• USD: Mixed, bigger than expected decline in jobless claims, CPI upticks, stock market rally stalls
  • JPY: Lower, pressured by selling in cross trade to the GBP
  • EUR: Higher, EU CPI falls 0.3%, Trichet says EUR not designed to be a reserve currency
  • GBP: Higher, BOE may pause bond purchases
  • CAD and AUD: AUD higher & CAD lower, Canada's manufacturing shipments decline, threat of intervention

    Very interesting price action in the Forex market Thursday with the GBP trading sharply higher supported by speculation that the BOE may consider a pause in its asset purchases and the USD posting a modest rebound against most of the majors. BOE's Fischer says the BOE will likely pause asset purchases because rising asset prices and improved confidence confirms the BOE's quantitative ease is working.  EUR was pressured by report of falling EU inflation, fresh calls for the ECB to lower interest rates and a statement from ECB President Trichet that the EUR is not designed to be a global reserve currency. JPY traded lower pressured by improving risk sentiment as the Nikkei rallies and by heavy selling in cross trade to the GBP. Report of better than expected earnings at Goldman Sachs fueled early equity market gains but the rally stalled in the US session. Commodity currencies were mixed. AUD rallied to 15 month high in overseas trade. Profit-taking and weaker oil prices weighed on the CAD and AUD. AUD downside was limited by hawkish comments from RBA Governor Stevens. Stevens said that interest rates will return to more normal levels as the economy improves. CAD was pressured by report of weaker than expected Canadian manufacturing shipments and threat of intervention. US economic data was mixed with jobless claims falling to the lowest level since January, CPI posting a modest uptick and the Philly Fed survey falling more than expected. USD is approaching extreme oversold and this could set the stage for a technical rebound. Former Fed Chairman Greenspan say he is not overly concerned about the USD decline because the USD is trading back at the same level it traded before the financial crisis.

    Today's US data:
    Jobless claims for week ending 10/13 fell by 10k to 514k, a reading of 525k was expected. September CPI rose 0.2% with the core inflation rate up 0.2% as well. The CPI report was right in line with expectations. October Philly Fed dropped to 11.5 from 14.5 last month, a reading of 12.5 was expected.

    Upcoming US data:
    On October 16th September industrial production will be released expected at 0.2% compared to 0.8% last month along with September capacity utilization expected 69.8 compared to 69.6 last month and October University of Michigan consumer sentiment expected unchanged at 73.5.

    JPY traded lower pressured by improving risk appetite as the Nikkei closes 176 points higher and by heavy selling in cross trade to the GBP. The rally in the Nikkei encouraged investment flows out JPY to higher yielding currencies. GBP/JPY cross traded 2.5% higher with GBP supported by a statement from the BOE's Fisher that the BOE may pause its asset purchases. JPY was also pressured by report that the Reuters October Tankan manufacturing index fell to -35 from -33 last month. The decline in the Tankan manufacturing index reflects the impact of the strong JPY and manufactures sentiment. Japan's revised August industrial production rose 1.6%. Tuesday the BOJ elected to hold policy steady as expected and upgraded its economic outlook for Japan's economy. The BOJ says that economic activity has picked up. The BOJ made no comment on the central bank's corporate bond buying program. There was limited reaction to statement from Japan's Finance Minister Fujii that Japan must not rely so much on export for growth or report in Nikkei press that the BOJ is close to ending its corporate bond purchase plan and is eyeing an exit strategy from recent accommodative easing measures.

    Key technical levels to watch in USD/JPY include support at 89.30 the October 15th low with resistance at 91.63 the October 24th high.

    EUR traded at a new high for the year in overseas at 1.4968 and turned lower in US trade. EUR was pressured by report of falling EU inflation, fresh calls for the ECB to lower interest rates and a statement from ECB President Trichet that the EUR was not designed to be a global reserve currency. Trichet went on to say that it is extremely important that the US pursues policies to support the USD and that excess Forex volatility is a threat to the global economy. EU annual CPI declined by 0.3% in September. The decline in the EU CPI reflects lower energy costs and may increase fears of deflation in the EU. The ECB expects EU inflation to turn positive as the economy recovers and ECB is unlikely to alter monetary policy in light of today's CPI report. ECB's Mersch says threat of EU deflation is near zero. The European Institutes called on the ECB to lower interest rates to 0.5%. According to a Bloomberg report analysts at Goldman Sachs expect the USD to extend its decline to 1.5500 versus the EUR reflecting the USD close correlation to improving risk sentiment. There was limited reaction to report that the Swiss October ZEW economic expectations index improved to an all-time high of 65. The improvement in the Swiss ZEW index is further confirmation that the European economy is recovering. Focus turns to Friday's release the EU trade balance. The trade expects EU trade balance to confirm improving export demand.

    On October 16th August trade balance will be released expected at 13.2 bln compared to 12.3 bln last month.

    The technical outlook for the EUR is positive as EUR trades above 1.4900. Expect EUR support at 1.4762 the October 13th low with resistance at 1.4968 the October 15th high.

