• USD: Higher, stocks erase early losses on banking woes, factory orders rise
  • JPY: Higher, supported by rising risk aversion as equity markets decline
  • EUR: Lower, bank stress tests reveal the EU may face additional bank losses, deficits rising
  • GBP: Mixed, UK construction spending falls, bank troubles re-emerge, more bailout money for RBS & Lloyds
  • CAD and AUD: AUD lower & CAD higher, RBA hikes rates, dovish statement, CAD supported by gold rally

Overview     
European bank troubles sparked a sharp sell of in global equity markets, a spike in risk aversion and a rally in the USD. UBS posted a larger than expected Q3 loss, RBS and Lloyd's will receive additional bailout funds from the UK government and the EU commission warns that EU banks face additional banks looses. The GBP was pressured by a WSJ report which says economists expect the BOE to expand its asset purchases by 25 bln at Thursday BOE policy meeting. The other major feature of Tuesday's trade was the RBA decision to hike rates 25 bps to 3.5%. The rate hike was widely expected and the AUD traded lower pressured by falling equity markets and doubt about whether the RBA will hike rates again in December. The RBA policy statement showed little urgency for the need to hike rates again in December. US economic data was positive as factory orders rise. The rise in factory orders helped to erase sharp early losses for the US equity market and the USD gave back some of its overseas gains versus the high yields currencies. JPM cut its GDP forecast to 3.1% from 3.5% after today's release factory orders release.

The Fed will complete a two-day policy meeting Wednesday and is expected to hold monetary policy unchanged. In light of the improving outlook for the US economy the Fed may drop its language that interest rates will remain low for an extended period. The ECB and BOE meet on Thursday and ECB is expected to leave monetary policy unchanged. There is a great uncertainty over whether the BOE will elect to expand its asset purchase program as UK GDP posted a negative result. US October unemployment will be released Friday. US unemployment is expected to rise to a new 26 year high but nonfarm payroll job losses will likely be less than 200k. The trade will be closely monitoring central bank policy decisions and how they may impact global liquidity and the economic recovery. The US unemployment report will be key to investor risk sentiment and speculation about whether the US recovery is sustainable. FX price direction remains closely correlated to equities and risk sentiment.

Today's US data:
September factory orders rose 0.9%, a 1% rise was expected.

Upcoming US data:
The FOMC begins a two day policy meeting on November 3rd. On November 4th October ADP employment and non-manufacturing ISM Index will be released. The GDP report is expected at -188k compared to -254k last month and non-manufacturing ISM is expected at 51.8 compared to 50.9 last month. On November 5th initial jobless claims for week ending 10/31 will released expected at 521k compared to 530k last week. Q3 productivity and unit labor costs will also be released on November 5th. Q3 productivity is expected at 5.5% compared to 6.6% last month and unit labor costs are expected at -4.5% compared to -5.9% last month. On November 6th October nonfarm payroll and unemployment will be released. The nonfarm payroll is expected at -175k compared to -263k last week and the unemployment rate is expected to rise 0.1% to 9.9%.

JPY
Japanese markets were closed for holiday Tuesday. The JPY traded higher supported by safe haven demand as equity markets decline and by gains in cross trade. A sharp selloff in European and US equities sparked safe haven flows to the JPY as investors pare risk. EUR/JPY and GBP/JPY crosses were pressured by concern about European bank troubles with the GBP facing additional selling pressure in reaction to a WSJ report which suggests that the BOE will expand its asset purchases plan at Thursday's BOE policy meeting. AUD/JPY traded over 1% lower as the RBA rate hike was discounted by the trade and weaker equity market trade sparked selling of higher yielding assets. Monday, JPY traded lower pressured by stronger equity market trade sparked by report of better than expected US housing and ISM manufacturing data. The trade continues to digest last week's decision by the BOJ to end its corporate bond support plan and begin its exit from the credit markets. The BOJ elected to hold monetary policy unchanged Friday and began withdrawing from the credit market. The BOJ said it will extend its low interest rate loans by three months from December to March but then would end the loan program. The BOJ will end its corporate bond and commercial paper buy plan in December. The BOJ's decision to end its liquidity program is a sign that the BOJ has confidence in the Japanese economic recovery. The trade will look to Wednesday's release of the BOJ policy minutes for further insight into BOJ outlook for Japan's economy.

This week's Japanese economic calendar includes the November 4th release of the minutes for the BOJ policy meeting last week. On November 6th September leading indicators will be released expected at 1% compared to 0.8% last month.

Key technical levels to watch in USD/JPY include support at 88.35 the October 9th low with resistance at 91.80 the October 28th high.

EUR
EUR traded sharply lower pressured by weaker equity markets and concern about EU bank troubles. The decline in global equity markets encouraged investors to pull back on risk trades. The EU commission warned that the EU faces additional bank losses which may total €200 to €400 bln in 2009/10. The EU's Almunia also said that credit flows will not return to normal until banks repair their balance sheets. The trade took little comfort in the EU commission forecast that they expect the EU economy recover in 2010 and 2011 and that the EU will begin preparing for an exit from fiscal stimulus. The EU commission expects growth of 0.7% in 2010 and 1.5% in 2011. EU GDP debt ratio is expected to be 6.9% in 2010. The commission noted concern that rising unemployment is a major headwind to the EU recovery. Monday the EU reported a sharp improvement in manufacturing PMI and EU officials appear to be growing more confident in the outlook for the EU recovery. EU October manufacturing PMI rose to 50.7 from 49.3 last month. The EU manufacturing PMI report suggests that the EU economy is expanding This week's key focus will be Thursday's ECB policy meeting. The ECB is widely expected to leave interest rate policy unchanged at 1% but it is unclear if the ECB is ready to lay out the details for an exit strategy from unconventional policy measures. In addition, the trade will be looking to see whether the ECB sees the recent improvement in EU economic data as strong enough to warrant a shift to a more hawkish bias. Last week the ECB's Weber said that the ECB would begin to discuss an exit strategy. The big question is whether the current recovery in the global economy is sustainable. The EU and global recovery will likely be uneven and weak. This suggests that the ECB will remain cautious and be in no hurry to change monetary policy. In addition, EU inflation remains in check. The trade will be monitoring the press conference following the ECB policy meeting for clues as to the timing of when the ECB plans to begin its exit strategy. The EUR has failed to rise back above 1.5000. This generates speculation that the EUR may be vulnerable to further weakness. The trade is closely watching uptrend support around 1.4600. A break of this level could signal a deeper downside technical correction for the EUR.

