• USD: Higher, Russia plans to maintain current holdings of US treasuries, FDIC seeks insurance prepayment
  • JPY: Higher, Japan supports USD reserve status and will not rule out intervention
  • EUR: Lower, Trichet warns of slow recovery and says interest rates are appropriate/exit tied to price risk
  • GBP: Higher, CBI retail sales come in stronger than expected
  • CAD and AUD: AUD & CAD lower, RBA rates may rise by year end, BOE warns on CAD strength

Overview     
USD traded mixed Tuesday with GBP supported by report of stronger than expected September CBI retail sales, JPY pressured by statement from Japan's Finance Minister Fujii that he has not ruled out intervention in Forex markets, and EUR trading lower pressured in cross trade to the GBP and by report that Russia cut interest rates. The Russian central bank cut its main interest rate to 10% from 10.5%. The Russian rate cut is seen as a sign that the impact of the global crisis may not have completely passed. EUR was also pressured by statement from ECB President Trichet that he supports a strong USD. Russia also said they plan to maintain their current level of US reserves which is around 30%. The commodity currencies were mixed with the AUD initially supported by RBA rate hike speculation. RBA watcher McCrann says he expects the RBA to begin to hike rates in November or December. Commodity currencies turned lower tracking weaker US equities. There was limited reaction to a statement from World Bank President Zoellick warning that there are viable alternatives emerging to the USD reserve currency status and that the EUR could be a respectable alternative to the USD. USD maintained a modest bid save for losses versus the GBP with support from a report that the FDIC will ask US banks to prepay insurance to help the FDIC bridge its funding gap and in reaction to a statements from Japanese officials that Japan should support the USD reserve status. US economic data was mixed with the Case Shiller Home Price Index declining by less than expected and consumer confidence posting an unexpected drop. USD traded higher after the release of the unexpected drop in consumer confidence. The report generates concern about the strength of the US recovery and sparked safe haven USD demand. USD was also supported by hawkish comments from the Fed's Fisher. Reuters reports that the Fed's Fisher said that when it comes time to tighten the Fed will move as quickly and intensely as it pursued monetary accommodation.

Today's US data:
July Case Shiller Index declined by 13.3%, a reading of -14.2% was expected. September consumer confidence declined to 53.1, a reading of 57 was expected.

Upcoming US data:
On September 30th September ADP employment will be released expected at -212k compared to -298k last month. Final Q2 GDP will also be released on September 30th expected at -1.1% along with September Chicago PMI expected 51.2 compared to 50 last month. On October 1st initial claims for the week ending 9/26 will be released expected at -525k compared to -530k last week. August personal income and consumption will also be released on October 1st expected at 0.1% and 1% respectively. August construction spending, September ISM index and pending home sales index will also be released along with September domestic auto sales on October 1st. Construction spending is expected unchanged  at -0.2%, the ISM index is expected 54 compared to 52.9 last month, pending home sales are expected at 99.1 compared to 97.6 in July. On October 2nd September unemployment will be released expected 9.8% compared to 9.7% with nonfarm payrolls at -188k compared to -216k last month. August factory orders will also be released on October 2nd expected at 1.1% compared to 1.3% last month.

JPY
JPY drifted lower pressured by a statement from Japan's Finance Minister Fujii that he won't rule out intervention and by report of a decline in August CPI. Since Japan's new government came to power at the end of August there have been numerous and conflicting statements from Japanese officials about JPY intervention policy. The previous Japanese government had relied on a weak JPY policy to help support Japan's export competitiveness. The new Japanese government plans to shift Japan's dependence on export led growth to domestic. This transition would require less of a need for a weak JPY. Investors sensing that Japan was abandoning weak JPY and JPY intervention policy have rallied the JPY to an eight-month high versus USD. Tuesday Japan's Finance Minister Fujii tried to slow the rate of the JPY rally with his statement that the Japanese government will take action if FX moves of abnormal. Fujii went on to say that Japan should support USD reserve status. We suspect that Japan will be more concerned about the pace of the JPY rally as opposed to specific price level. If the JPY were to continue the rapid rise it would likely increase the odds of rhetorical intervention or possible physical intervention. Because of the shift in focus by Japan's government to domestic led growth any intervention in Forex markets from Japan would likely be limited to smoothing operations to slow the pace of the JPY rise. Japan's August core CPI fell 2.4%. The decline in the CPI was in line with expectations but the CPI report may revive concerns about deflation in Japan. Because the threat of aggressive intervention by Japan to try to weaken the JPY has been greatly diminished investors will likely continue to use intervention inspired breaks in the JPY as a buying opportunity. The timing of today's statements by Fuji on Japanese intervention appeared to coincide with the USD/JPY decline below 90.00. This could be a sign that Japanese officials would like the JPY to stabilize at this level.

