Lower equity markets are once again triggering an aversion to risk overnight boosting demand for the U.S. Dollar.  Some of the selling pressure could be coming from investors lightening up positions ahead of today’s important U.S. manufacturing report known as the ISM Index.  

The key currency market driver will be the ISM Index.  Investors want to see this report clear the 50% hurdle which would indicate the economy has made a serious turn toward recovery.  Last month the report came in at 48.9%.  Pre-report estimates are for this month’s report to show the index at 50.5%.

Additional U.S. reports today include pending home sales, construction spending and auto sales.  Traders expect auto sales to show an increase after getting a boost from the “cash for clunkers” program.

Overnight Chinese equity markets received a boost from an increase in a Chinese manufacturing report.  Although there was a little blip in the equity markets at the time, the markets turned seller quickly as traders began putting more weight on the U.S. ISM Report.  

Several reports came out overnight which had short-term effects on individual currencies but once again, it became obvious that investors are waiting for the ISM report before committing to a trend today.

U.S. equity markets are under pressure this morning.  The overnight weakness took out yesterday’s lows and set the main indices up for a test of key retracement zones.  The September E-mini S&P 500 is poised to test a 50% retracement level at 1007.25.  A failure to hold this level could set up an even further decline to 999.75.  

December Treasury Bonds are trading flat.  Traders will be leaning to the upside if equity markets get hit hard after the release of the U.S. ISM Report.  A bullish report will trigger a rally as traders will desire less demand for safer assets.  In addition, signs of a U.S. economic recovery will encourage investors to ask for a higher yield.

The September Euro is trading lower this morning despite a government report that showed German unemployment fell in August.  Some traders feel the report showed a one-time event that skewed the results.  Traders are also beginning to price in the strong possibility that the European Central Bank will leave interest rates unchanged at its next meeting on September 3rd.

U.K. manufacturing unexpectedly fell to 49.7 in August from 50.2 in July.  This news weakened the September British Pound as it showed more evidence that the economy was still contracting.

Although it spiked up overnight for a short-time, the September Canadian Dollar settled back into yesterday’s range as buying dried up.  Falling equity and crude oil prices weighed heavily on this market yesterday.  This trend is likely to continue today if the same conditions exist.  Another report that could linger in the market for a few days is the GDP report which showed a worse-than-expected contraction in the economy during the second quarter.  Finally, comments from a Bank of Canada official re-emphasized the central bank’s desire to maintain a stable currency for the good of the economy.

Lower equity prices in China and the U.S. as well as an election victory by the opposition party helped the September Japanese Yen maintain its strong uptrend.  Overnight the Yen is trading flat despite less demand for higher risk assets.  This is most likely because of positioning evening ahead of this morning’s U.S. ISM Report.

The September Swiss Franc continued to trade inside of its 90-day range in spite of news that the economy contracted less than economists forecast in the second quarter.  This news should be interpreted as another sign the European economy is beginning to recover.  Traders still cite rising unemployment and the threat of deflation as the main reasons why the Swiss Franc remains range bound.

Look for a slow opening, but expect the markets to heat up following the release of the U.S. ISM Report at 9:00 am CDT.

The stronger Dollar is expected to put pressure on the precious metals this morning.  A reversal to the downside in the Dollar should trigger a short-covering rally in December Gold and Silver.  December Copper is called higher following the bullish Chinese manufacturing report.

December Crude Oil is called lower this morning.  Short-term oversold conditions coupled with a better than expected U.S. ISM number is likely to trigger a strong short-covering rally.  If the ISM number doesn’t come out as expected then look for selling pressure to drive this market lower.

December Corn has been feeling selling pressure on expectations of a bumper crop.  The USDA is now reporting that improvements in crop conditions should lead to higher yields.  December Wheat is falling because of the lack of demand and high inventory.  November Soybeans have been trading lower recently but traders are beginning to talk about the possibility of an early frost.  

Lack of demand is pressuring December Coffee.  The lower British Pound is helping to weaken Cocoa prices in the U.K. which is dragging down December Cocoa in New York.  Traders expect the uptrend in October Sugar to continue as reports are now circulating that Brazil’s crop may not be sufficient to meet demand.


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