• USD: Higher, recovery concerns, jobless claims rise, ISM declined and stocks fall
  • JPY: Higher, Tankan business sentiment improves, gains in cross trade
  • EUR: Lower, concern about EUR strength, unemployment rises to a 10 year high, German retail sales fall
  • GBP: Lower, manufacturing PMI falls for the second month in a row, IMF upgrades UK growth outlook
  • CAD and AUD: AUD & CAD lower, tracking weaker commodity and equity prices

Overview

Concern about the global recovery boosts the USD.USD traded higher Thursday supported by weaker equity market trade and report that the EU is concerned about EUR appreciation. Equity markets traded lower in reaction to disappointing economic data from Europe as the EU unemployment rate rises to a 10 year high, German retail sales are reported weaker than expected and UK PMI posts an unexpected decline. EU Monetary Affairs Commissioner Almunia said that the EU will be discussing EU strength ahead of the G-7 meeting this weekend and ECB President Trichet said that excessive FX moves have adverse implications. Last week French President Sarkozy said that European officials are becoming increasingly worried about the EUR rise. Commodity currencies were pressured by weaker equity market trade and a decline in metals and the price of crude. Today's data from Europe generates concern about the global recovery outlook. There is an emerging tension in Forex markets between recovery hopes and safe haven flows. The IMF says the world economy is recovering, but today's data from Europe generates concern that the recovery will be weak. USD may benefit from safe haven flows if concern about a weak global recovery sparks additional selling of global equity markets and commodities. Today's US economic data was mixed with jobless claims posting an unexpected rise and personal income rising the most since October 2001. USD traded to the day's highs immediately after the release of the disappointing jobless claims data. The rise stalled after the release of the stronger than expected rise in personal consumption spending. The ISM manufacturing index came in weaker than expected, construction spending rose more than expected and pending home sales rose to their highest level since March of 2007. US equities remained on the defensive after the release of today's data and USD and JPY traded higher. USD was also supported by Bernanke’s statement that there is no immediate risk to USD reserve status.

Focus turns to Friday's release of US September unemployment and nonfarm payrolls. The US employment report will be a key gauge for market sentiment about the outlook for the US recovery. Former Fed Chairman Greenspan says the US should begin to raise taxes and tighten credit as the economy recovers. Fed’s Kohn said tightening of monetary policy will depend on economic and inflation forecasts not current conditions. Kohn said that the Fed may raise rates while economy is still weak. Fed rate hike speculation may further dampen optimism about the US and global economic recovery. There is a major concern about how the US and global economy will perform as fiscal and monetary policy stimulus is withdrawn. According to the IMF the US economy is recovering faster than expected but consumers are unwilling to spend because of uncertainty about the labor market. 70% of the US economy is based on consumer demand and if the consumer does not increase spending the recovery will be at risk as stimulus is withdrawn. Today's data shows that US consumer spending has improved. Whether this improvement can be sustained will largely depend on labor market outlook.

Today’s US data will:

Jobless claims for week ending 9/26 rose by 17k to 551k, a reading of -525k was expected. August construction spending rises 0.8%, a decline of 0.2%was expected. August personal income rose 0.2% and spending rose 1.3%. September ISM manufacturing index comes in at 52.6, a reading of 54 was expected. Pending home sales for August rose 6.4%.

Upcoming US data:

On October 2nd September unemployment will be released expected 9.8% compared to 9.7% with nonfarm payrolls at -188k compared to -216k last month. August factory orders will also be released on October 2nd expected at 1.1% compared to 1.3% last month.