On September 30th August industrial output will be released expected at 1.9% compared to 2.1% last month. Housing starts and construction orders for August will also be released on September 30th.  Housing starts are expected to fall 0.8% compared -0.4% last month. Construction orders are expected to fall by 24.5% compared to -42.8% last month. On October 1st the September Tankan Index will be released expected at -35 compared to

-48 last quarter with CAPEX spending expected at -11%. August retail sales will also be released on October 1st expected at 0.4% compared to -0.2% in July. On October 2nd August unemployment and household spending will be released. The unemployment rate is expected to rise to 5.8% from 5.7% and household spending is expected to rise by .3% compared to a 1.3% decline last month.

Key technical levels to watch in USD/JPY include support at 88.24 the September 28th low with resistance at 91.63 the September 24th high.

EUR
EUR traded lower pressured by report that the Russian central bank cut interest rates, selling in cross trade to the GBP and in reaction to a statement from ECB President Trichet that he supports a strong USD. The Russian central bank lowered interest rates to 10% from 10.5%. The rate cut is seen as a sign that more work needs to be done to boost the Russian recovery. The Russian recovery outlook may have implications for the recovery outlook in Europe. EUR was also pressured by report that Russia says it will maintain its current share of US reserves of around 30% and does not plan to diversify into AUD or CAD because of liquidity concern. EUR decline in cross trade to the GBP reflects today's report of much better than expected UK CBI retail sales for September and mixed EU economic data. EU September economic sentiment improved 82.8 from 80.8 last month, September industry sentiment improved -24 from -25 and consumer sentiment improved -19 from -22. EUR was also pressured by ECB President Trichet's statement before the European Parliament that he EU growth outlook is surrounded by uncertainty and recovery will come at a gradual pace. Trichet went on to say that interest rates are appropriate and that the ECB will not exit monetary support measures until inflation risks emerge. Monday German CPI was reported to have contracted by 0.4%. The German CPI report confirms limited near-term risk of inflation pressure. Trichet's comments are seen as dovish and dampening the risk of a near-term ECB rate hike. Monday ECB's Nowotny said EU recession is over but growth will remain sluggish and there is no need to raise rates anytime soon. He went onto say that inflation price growth will remain below the ECB's 2% target for the next two years. The ECB has tied its exit strategy to inflation risk and price stability. Diminished ECB rate hike threat may limit demand for the EUR. The failure to hold rallies above 1.4600 points to further downside risk for the EUR.

On September 30th German unemployment rate will be released expected at 8.4% compared to 8.3% last month. On October 2nd EU PPI will be released expected at -0.6% compared to -0.8% last month.

The technical outlook for the EUR is mixed as EUR fails to hold last weeks rally above 1.4700. Expect EUR support at 1.4515 the September 14th low with resistance at 1.4748 the September 25th high.

