• USD: Higher, Fitch rating warnings boosts safe haven flows
  • JPY: Higher, machinery orders rise, Fitch warns on Japans debt rating
  • EUR: Lower, German Zew business sentiment posts an unexpected decline, CPI declines
  • GBP: Mixed, Fitch warns UK most at risk to debt downgrade, retail sales and house prices rise
  • CAD and AUD: AUD lower, CAD higher, tracking stocks and crude oil, Australia's business confidence rises

Overview     
USD edged higher Tuesday rebounding from a 15 month low with GBP and JPY pressured by a warning from Fitch that UK and Japanese debt rating is at risk of a downgrade because of rising government spending. GBP downside was limited by report of rising UK house prices and a report that UK retail sales post the strongest monthly growth in seven years. Commodity currencies drifted lower as the stock rally slows. The EUR was pressured by report weaker than expected Germans Zew business confidence. AUD traded lower despite report of strong Australian business confidence data. The commodity currencies turned higher midsession as crude and gold prices trade higher. USD rebound was limited by optimism about the global recovery as the Baltic Freight Index rose to a three month high, the Blue Chip Index for November shows that forecasters have raised their US 2010 GDP projection to 3% and Moody's upgraded China's credit rating. A Bloomberg survey of 64 economists finds that they expect the US economy will expand by 3% into year-end and that growth will be driven by manufacturing and business spending as exports rise and consumer spending slows. Risk sentiment and the direction of equity markets remain the main market drivers for the Forex trade.

Today's US data:
No major US economic data was released in today's trade.

Upcoming US data:
This week's US economic calendar includes the November 12th release of initial jobless claims for the week ending 11/07 expected at 510k compared to 512k last week. October Treasury budget will also be released on November 12th expected at -180bln compared to -155.53bln last month. On November 13th October import prices will be released along with September international trade and November University of Michigan consumer sentiment. Import prices are expected to rise 0.5% compared to 0.1% last month. The trade balance is expected to improve -30.71bln compared to -31.50bln last month. Michigan consumer sentiment is expected at 73 compared to 73.7 last month.

JPY
JPY drifted lower pressured by report that Fitch has warned that Japan's credit rating is at risk for downgrade if Japan doesn't keep its government borrowing in check. The Japanese government plans to increase spending to boost domestic growth and this has generated concern that Japan will have to issue a large amount of debt to finance the new spending. Concern about new debt issuance has sparked a rise in JGB yields. Japan's Finance Minister Fujii tried to dampen investor fears about Japan's debt issuance. Fujii said that Japan will look for ways to cut spending and acknowledged that the rise in long-term bond yields reflects concerns about its increased issuance of JGB's. The Fitch rating agency said it is unlikely that the Japanese government can meet its goal of limiting bond issuance to ¥44trln, and warned that if the debt issuance rises above that level the Japanese credit rating may be at risk of downgrade. JPY downside was limited by gains in cross trade to Europe with EUR/JPY pressured by report of weaker than expected German business confidence and GBP/JPY pressured by Fitch warning that the UK debt rating is most at risk. The trade is also watching President Obama's trip to Asia. Reuters reports that President Obama will discuss the issue of the Yuan and US China trade imbalance when he visits China later this week. Talk of global rebalancing has at times been one of the major negatives for the USD. Japan's economic data was mixed with the September current account surplus widening by 0.2% y/y and September machinery orders rose 3.8%. M2 October money supply rose by 3.3% y/y.

On November 12th October corporate goods prices will be released expected flat compared to 0.1% last month. On November 13th revised September industrial output will be released expected at 1.4% compared to 1.6%.

Key technical levels to watch in USD/JPY include support at 89.18 the November 2nd low with resistance at 90.86 the November 6th high.

EUR
EUR traded lower pressured by report of weaker than expected German business sentiment. German November Zew economic sentiment index dropped to 51.1 from 56 last month, a reading of 55 was expected. The Zew current conditions indicator also declined to -65.6 from -72.2. According to Zew officials today's report suggests that the German economic recovery will proceed in small steps. The Zew report confirms that German businesses remain optimistic but somewhat less optimistic about growth than last month. The dampened optimism may reflect concern about the impact of strong EUR exports. European equity markets drifted lower after the Zew report was released adding selling pressure in the EUR. EU annual CPI was reported flat. Today's Zew and CPI data will likely encourage the ECB to maintain steady interest-rate policy. EUR downside was limited by gains in cross trade to the GBP with GBP pressured by a warning from Fitch that the UK debt rating is at risk if UK government spending continues to expand. Monday the EUR traded sharply higher supported by a surge in global equity markets sparked by a G-20 pledge to maintain fiscal and monetary stimulus and strong German industrial production and trade data. German September industrial production rose by 2.7% and the German September trade surplus widened to 10.8bln with exports up 3.8%. The positive surprises in EU and German economic data helped to boost the EUR to trade over 1.5000. This week's main focus will be Friday's release of EU GDP. The trade will be looking to the EU GDP report for confirmation that the EU economy is expanding.