    GBP traded sharply higher supported by a statement from the BOE's Fisher which suggests that the BOE may soon pause its asset purchase program and by sharp gains in cross trade to the JPY and the EUR. According to a Financial Times article the BOE's Fisher says that the recent improvement in asset prices and confidence is confirmation that BOE's quantitative ease program is working. Fischer's comments greatly reduce the odds that the BOE will elect to extend quantitative ease at the November policy meeting. GBP has been underperforming partly pressured by speculation that the BOE may expand quantitative ease. Fischer went on to say that a pause in the asset purchase plan would give the BOE the option for taking action in the future if needed. GBP/JPY traded almost 3% higher and EUR/GBP 2% with GBP supported by heavy short covering sparked by Fischer's comments. BOE policy outlook is the key short-term driver for GBP trade. Last Thursday the BOE elected to keep monetary policy unchanged and maintain its current level of asset purchases at £175 bln. The BOE indicated that it will take another month to complete its current asset purchase program and that the scale of quantitative ease will be kept under review. This means that the November BOE meeting will be critical in determining whether the BOE will expand quantitative ease. Expansion of quantitative ease will largely depend on upcoming UK economic and inflation data. The minutes for the October BOE policy meeting will be published on October 21st. The minutes will be analyzed for clues to what the BOE board members are thinking about the possibility of pausing quantitative ease in November.

    The technical outlook for GBP has improved as GBP trades above 1.6200. Expect near-term support at 1.5840 the October 15th low with resistance at 1.6389 the September 24th high.

    After rallying to a 15 month high CAD turned sharply lower. This marked the first time the CAD has traded lower in the last six days. CAD was pressured by profit-taking as gold and the price of crude traded lower and in reaction to report of much weaker than expected Canadian manufacturing shipments. Canada's August manufacturing shipments declined by 2.1%, the consensus was for a decline of 0.4%. CAD was also pressured by the increased risk of intervention as the CAD trades near parity. Tuesday, Canada's PM Harper expressed concern about the strength of the CAD and how that strength could choke off the Canadian economic recovery. Harper's comments heighten the risk of intervention to try to limit CAD gains. If the CAD continues to rally we look for more verbal intervention from the BOC. Physical intervention seems unlikely unless a consensus emerges among G-7 nations on the need for coordinated intervention to support the USD.  The BOC meet next week and strength of the CAD is likely to be addressed by the central bank. CAD longs look to book profits ahead of the BOC policy meeting. The BOC meet on October 20th. The recent unexpected improvement in Canada's employment outlook may force the BOC to reassess its pledge to maintain interest rates at record low 0.25% through mid-2010. Canada's September unemployment rate declined by 0.3% to 8.4% with 30k new jobs created. The decline in Canada's unemployment rate suggests that the Canadian economy is recovering. The 30k new jobs creation would be the equivalent of 300k in the US. Canada's Q3 home resale's hit a record high. Today's report of weak Canadian manufacturing shipments suggests that the Canadian recovery remains fragile and uneven. This week's key focus will be Friday's release of September CPI. The BOC has pledged to maintain record low yields as long as inflation remains in check. CAD is vulnerable to a technical correction as the rally reaches extreme overbought.

    Friday September CPI will be released expected at -0.8% y/y.

    The technical outlook for CAD is positive as USD/CAD trades below 1.0500. Look for near-term support at 1.0130 the July 25th 2008 low with resistance at 1.0375 the October 13th high.

    AUD traded at fresh 15 month high of 9228 supported by hawkish comments from RBA Governor Stevens and improving risk sentiment as equity markets rise in Asia. Stevens said that interest rates will move toward a more normal level as the economy recovers but it he was unclear on the timing and pace of future rate hikes. Stevens expects gradual growth in 2010. Positive earnings from Intel, J.P. Morgan and Goldman Sachs suggest that the global recovery is gaining traction and that financial markets are healing. AUD is supported by optimism about the global recovery, rising commodity prices and speculation that the RBA will continue to hike rates into year-end. The RBA is expected to hike rates 25bps in November and December raising the overnight rate to 3.75%. RBA watcher Kevin Rudd said the improvement in Australian employment could lead to 50bps RBA rate hike in November. Last Tuesday, the RBA raised interest rates 25bps to 3.25% and signaled that more rate hikes may be needed. There was limited reaction to report that the RBA increased its sales of the AUD in September. The RBA sold A$830 mln in September and A$576 mln in August. The RBA sales of the AUD may increase the risk of more aggressive intervention if the AUD continues to rise. So far RBA AUD sales appear to be nothing more than smoothing operations. AUD will remain well supported on breaks by RBA rate with a number of analysts now looking for AUD to reach parity with the USD in the months ahead. The main risk to AUD is rally is reaching extreme overbought.

    The technical outlook for the AUD is positive as AUD rallies above 9100. Expect AUD support at 9033 the October 13th low with resistance at 9300 the August 5th 2008 high.