• USD: Higher, risk appetite drops as stocks and commodities decline, fear of double dip recession
  • JPY: Higher, supported by safe haven demand, gains in cross trade
  • EUR: Lower, German Wiseman said Germany may be at risk to double dip recession in late 2010
  • GBP: Lower, retail sales improve and public-sector borrowing rose more than expected
  • CAD and AUD: AUD & CAD lower, tracking weaker equity and commodity prices, RBA policy uncertainty

Overview     
A wave of pessimism hit the global equity and commodity markets Thursday sending the USD sharply higher as investors trim risk exposure. President Obama's warning that too much US debt could increase the risk of a double dip recession, a similar warning from the German Wiseman that Germany could be at risk for a double dip recession in late 2010 and a statement from Treasury Secretary Geithner that the credit crunch is not over appeared to have dented enthusiasm about the global recovery. Wednesday's report of the 10.6% drop in US housing starts,  today's report of a sharp rise in UK public sector borrowing and a statement from Canada's finance minister that the Canadian economy has not yet recovered also contributed to uncertainty about the global recovery. Today's wave of pessimism came even as the OECD doubled its growth forecast for 2010, the UK reported better than expected retail sales, the RBA says lending is picking up and the Baltic freight Index rose to a new high for 2009. The OECD expects global growth to expand by 1.9% in 2010 and 2.5% 2011. The OECD also said that the Fed and ECB should maintain accommodative policy well into late 2010.  US economic data was mixed with jobless claims reported close to expectations, and LEI rose by slightly less than expected. The Philly Fed came in well above expectations.

It is not clear whether today's price action marks a shift in overall risk appetite or reflects investor decision to begin to liquidate positions and lock in profits before year-end. Although the Fed and most of the G-20 have confirmed that they do not plan to withdraw fiscal and monetary stimulus until global recovery is secured, some investors may be coming to the conclusion that there may not be much more upside potential in the global equity and commodity markets without the injection of new liquidity as the impact of stimulus begins to fade.

Today's US data:
Jobless claims for week ending 11/14 were unchanged at 505k. Continuing claims dropped to 5.61mln from 5.65mln last week. The four week moving average for initial claims is at its lowest level for the year. Continuing claims are at the lowest level since March 14th. October LEI rose by 0.3%, a rise 0.4% was expected. The November Philly Fed rose to 16.7, a reading of 12.5 was expected.

Upcoming US data:
No major US economic data is scheduled for release on Friday.

JPY
JPY traded higher supported by safe haven flows sparked by a drop in global equity markets and a wave of pessimism about the global recovery. JPY was also supported by sharp gains in cross trade with the JPY rallying 2% against the AUD and over 1% against the GBP. JPY gains versus the AUD are attributed to a sharp pullback in demand for high yield currencies sparked by today's drop in risk appetite. GBP was pressured by report of much larger than expected UK net public sector borrowing in October There was limited reaction to statements from Japan's Finance Minister Fujii about the strengthening of the JPY. When Fujii became the new finance minister of Japan in late August he made numerous statements that appeared to indicate that he believes that a strong JPY is in the best interest of the Japanese economy. The new Japanese government plans to try and rely less on exports and more on domestic demand for growth which may mean that Japanese officials are less concerned about the impact of the JPY and export trade. Recent economic data from Japan's shows that the rate of decline in Japanese exports has slowed but export growth remains weak. A strengthening JPY makes Japanese exports less competitive. The more recent statements from Japan's finance minister about the JPY have been similar to the ones he made today where he indicated that he had never meant to support a rise in the JPY and that he is opposed to currency devaluation policy.

Key technical levels to watch in USD/JPY include support at 88.01 the October 7th low with resistance at 90.40 the November 13th high.



EUR
EUR traded lower pressured by a drop in risk appetite as global equity markets decline and in reaction to a warning from a German think tank that Germany may face a double dip recession in late 2010. The OECD expects the US economy to expand by 2.5% in 2010 and the EU economy to expand by 0.9%. The EUR was pressured by speculation that the US economy will expand faster than the EU economy in 2010 according to the OECD.   In addition, the OECD says that the ECB should maintain accommodative policies in 2010 and withdraw the emergency support measures gradually as the economy recovers. The USD may have also benefited from a statement from the Fed's Bullard that the Fed may soon start tightening financial conditions by selling assets. If the Fed begins withdrawal of stimulus too soon it could put the US and global recovery at risk. Some of today's drop in risk appetite may reflect investors beginning to lock in equity market profits before year-end. No major EU economic data was released in today's trade. Wednesday the EU reported that the current account slipped to deficit last month and construction output fell sharply since in September. These reports suggest that the EU recovery is likely to be weak.

