• USD: Higher, supported by fading risk appetite, new home sales unexpectedly drop
  • JPY: Higher, supported by repatriation flows as global equity markets decline
  • EUR: Lower, German import prices fall more than expected
  • GBP: Mixed, European equities trade sharply lower on bank concerns
  • CAD and AUD: AUD & CAD lower, Australia's CPI not strong enough to justify aggressive rate hikes

Overview     
USD and JPY traded higher Wednesday supported by declining equity markets and fading risk appetite. Investors are becoming concerned that the recent rally in equity markets and risky assets may be nearing a peak as governments and central banks begin to look at the possible timing of withdrawal of fiscal and monetary stimulus. Commodity currencies were pressured by equity market weakness. AUD reversed overseas gains that were inspired by report as expected Australian CPI. The Australian CPI data is not seen strong enough to justify aggressive RBA rate hikes. Fund manager Jim Rogers says that the rally in USD may last for a while as equity and commodity markets decline. US economic data was mixed with durable goods rising as expected and September new home sales posting an unexpected decline. The trade showed limited reaction to report that global consumer confidence is rising and that US consumer confidence is up first time since 2007 according to the Nielsen Global Consumer confidence survey. This report contrasts with Tuesday's report of weaker than expected US consumer confidence report released by the Conference Board. The week's main focus will be Thursday's release of US advanced Q3 GDP. US Q3 GDP is expected to show a sharp gain and confirm that the US is emerging from recession. Analysts at Goldman downgraded their forecast for GDP to 2.7% from an earlier forecast of 3%. FX price direction remains closely correlated to equities and risk sentiment.

US data:
October durable goods rose 1%, a 1.3% rise was s expected. Ex-transportation durable goods rose 0.9%. September new home sales declined by 3.6%, to 402K, a reading of 444k was expected. This marks the largest decline in new home sales since March.

Upcoming US data:
October 29th initial jobless claims for the week ending 10/24 we released expected that 525k compared to 531k last week. Advanced Q3 GDP will also be released on October 29th expected at 3.2% compared to -0.7% last quarter. On October 30th September personal income and consumption will be released expected at 0.1% and -0.5% respectively along with Chicago October PMI expected at 49.1 compared to 46.1 last month's and final October Michigan sentiment expected unchanged at 69.4.

JPY
JPY traded higher supported by repatriation flows sparked by weaker global equity market trade. The Nikkei closed 137 points lower in European equities were down 1.8%. The decline in equities dampened demand for high yield and riskier assets. JPY surged in cross trade to the AUD and EUR as investors fear that central bank and government preparations to withdraw economic stimulus will reduce demand for riskier assets. JPY was also supported by report that Japan's September retail sales rose by 0.9% and by rising JGB bond yields. JGB bond yields traded at two-month high Tuesday. The rise in JGB bond yields reflect improving economic outlook in Japan and concern about new bond issuance from the Japanese government. The Japanese government plans to increase spending to boost growth and will have to issue bonds to finance the spending increase. Japan's Finance Minister Fujii expressed concern about rising Japanese bond yields. The BOJ recently upgraded its outlook for Japan's economy. Japan's finance minister does not share the same optimism about Japan's economy as the BOJ. A rift is emerging between the finance ministry and BOJ over whether the BOJ should begin an exit strategy from its corporate bond support plan. If the BOJ ends the support plan too soon it may put the Japanese economic recovery at risk. BOJ exit from its bond purchase plan may generate additional fears about the impact of the withdrawal of stimulus on the global recovery.

On October 29th September industrial output will be released expected at 1% compared to 1.6% this last month. On October 30th September CPI will be released expected at -0.1% compared to 0.3% last month along with September household spending, unemployment housing starts and construction orders. Household spending is expected to fall 1% compared to a 1.9% rise last month. The unemployment rate is expected to rise to 5.7% from 5.5%. Housing starts are expected to rise 4% compared to -9.4% last month, and construction orders are expected to fall 30% and -25.2% last month.

Key technical levels to watch in USD/JPY include support at 90.77 the October 22nd low with resistance at 92.55 the September 21st high and 9330 the September 7th high.

EUR
EUR traded lower pressured by weaker equity market trade and report of weaker German import prices. The decline in global equity markets dampened risk appetite and sparked safe haven USD demand. German September import prices declined by 0.9%. The decline in German import prices indicates that inflation pressures remain in check and the data will encourage the ECB to maintain a steady policy bias. EUR was also pressured by report of a rise in Norway's unemployment rate to 3.2% from 3% last month and a sharp drop in European banking stocks with the Bank of Ireland shares down 15%. The trade is watching today's Norway's central bank policy meeting. Norway's central bank is expected to become the first European central bank to raise interest rates since the start of the global financial crisis. A rate hike from Norway may fuel additional concern about the impact of central bank withdrawal of stimulus on the global recovery in particular since Norway reported higher than expected rise in unemployment. This week's price action in the EUR generates speculation that the EUR may be vulnerable to further weakness. The EUR's failure to hold above 1.5000 may encourage a deeper downside technical correction.