GBP
GBP traded higher versus the USD and rebounded in cross trade supported by report of much better than expected CBI retail sales for September. UK September CBI retail sales rose to +3 from -16 last month. The rise in CBI sales suggests that the UK recession may be ending. Today's other UK economic reports were mixed with mortgage approvals above expectation and consumer spending below expectation. August mortgage approvals rose by 52.3k, the trade was looking for rise of 51.5k and consumer credit declined for the second month in a row to -0.309bln from -0.203bln last month. M4 money supply rose 0.1% and final Q2 GDP was -0.6%. The GDP decline was less than expected. These reports follow Monday's report that UK house prices rose at the fastest pace in two years. Monday, GBP was pressured by speculation that the BOE is considering lowering its remuneration rate for commercial banks. Today's GBP recovery may be short-lived because of speculation that BOE may need to take additional measures to try to reduce tight credit market conditions. Tight credit markets conditions are seen as a continued threat to the UK recovery. GBP gave back 2/3 of the overseas gains after the release of weaker than expected US consumer confidence.

On September 30th September GFK survey will be released expected at -20 compared to -25 last month. On October 1st September CIPS PMI manufacturing index will be released expected at 50.2 compared to 49.7 last month.

The technical outlook for GBP is negative as GBP trades below 1.6000. Expect near-term support at 1.5770 the September 28ht low with resistance at 1.6140.

CAD
CAD traded lower pressured by concern about the global recovery and threat of intervention. Today's surprise Russian rate cut, weaker oil prices and weaker than expected US consumer confidence sparked concern about the strength of the global recovery. Tuesday BOC Governor Carney warned that recovery may be at risk when the stimulus runs out and he repeated his warning that strong CAD could hurt growth and limit inflation. Carney's comments suggest that the Canadian recovery may be fragile. Last week Canada's PM Harper said the Canadian economic recovery remains extremely fragile and he is concerned that the weak labor market will weigh on economic activity. Last week the BOC reaffirmed its commitment to keep interest rates at their current level through mid-2010. CAD traded to the day's lows after the release of an unexpected drop in US September consumer confidence and hawkish comments form the Feds Fischer. The drop in US consumer confidence generates concern about US economic recovery. Fischer said that when the Fed tightens the Fed will move with equal speed and intensity as it pursued with monetary accommodation. No major Canadian economic data was released in today's trade. CAD will continue to track the direction of equity and oil markets. Focus turns to this week's release of Canada's producer prices and GDP.

This week's Canadian economic calendar includes the September 30 release of August IPPI and RMPI.IPPI is expected to fall by 0.1% compared to -0.5% last month and RMPI  is expected at -2% compared to-3.8% last month. July GDP will also be released on the 30th expected at 0.1%.

The technical outlook for CAD is negative as USD/CAD trades above 1.0900. Look for near-term support at 1.0794 the September 29th low with resistance at 1.1075 the September 3rd high.

AUD
AUD traded mixed initially supported by RBA rate hike speculation with early gains erased by weaker US equity market trade and hawkish comments from the Feds Fischer. The RBA's Richard warned of the risk of a housing bubble and said that interest rates cannot stay low indefinitely. Richard's comments echo comments made by RBA governor Stevens on Monday. Stevens repeated his previous statement that interest rates will eventually need to rise and inflation target would be the guide for future rate adjustments. Stevens is not sure if interest rates will be hiked before the jobless rate peaks.  RBA watcher McCrann said expects the RBA to hike rates in November or December. AUD turned lower in US session after the release of an unexpected decline in US September consumer confidence and comments from the Feds Fischer. The decline in US consumer confidence sparked selling of equities and generates concern that the US economic recovery will be fragile. Fischer said that the Fed will hike rates as quickly and is intensely as they pursued accommodative policy when the time comes to exit quantitative ease. AUD price direction will continue to track risk sentiment and the outlook for the global economy. AUD traded at a one year high last week of 8778 supported by RBA rate hike speculation and improving optimism about the global recovery. AUD has not taken out the 8778 level. Failure to take on the 8778 level could signal a technical divergence and spark selling of the AUD.

This week's Australian economic calendar includes the September 30th release of August building approvals expected at 2% compared to -3.9% last month. August retail trade also be released on September 30th expected at 1% compared to -1% last month. On October 1st August trade balance will be released.

The technical outlook for the AUD is mixed as AUD trades below 8700. Expect AUD support at 8585 the September 21st low and 8528 the September 8th low with resistance at 8763 the September 29th high and 8820 the August 22nd 2008 high.