The technical outlook for the EUR is mixed as the EUR falls below is 1.4900. Expect EUR support at 1.4808 the November 17th low and 1.4740 with resistance at 1.4999 the November 17th high.

GBP
GBP traded lower pressured by weaker equity market trade and report of a larger than expected rise in UK public sector borrowing last month. The UK public sector borrowing rose to £11.4bln in October, a rise to 6.1bln was expected. Earlier in the quarter ratings agencies warned that the UK AAA debt rating may be at risk if debt continues to rise. Today's UK budget data may revive fears about the UK government debt rating. There was limited reaction to a statement from the BOE's Fisher about quantitative ease. Fisher said that the BOE may pause in its asset purchases or vote to expand asset purchases at the February policy meeting. The MPC minutes for the November BOE policy meeting were released Wednesday and the minutes showed that the BOE is split on whether to expand its asset purchases or leave the asset purchases at the current level. BOE board member Myles called for a £40bln expansion in asset purchases to help ensure UK economic recovery. BOE board member Dale warned about the risk of expanding purchases and how it may be costly to undo the impact of the additional stimulus. The OECD says that the BOE should hold rates at record low level until 2011 to ensure a sustainable recovery. GBP downside was limited by report of better than expected UK retail sales. UK October retail sales rose by 0.4%.

The technical outlook for GBP is mixed as GBP trades below 1.6700. Expect near-term support at 1.6515 the November 12th low with resistance at 1.6875 for November 16th high.



CAD
CAD traded lower pressured by a spike in risk aversion as equity markets slide and in reaction to weaker commodity prices. The trade is debating whether today's drop in equity markets and commodities reflects a significant shift in risk appetite or is more reflection of investors locking in profits before year-end concluding that the liquidity driven market gains may be nearing a peak. CAD downside was limited by report of a surge in investment flows to Canada in September and report of the fourth consecutive monthly rise in Canada's leading index. Net investment flows to Canada rose by 13.6 bln, an inflow of just 3bln was expected. The leading index rose by 0.7% Canada's wholesale sales came in lower than expected at 0.2%, a 1% rise was expected. Wednesday, Canada reported that core inflation rose for its first time in five months. BOC members are focused on Canada's core inflation rate and the modest rise in the October CPI is unlikely to encourage the BOC to make any changes in their plans to maintain current record low yields through June 2010. The trade is digesting comments from Canada's Finance Minister Flaherty that the Canadian economy has not yet recovered. His comments add to speculation that the BOC will remain on hold into at least June of 2010.

The technical outlook for CAD is mixed as USD/CAD trades above 1.0600. Look for near-term support at 1.0565 the November 19th low with resistance at 1.0780 the November 9th high.



AUD
AUD traded sharply lower pressured by weaker equity market trade and uncertainty about RBA policy outlook. Investors are less certain about RBA rate hike in the December. AUD price direction has been most sensitive to sentiment about the global recovery and the outlook for RBA policy. Today's AUD decline is somewhat of a surprise in light of the fact that the OECD raised its growth forecast for the global economy in 2010 and Australia reported that August AWOTE rose by 0.9%%. In addition, the RBA indicated that business lending was picking up and the Baltic Freight Index closed at its highest level for the year Wednesday. The rise in the Baltic Freight Index is seen as a positive sign for global trade and the economy. There was limited reaction to report that the RBA sold AUD307mln in October. AUD has been struggling most of the week since the release of the RBA policy minutes which appeared to have a less hawkish bias.  Some analysts note that the RBA policy minutes released Tuesday suggested that the pace of tightening is open to question. There could be an argument that the RBA could hike rates 25 bps in December and pause. RBA rate hike speculation is already discounted by the recent rally in AUD. Today's price action suggests that the AUD is vulnerable to a deeper technical correction.

The technical outlook for the AUD is mixed as the AUD falls below 9200. Expect AUD support at 9045 the July 13th low with resistance at 9378 the November 17th high.