On October 29th, German September retail sales will be released expected at 0.2% compared to -1.5% last month along with German October unemployment expected unchanged at 8.2%. EU October business climate will also be released on October 29th expected at -2.50 compared to -2.07 last month. On October 30th EU October HICP will be released along with October unemployment. The HICP is expected unchanged at -0.3% with the unemployment rate rising to 9.7% from 9.6% last month.

The technical outlook for the EUR is mixed as the EUR fails to hold above 1.5000. Expect EUR support at 1.4675 the October 12th low with resistance at 1.4928 the October 27th high.

GBP
GBP traded mixed initially pressured by a sharp decline in European equities and selling in cross trade to JPY.GBP/JPY traded 1%lower. The main focus for GBP trade apart from the risk appetite is BOE policy outlook. 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 next week's policy meeting. An official with the UK Treasury and member of the opposition party Philip Hammond said that it is essential that the BOE maintain accommodative policy to ensure a sustainable recovery in the UK. Hammond said the conservative opposition party wants the BOE to keep interest rates low and he pledged to cut the UK deficit. 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. The BOE's decision will be crucial to the outlook for the GBP because a number of central banks and governments are preparing to withdraw stimulus. 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. Monday, the BOE's Blanchflower said that the BOE may expand its asset purchase program by another £50 bln. The Sunday Times however carried a piece warning the BOE not to panic over Friday's GDP report. GDP is seen as a lagging indicator.  Weak UK Q3 GDP has increased the risk that BOE will expand QE at the November meeting. The only economic data released in the UK today was that September house prices rose by 0.9%.

On October 29th September consumer credit, money supply mortgage applications and mortgage lending will be released. The consumer credit is expected at -0.299 bln compared to -0.309 bln last month with mortgage approvals expected at 50k and mortgage lending expected at 1.0210 bln. On October 30th, October GFK is expected at -14 compared to -16 in September. 

The technical outlook for GBP is mixed as GBP trades below 1.6400. Expect near-term support at 1.6100 with resistance at 1.6440 the October 27th high.

CAD
CAD traded at a three week low versus the USD pressured by weaker equity markets, fading risk appetite and lower crude prices. Comments from BOC Governor Carney had limited impact. Carney said that he expects the USD to remain the world's reserve currency. He went on to say that intervention is not effective unless backed up by policy and is encouraged by recent economic data from Canada chose improvement in housing and employment. CAD traded lower to start the week pressured by a statement from the IMF warning that CAD strength could slow the Canadian recovery and by weaker oil prices. The IMF expects Canada's economy to contract by 2.5% 2009 and grow by 2% in 2010. The IMF noted that the Canadian economy has shown resilience even in the face of strong CAD. CAD has been underperforming since last week's BOC policy meeting and the release of the Monetary Policy Report Thursday. The BOC elected to hold rate policy unchanged at 0.25% and expressed concern that the strength of the CAD has offset the recent recovery in the Canadian economy. In a press conference following the release of the Monetary Policy Report BOC Governor Carney said that intervention is an option. Verbal intervention has helped to slow the CAD rally. Today comments by Carney appear to reduce the risk of physical intervention.

This week's Canadian economic calendar includes the October 29th release of September IPPI and RMPI expected that 0.3% and 2.8% respectively. On October 30th of August GDP will be released expected at 0.1% compared to flat last month.

The technical outlook for CAD is negative as USD/CAD trades above 1.0600. Look for near-term support at 1.0590 the September 17th low with resistance at 1.0825 the October 5th high.

AUD
AUD traded sharply lower pressured by weaker equity market trade, diminished risk appetite and speculation that RBA rate hikes may be less aggressive. A sharp selloff in global equity markets sparked liquidation of higher yield assets like AUD. There is concern that as central banks and government prepare to withdraw economic and fiscal stimulus that the global recovery may be at risk. AUD was also pressured by a sharp selloff versus the JPY as investors move out of high yield assets and look for safety in the JPY. AUD/JPY cross traded 2% lower. AUD initially traded higher early overseas trade supported by report that Australia's Q3 CPI rose by 1.3% compared to 1.5% last quarter. This marked the smallest gain in Australia's CPI since second quarter of 1999. The smaller than expected rise in Australia's CPI may dampen speculation that the RBA will hike interest rates aggressively in the months ahead. The RBA raised rates 25bps to 3.25% at the start of October and AUD has been trading near a 14 month high supported by speculation that the RBA would continue to hike rates in November and December with a number of analysts looking for possible 50bps as early as November. RBA watcher McCrann sees less of a chance 50bps rate hike from the RBA if inflation remains in check. Today's Australia's CPI report suggests that RBA rate hikes may less aggressive. The next RBA policy meeting will be held on November 3rd. A 25 bps rate hike is expected but today's CPI report may contribute to uncertainty about the RBA policy outlook. RBA policy uncertainty may limit AUD demand.  

 On October 30th September private credit will be released expected at 0.2% compared to 0.1% last month.

The technical outlook for the AUD is mixed to as AUD fails to hold above 9200. Expect AUD support at 8983 the October 12th low with resistance at 9207 the October 28th high.