• USD: Higher, jobless claims rise, leading indicators rise, equity markets trade higher after LEI
  • JPY: Lower, Japan's exports fall more than expected, BOJ may soon end it's bond purchases plan
  • EUR: Lower, EU current account swings to deficit as export sales slow
  • GBP: Lower, UK retail sales disappoint, BOE's Tucker says QE may be expanded if needed
  • CAD and AUD: AUD & CAD lower, China's monetary and fiscal stimulus may soon be withdrawn

Overview     
USD rebounded from a 14 month low supported by a dip in risk appetite and an unexpected rise in US jobless claims. China reported Q3 GDP growth of 8.9%. USD was also supported by China's GDP report as the continued strength of China's economy may encourage China to begin to withdraw fiscal and monetary stimulus. JPY traded lower pressured by report of a bigger than expected drop in Japan's export sales during September. GBP was pressured by report of that UK retail sales were flat and a statement form the BOE's Tucker that quantitative ease will be expanded if needed. EUR experienced light selling after the release of EU current account which swung back to deficit in August as exports fall. Commodity currencies trade lower pressured by weaker equity market trade and liquidation pressure after the release of Chinas GDP. Some analysts had expected China's Q3 GDP to rise above 9%. US economic data was mixed with jobless claims posting an unexpected rise and leading indicators higher than expected. USD rebound was limited by a statement from Pimco's Clarida that a disorderly decline of the USD cannot be ruled out and a warning from Moody's about US deficit and its AAA debt rating. An analyst with Moody's warns that the US could lose its AAA bond rating status if it does not take action on the rising budget deficit. The main drivers for the Forex trade remain risk appetite and Fed policy outlook. A majority of the trade expects the USD to continue to fall and it's just a question of how fast. Today's USD rebound will likely be short lived.

US data:
Jobless claims for week ending 10/17 rise 11k to 531k, a reading of 514k was expected. September LEI rose 1%, a rise of 0.8% was expected.

Upcoming US data:
On October 23rd September existing home sales will be released expected at 5300k compared to 5100k last month.

JPY
JPY traded lower pressured report of a larger than expected drop in Japanese export sales and press report that suggest that BOJ is considering an exit from its corporate bond purchase plan. Japan's September trade surplus narrowed with exports down 30.7% and imports down 36.9%. The decline in exports may increase pressure on Japanese officials to take action against JPY strength. Recent strengthening of the JPY reduces Japans export competitiveness. Reuters reports that the BOJ is leaning towards ending its corporate debt buying plan. According to the Reuters report the decision by the BOJ to end this program may come as early as October 30th policy meeting. The new Japanese government has called upon the BOJ to continue with its accommodative monetary policy measures to ensure the continued recovery in Japan's economy. The BOJ is widely expected to keep interest rates low and have indicated that an exit from the corporate bond buying program is separate from monetary policy decisions. Last week, BOJ Governor Shirakawa said that the bond support program could be about to end in December. The BOJ bond support program allowed Japanese banks to borrow at 0.1%.

Key technical levels to watch in USD/JPY include support at 90.08 the October 20th low with resistance at 92.08 the September 22nd high.

EUR
EUR drifted lower in reaction to weaker equity market trade and report that the EU current account turned to deficit in August. Weaker equity market trade dampened risk appetite and encouraged USD demand. EU August current account swung back to deficit of 1.3 bln compared to 3.7 bln surplus in July. Exports fell 2.7% and imports rose 1.3%. The EU current account report generates concern about EU export demand and may be an indication that the economic recovery in Europe remains fragile. Despite today's release of the EU current account report the ECB's Weber said that he believes the worst of the financial and economic crisis appears to have passed. EUR is struggling to hold gains above 1.5000 as EU and ECB officials express concern about the strength of the EUR. It's not clear what the long-term impact will be of increased EU and ECB rhetoric expressing concern about EUR strength. ECB President Trichet expressed concern about excessive FX volatility, French Finance Minister Largarde says the Eurogroup reiterated its desire for strong USD and an advisor to French President Sarkozy said that at some point EUR strength will become unbearable and EU would have to act. According to this advisor 1.5000 EUR is a disaster for the EU economy. It remains unlikely that EU officials are prepared to authorize physical intervention to try and slow the rate of the EUR but verbal intervention is likely to intensify if the EUR continues to rise. EU and ECB are concerned that the strength of the EUR will exert more deflationary pressures, erode export demand and could choke off your recovery. Today's EU current account report is confirmation of fears about the impact of strong EUR on exports. EU growth, in particular Germany are highly dependent on exports and weak USD/strong EUR is offsetting the impact of the current recovery in global growth. This week's key focus will be the release of German IFO and EU industrial orders.

