests US jobs remain hard to get. May wholesale sales declined 0.8%, a 1% decline was expected.

Upcoming US data:

On July 10th June import prices, May trade balance and July Michigan sentiment will be released. Import prices are expected at 1.5% compared to 1.3% last month. The trade balance is expected to come in near unchanged at -29 bln. Michigan consumer sentiment is expected to rise to rise from 70 from 69.2 in June.

JPY

JPY traded lower and weakened in cross trade pressured by improving risk sentiment as equity markets rally and the IMF sees the global recession nearing an end. Wednesday, the JPY surged to its highest level in five months supported by the safe haven demand sparked by investors’ fear that the global recession will continue. Fears about the global economic outlook were reduced in Thursday's trade by a combination of factors which included the IMF's upgrade of its 2010 growth forecast, a statement from German officials that the German recession may have ended, the Bank of England's decision to not extend quantitative ease and report of a much bigger than expected drop in US jobless claims. GBP/JPY and AUD/JPY traded sharply higher with sterling supported by the Bank of England's decision to maintain its current asset purchase program and AUD supported by a rebound in commodity prices. The JPY has reemerged as the favored safe haven currency. Today's JPY price action reflects less investor risk aversion and weaker demand for safety. Japan’s domestic economy remains weak. Wednesday Japan reported a sharp fall in machinery orders and weaker export sales. There are three risks to further JPY gains. The first and primary risk is the possibility that the global recession is ending and equity markets begin to rally. The second risk is that the continued weakening of the Japanese domestic economy forces that BOJ to expand quantitative ease. The next BOJ policy meeting will be held on July 14th and 15th. The third risk to the JPY is the possibility of intervention as stronger JPY will hurt Japan's export outlook. Japan's Kawamura says that Japan's government is watching FX market moves closely. This is a not so veiled attempt at rhetorical intervention and may be a prelude to Japan's efforts to try to talk JPY lower. Short-term JPY price direction will remain closely correlated to risk sentiment in the direction of global equity markets. On July 10 th, June CGPI will be released expected at -0.1% compared to -0.4% last month. Key technical levels to watch in USD/JPY include support at 92.60 and 9180 the July 8 th low with resistance at 95.45 the July 7th high.

EUR

EUR traded higher supported by improving risk sentiment and a statement from a senior German official that the German recession may have ended in Q2. EUR was also supported by an upbeat ECB monthly report which says that interest rates are appropriate. The ECB monthly statement for July says that ECB expects gradual EU economic recovery and positive growth in mid 2010. The ECB downplayed recent reports of lower inflation in the EU and gave no indication that ECB plans to expand its asset purchases. The ECB also plans to remove stimulus quickly when the economy recovers. The ECB monthly report suggests that the ECB monetary policy will be on hold for the foreseeable future. There was limited reaction to a statement from Bonello that the global economic contraction is slowing but the recovery will be weaker than in past recessions because of debt burdens. EU economic data had limited impact on the trade. German final CPI was came in at 0.1%. German May trade balance improved 10.3 billion from 9 billion last month. EUR will continue to track risk sentiment.

The technical outlook for the EUR is mixed as the EUR falls back below 1.4000. Expect EUR support at 1.3825 the June 22nd low with resistance at 1.4155 the July 2nd high.

GBP

GBP traded sharply higher supported by improving risk sentiment and the Bank of England's decision to not extend quantitative ease. As noted above, European and US equity markets traded higher which sparked broad selling of USD. The Bank of England elected to hold monetary policy steady as expected but surprised and did not announce a plan to expand its asset purchase program. The trade had expected the Bank of England to expand its asset purchase program from the current GBP125 bln by GBP 25 bln. The British Chamber of Commerce has called for the Bank of England expand quantitative ease to combat UK recession. The BOE indicated that it would address the issue of expanding its asset purchase program in August. GBP was also supported by a statement from the IMF that the UK recession will be over by December. There was little reaction to report that UK May trade gap narrowed to 6.263bln from 7.137bln last month. GBP price direction will continue to focus on risk sentiment and speculation about whether the UK recession is ending. Today's BOE decision to leave the size of its asset purchase plan unchanged is a modest positive for the GBP.

On July 10th June PPI will be released expected unchanged at 0.2%.

The technical outlook for GBP has improved as GBP rises back above below 1.6200. Expect near-term support at 1.6025 the July 8th low with resistance at 1.6430 the July 3rd high.

CAD

CAD traded higher rebounding from a seven week low supported by improving risk sentiment, rising equity markets and rebound in the price of crude. The rebound in equity markets and fresh hope that the global recession is nearing an end fueled demand for higher yielding currencies and the CAD. As noted above, the IMF sees an end to the global recession and raised its 2010 global growth forecast. German officials suggest that that the German recession may have ended in Q2. The direction of the CAD remains closely correlated to the outlook for the global economy and the direction of equities and commodity prices. CAD was also supported by report of stronger than expected June housing starts. Canada's June housing starts rose 6% to 140.7k, the trade had expected a rise 130k. Recent concern about the pace of the global recovery sparked liquidation selling pressure in the CAD with the CAD traded at its lowest level in seven weeks Wednesday. A sustained rebound in global equity markets and commodities will be needed to encourage fresh inflows to the CAD. CAD gains were limited as crude turns lower for the day. Focus turns to Friday's release of Canadian unemployment and trade balance.

Canada's unemployment rate is expected to rise to an 11 year high with net job losses of 35k.The trade balance is expected to show a modest deterioration reflecting weaker export sales.

On July 10th June unemployment rate and May employment growth, May trade balance and New Housing Price index will be released. The unemployment rate is expected to rise to 8.5% from 8.4% last month with jobs growth -35k compared to -41k last month. The trade balance is expected to narrow to -0.050 bln compared to -0.179 bln last month. The new house price index is expected to fall to -0.8% from -0.6% last month.

The technical outlook for CAD is mixed as USD/CAD fails to hold above 1.1600. Look for near-term support at 1.1480 with resistance at 1.1683 the July 8th high.

AUD

AUD traded higher supported by improving risk sentiment and slightly better than expected Australian employment data. Australia's June employment declined by 21.4k and the unemployment rate rose to 5.8%. The trade had expected net job loss of -25k and an unemployment rate of 5.9%. Today's Australian jobs report is another example of economic news being less bad. AUD gains were limited as US equities and commodities struggle to hold opening gains. The US reported a sharp drop in jobless claims for the week ending July 4th. The initial reaction to the US jobless claims was positive but as the trade digested the report the impact faded because the declining jobless claims mainly reflected seasonal adjustments and continuing claims were at a record high. Today's US jobless claims data will do little to reduce uncertainty about the US economic outlook. AUD has experienced significant liquidation selling pressure because of uncertainty about the pace of the global recovery and a downside correction in global equity markets and commodity prices. In addition the technical outlook for the AUD has turned negative as the AUD trades below 7800.

BNP analysts are downgrading their forecast for commodity currencies because they expect commodity prices and equity markets to continue to weaken. AUD price direction will closely track risk sentiment.

The technical outlook for the AUD is negative as AUD drops below 7800. Expect AUD support at 7700 the May 25th low with resistance at 7895 the July 8th high.