• USD: Lower, jobless claims fall to lowest level since January, stocks rise in reaction to Alcoa's earnings
  • JPY: Higher, no sign yet of MOF intervention, current account surplus widens less than expected
  • EUR: Higher, ECB unchanged, German industrial production rises
  • GBP: Higher, BOE unchanged, maintains current level of QE
  • CAD and AUD: AUD & CAD higher, Australia unemployment rate unexpectedly drops

    Overview     
    USD traded lower Thursday as the AUD rallies to a fresh 14 month high in reaction to report of an unexpected decline in Australia's unemployment rate. The USD was also pressured by sharp gains in the US equity market sparked by report of better than expected earnings forecast from Alcoa. The rally in US equities contributes to improving risk appetite and optimism about the US and global recovery. The ECB and BOE left monetary policy unchanged as expected. International concern about the decline of the USD is growing. Tuesday the UN repeated its call to create a new reserve currency to replace the USD. It was reported that central banks in South Korea, Taiwan, Philippines and Thailand were intervening to try to limit today's USD decline. And, the Financial Times reports that President Obama is under fire over the decline of the USD. US jobless claims declined more than expected falling to the lowest level since January. Continuing claims were also sharply lower. USD remained on the defensive after the jobless claims report. The data raises hope that the US economy is recovering. USD experienced a modest and temporary recovery versus the EUR in reaction to comments from ECB President Trichet that US support for strong USD is important and there is no campaign for EUR to become a reserve currency. The USD is likely to continue to weaken unless there is a credible threat of coordinated intervention or the Fed signals the potential for a rate hike.

    Today's US data:
    Jobless claims for the week ending 10/30 declined by 33k to 521k, a reading of -545k was expected. Wholesale inventories for October declined by 1.3%.

    Upcoming US data:
    On October 9th August trade balance will be released expected at -32 bln compared to -31.92 bln last month.

    JPY
    JPY traded higher supported by broad USD weakness and indication that Japanese officials are unlikely to intervene at the current level. The most recent comments from Japan about the possibility of intervention were made by Japan's Finance Minister Fujii Wednesday. Fujii said that the current JPY level was consistent with acceptable market activity and that JPY rally reflects weak USD and the impact of low US interest rates. Fujii went on to say that Japan is prepared to intervene if JPY moves become abnormal but it's best to let the markets determine FX levels. Fujii's comments were seen as a signal that Japanese officials are comfortable with JPY strength. In addition the IMF says that JPY strength reflects fundamentals. The trade is likely to continue to test how far Japan is willing to allow the JPY to rise with the key question, what does Japan consider as abnormal price movement for the JPY. We suspect that the risk of intervention from Japan will remain low unless the pace of the JPY rally accelerates. Rumors continue to circulate that the MOF may be bidding for USD/JPY around 8800. JPY gains were limited by report of a smaller than expected August current account surplus. Japan's August current account surplus rose 10.4% to ¥1.17 trln, market consensus was for a rise of 12.7% to ¥1.96 trln. Exports were reported down 37.1% and imports declined by 42.8%. The continued weakness in Japan's export sales may intensify concern about the impact of the JPY rise on exports and increase pressure on the new Japanese government to take action to slow the rate of the JPY rally. The MOF released a study which concluded that the impact of strong JPY was limited for Japanese companies' earnings.

    On October 9th August machinery orders will be released expected at 3.2% compared to -9.3% last month.

    Key technical levels to watch in USD/JPY include support at 88.01 the October 7th low with resistance at 90.13 the September 30th high.

    EUR
    EUR traded higher supported by report of better than expected German industrial production and the ECB decision to leave monetary policy unchanged. German August industrial production rose by 1.7%. The rise in German production is an indication that the EU economy continues to improve. The ECB left monetary policy unchanged as expected. In the press conference following the ECB rate decision ECB President Trichet said that interest rates are appropriate and that it's too early to draw conclusions about its bank auctions. His comments suggest that it's too soon to consider an exit strategy from the ECB's unconventional policy measures. Earlier this year the ECB extended its auctions from six months to 12 months for bank loans.  Recent demands for loans at the auctions have been weak. The ECB essentially is allowing banks to borrow below its 1% overnight rate. Last week the EU banks took €75 bln loans from the ECB and a total of €400 in June. This is an indication that the ECB is not getting a big increase of liquidity from its bank auctions.  Trichet says there is no campaign for international use of the EUR. Trichet repeated his call for a strong dollar. ECB officials have become increasingly concerned about weak USD. The EUR declined from day's highs after Trichet's comments about strong USD and EUR reserve status.