On October 23rd EU October manufacturing PMI will be released expected at 49.5 compared to 49.3 last month along with October services PMI expected at 51.2 compared to 50.9 last month. German October IFO index will also be released on October 23 expected it 90 compared to 91.3 last month along with August industrial orders expected at 1% compared to 2.6% last month.

The technical outlook for the EUR is positive as EUR trades above 1.5000. Expect EUR support at 1.4880 the October 20th low with resistance at 1.5047 the October 21st high.

GBP
GBP traded lower pressured by report of weaker than expected retail sales, a statement from the BOE's Tucker about quantitative ease and in reaction to report higher than expected US jobless claims. UK September retail sales were unchanged. The flat reading for UK retail sales generates concern about the strength of the UK recovery. Tucker said that the outlook for the UK economy has improved but that the BOE was prepared to expand its asset purchase program if needed. GBP traded sharply higher Wednesday and surged in cross trade supported by report that the BOE voted 9 to 0 in October to maintain its current level of asset purchases and interest rates. In addition, BOE Governor King was quoted in the Herald newspaper that at some point interest rates will have to rise. The MPC minutes seemed to reduce the risk that the BOE will expand quantitative ease but Tuckers comments inject a note caution that BOE may only pause its asset purchase program. The National Institute for Economic and Social Research says that the BOE should pause its quantitative ease after the economy emerges from recession. Friday's release of UK advanced Q3 GDP will be key to whether the GBP rally can be sustained. The report is likely to show that the UK economy is expanding. BOE members see signs of growth. The GDP report will be key to whether the UK economy is at the start of a sustainable recovery. A strong GDP reading would greatly reduce the risk of expansion of the BOE's quantitative ease.

On October 23rd Q3 GDP will be released expected at 0.2% compared to -0.6% last month.

The technical outlook for GBP has improved as GBP trades above 1.6400. Expect near-term support at 1.6328 the October 20th low with resistance at 1.6660 the September 15th high and 1.6835 the August 7th high.



CAD
CAD traded lower pressured by weaker equity market trade and a modest decline in crude oil prices. CAD was also pressured by speculation that today's strong economic data from China may encourage Chinese officials to begin to withdraw fiscal and monetary stimulus. The withdrawal of monetary stimulus from China may dampen global growth prospects as China has led the global recovery. There was little reaction to the report of better than expected Canadian retail sales. Canada's August retail sales rose 0.8% and 0.5% ex-autos. The Canadian retail sales were expected to rise 0.4% and 0.6% ex-autos. The trade is still digesting the implications of this week's BOC policy meeting. Tuesday, 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. The BOC's strong language about the strength of the CAD coupled with an extended forecast of a subdued inflation suggests that the BOC is unlikely to elect an earlier rate hike. The BOC is seen open to possibility of intervention to try to weaken the CAD. The BOC released its Monetary Policy Report (MPR) today. The report said that the BOC expects the CAD to remain strong, that the economy is improving and growth will be higher in the second half of 2009. The MPR went on to say that labor market has stopped deteriorating, consumer spending is expected to grow through 2011 and gave no indication if the BOC plans to intervene.

The technical outlook for CAD is negative as USD/CAD trades above 1.0500. Look for near-term support at 1.0350 low with resistance at 1.0632 the October 8th high.

AUD
AUD traded lower pressured by a dip in risk appetite and speculation that China may soon begin to withdraw economic and fiscal stimulus as the Chinese economy posted strong growth in the third-quarter. Wednesday's release of the US Beige page book may have also weighed on investor sentiment as the Fed notes improvement in the economy but also sees limited consumer demand. China's Q3 GDP rose 8.9%, many analysts had expected a rise above 9%. It would be hard to argue that the Chinese data was a disappointment and the reaction in the FX market to China's GDP appeared to be related to the possibility of a tightening of fiscal and monetary policy in China. There was a report Wednesday which states that China is telling its banks to prepare for a shift in policy and that loose monetary policy will not continue indefinitely. The threat of a tightening of China's monetary policy may raise concern about the sustainability of the global recovery. China has been leading the global recovery and a slowdown in China's growth could hurt the outlook for the global economy. The industrialized nations coordinated fiscal and monetary stimulus effort but it is not clear that exit strategies will be as closely matched. AUD is consolidating near a 15 month high supported by optimism about the global recovery, rising commodity prices and speculation that the RBA will continue to hike rates into year-end. The main risk to AUD is the rally has reached extreme overbought.

On October 23rd Q3 import and export prices will be released with export prices expected at -2% import prices expected at -2.5%.

The technical outlook for the AUD is positive as AUD holds above 9100. Expect AUD support at 9181 the October 20th low with resistance at 9312 the October 20th 2008 high.