On November 4th September PPI will be released expected at 0.2% compared to 0.4% last month. On November 5th EU September retail sales will be released expected at 0.3% compared to -0.2% last month. ECB meet on November 5th. No policy change expected.

The technical outlook for the EUR is mixed as the EUR fails to hold above 1.5000. Expect EUR support at 1.4573 the October 28th low with resistance at 1.4811 the November 3rd high.

GBP
GBP traded mixed erasing an early loss that was sparked by report that UBS posted a bigger than expected Q3 loss and RBS and Lloyds will receive additional government bailout funds. GBP was also pressured by all WSJ report which says that the BOE will likely expand asset purchases at Thursday's meeting and weaker than expected construction spending. CIPS October construction PMI falls to 46.2 from 46.7 last month .GBP downside was limited by report of better than expected UK home price data. Halifax house prices rose sharply last month. The Halifax house price rise may temper speculation about the size of the BOE's expansion of asset purchases. The BOE meet on Thursday and it remains unclear whether the BOE will elect to expand quantitative ease. In light of last week's report of a surprise decline in UK Q3 GDP the BOE may elect to expand its asset purchase plan at Thursday's policy meeting. The BOE meet on November 5th and are expected to decide whether to extend the current size of the asset purchase plan of £175 bln. Based on the UK GDP report it may be difficult for the BOE to refrain from adding additional stimulus. Recent GBP price action has found that the GBP benefits on BOE decision to hold the current level of asset purchases and weakens if the BOE elects to expand quantitative ease. A Reuter's poll of 62 economists shows that 19 expect no change in BOE asset purchases, 22 look for an increase of £25 bln and 21 look for 50 bln. The impact of the BOE decision may be limited as focus returns to risk appetite.

On November 4th October consumer confidence index will be released expected at 71.3 compared to 71 last month along with October's CIPS services PMI expected at 55.9 compared to 55.3 last month. On November 5th September industrial production will be released expected at -1% compared to -2.5% last month. The BOE meet on November 5th and it is uncertain whether the BOE will elect to expand its asset purchase program and if so by how much. On November 6th October PPI will be released expected unchanged at 0.5%.

The technical outlook for GBP is mixed as GBP fails to hold above 1.6400. Expect near-term support at 1.6200 with resistance at 1.6480 the November 2nd high.

CAD
CAD opened lower pressured by weaker equity markets and lower price of crude. Equity markets were pressured by concern about European bank troubles. Crude prices slipped below $77 a barrel. UBS reported a larger than expected Q3 loss and the UK government announced that it will take a bigger stake in RBS. European bank news generates concern that the global financial crisis has not been fully resolved. CAD downside was limited as the price of gold rises to a record high. Gold was supported by report that the IMF will sell 200 tons of gold to the Reserve Bank of India. Last week Canada reported that August GDP declined by 0.1%, 0.1% is rise was expected. This marked the first monthly GDP drop since May and signals weaker outlook for Canada's recovery. The GDP decline reflects weaker demand for energy and manufacturing and the impact of strong CAD on Canada's export demand. The GDP report may encourage speculation that the BOC will have to maintain accommodative policy for a longer period and that's BOC officials may step up for more intervention. The trade continues to debate whether the BOC will continue to try and talk the CAD lower. There were major Canadian economic releases in today's trade. This week's main focus will be Friday's release of Canada's unemployment. CAD price direction will continue to track crude and equity markets.

This week's Canadian economic calendar includes the November 5th release of September building permits expected at 2% compared to 7.2% last month along with IVEY PMI index for October expected at 62 compared to 61.7 last month. On November 6th October unemployment will be released expected unchanged at 8.3% with employment growth at 6K compared to 31k last month.

The technical outlook for CAD is negative as USD/CAD trades above 1.0600 and breaks trend line resistance. Look for near-term support at 1.0652 the October 30th low with resistance at 1.0930.

AUD
AUD traded sharply lower despite the RBA decision to hike rates 25bps to 3.5%. The rate hike was as expected and the RBA policy statement failed to confirm whether the RBA will continue to hike rates in December. Doubts about a December RBA rate hike and weaker global equity market trade sparked heavy selling and AUD. In its policy statement, the RBA indicated that they see the global economy resuming growth, the risk of serious economic contraction has passed and that China's growth is strong. The RBA also expects inflation to be near target and they plan to gradually reduce stimulus. AUD has been supported by RBA rate hike speculation and improving risk appetite sparked by optimism about the global recovery and the recent rally in global equity markets. Global equity markets traded sharply lower today pressured by concerns about European bank troubles and the AUD was pressured by a spike in risk aversion.

On November 4th September building approvals will be released expected 2.5% compared to -0.1% last month along with September retail trade expected at 0.6% compared to 0.9% last month.  

The technical outlook for the AUD is negative as AUD fails to hold above 9000. Expect AUD support at 8906 the November 2nd low with resistance at 9175 the October 30th high.