    German August trade balance will be released on October 9th expected at 12.8 bln compared to 12.4 bln Last month.

    The technical outlook for the EUR has improved as EUR trades back above 1.4700. Expect EUR support at 1.4650 with resistance at 1.4804 the September 24th high.

    GBP
    GBP traded higher as the BOE elects 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. Prior to the November meeting the BOE will receive updated inflation data and this will help the central bank evaluate the impact of quantitative ease. At the August BOE policy meeting three members of the policy board including BOE Governor King voted for an additional increase in the asset purchase program of £25 bln. At the September BOE policy meeting the vote was unanimous to maintain the current level of asset purchases. There remains an outside chance that the BOE will decide to expand quantitative ease by £25 bln to £200 bln at the November policy meeting. Expansion of quantitative ease will largely depend on upcoming UK economic and inflation data. The minutes for today's 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 expanding quantitative ease in November. GBP was supported by BOE's decision to maintain current level of its remuneration rate it pays on commercial bank assets at 0.5%. Focus turns to Friday's release of UK PPI and trade balance.

    On October 9th September PPI will be released expected flat compared to 0.2% last month. August trade balance will also be released on October 9 expected at -6.234 bln compared to-6.479 bln last month.

    The technical outlook for GBP has improved as GBP trades above 1.6000. Expect near-term support at 1.5858 the October 7th low with resistance at 1.6127 the September 30th high.

    CAD
    CAD traded higher supported by improving risk sentiment and the record rise in the price of gold. Canada's September housing starts rose by 150.1k. Canadian housing starts report was close to market expectation and had limited impact on the CAD trade. CAD is trading at one year high supported by optimism about the global recovery and a rally to a new record high in the price of gold. Tuesday's surprise RBA rate hike contributes to in today's report of an unexpected drop in Australia's unemployment rate fuels optimism about the global recovery. Gold traded above $1050 an ounce reflecting weak USD. Tuesday, Canada reported a sharp improvement and manufacturing PMI and a modest rise in August building permits. Canada's September Ivey PMI rose to 61.7 from 55.7 last month, a reading of   Canada's August building permits rise 7.2%, the trade was looking for an 8% rise. These reports contribute to optimism about the Canadian economic recovery. Focus turns to Friday's release of Canadian unemployment and trade balance.

    On October 9th September unemployment will be released expected to rise 0.1% to 8.8% to fund growth at 5k compared to 27k last month along with August trade balance expected at -0.95 bln compared to -0.750 bln last month.

    The technical outlook for CAD is positive as USD/CAD trades below 1.0600. Look for near-term support at 1.0335 the September 29th 2008 low with resistance at 1.0715 the October 6th high.

    AUD
    AUD traded at fresh 14 month high supported by report of unexpected decline in Australia's unemployment rate and a record rise in the price of gold. Australia's September unemployment rate declined by 0.1% to 5.7% and Australia created 40.6k in new jobs. The trade had expected a rise in Australia's unemployment rate to 5.9% and 10k loss of jobs. The surprise improvement in Australia's employment rate will fuel speculation that the RBA could elect to make additional rate hikes in November in response to the strengthening of the Australian domestic economy. Tuesday, the RBA raised interest rates 25 bps to 3.25% and signaled that more rate hikes may be needed. In the policy statement accompanying the RBA rate decision the RBA said that they see the global economy resuming growth that China's growth is strong and that inflation was likely to move close to target. The RBA rate hike contributes to optimism about the global recovery. AUD will remain well supported on breaks by RBA rate hike speculation with a number of analysts now looking for AUD to reach parity with the USD in the months ahead.

    The technical outlook for the AUD is positive as AUD rallies above 9000. Expect AUD support at 8924 the October 8th low with resistance at 9075 the August 8th high and 9200.