On November 12th EU September industrial production will be released expected at 1% compared to 0.9% last month. On November 13th German Q3 GDP will be released expected at 0.3% along with EUQ3 GDP expected to rise by 0.6%.

The technical outlook for the EUR is positive as the EUR trades above 1.5000. Expect EUR support at 1.4851 the November 9th low with resistance at 1.5065 the October 23rd high.

GBP
GBP traded mixed recovering from early weakness sparked by a warning from Fitch of a possible downgrade of UK debt rating. Reuters reported that the Fitch says that the UK is most at risk of losing its AAA status among major economies. The decline in the GBP on the Fitch warning was short lived with GBP downside limited by strong UK retail sales and house price data. UK October BRC retail sales posted their biggest monthly gain in seven years at 3.8%. October RICS house price balance rose to three-year high of +34. There was limited reaction to report of widening the UK global trade gap. UK September trade deficit widened to its highest level since January at 7.19bln compared to 6.073bln last month. GBP traded at a three month high versus the USD Monday supported by improving risk sentiment as global equity markets surge on speculation that the BOE is nearing the end of its expansion of quantitative ease. GBP has held up remarkably well in light of this last Thursday's decision by the BOE to expand its asset purchase plan by £25bln to £200bln. One explanation for the GBP price action is speculation that the BOE may be getting closer to the end of its expansion of asset purchases as recent UK economic data including housing, consumer sentiment and today's retail sales data points to the beginning of recovery for the UK economy. Focus turns to Wednesday's release of BOE inflation report. Trade will be looking to the BOE inflation report for clues to BOE plans for its asset purchases and BOE outlook for the UK recovery

On November 11th September unemployment will be released expected 8% compared to 7.9% of average earnings unchanged at 1.6% and the claimant count at 27k.

The technical outlook for GBP has improved with this weeks rally above 1.6700. Expect near-term support at 1.6617 the November 9th low with resistance at 1.6800.

CAD
CAD opened lower pressured by a modest pullback in global equity markets and broad USD rebound against Europe as investors react to the Fitch warning about UK and Japan's debt rating. This CAD turned higher mid-session as stocks recover and crude and gold prices trade higher for the day. There were no major Canadian economic reports released in today's trade. CAD traded sharply higher Monday supported by a surge in equities, higher commodity prices and strong Canadian housing data. Gold rallied to a new record high Monday reflecting the G-20 pledge to maintain fiscal and monetary stimulus and in reaction to weaker USD. Canada's October housing starts rose to 157.2k, a reading of 155k was expected. Mondays rally in the CAD was impressive in light of Friday's release of weaker than expected Canadian employment data. Canada unexpectedly lost 43,200k jobs in October and the unemployment rate rose 0.2% to 8.6%. The trade had expected Canada to create 10K jobs last month with unemployment rising to 8.5%. Canadian manufactures said that the worst of the Canadian recession is over but they are concerned that recent CAD strength is a hindrance to recovery. Mondays' CAD rally may increase the risk of intervention.

Canada's trade and balance will be released Friday expected to widen to -2.6bln on compared to -2.0 bln last month.

The technical outlook for CAD is mixed as USD/CAD consolidates near 1.0600. Look for near-term support at 1.0502 the October 26th low with resistance at 1.0748 the November 9th high.

AUD
AUD traded lower tracking weaker equity market trade and spillover from a Fitch warning of possible UK debt downgrade. AUD weakened this despite report that Australia's October NAB business conditions index rose 9 points this to 12 and confidence rose 2 points to 16. This puts business confidence levels back to the highs in February of 2008. There was limited reaction to a statement from Australia's trade Minister that the strong AUD reflects market fundamentals and that exports have improved. The trade minister went on to say that the Australian manufacturers must prepare for the strong AUD. AUD traded sharply higher Monday supported by improving risk sentiment and rising commodity prices. Equity markets surged Mondayi  in reaction to the G-20 pledge to maintain fiscal and monetary stimulus. Gold traded a record high and crude oil prices also rallied Monday supported by G-20 liquidity pledge and threat of hurricane Ida. Last week, the RBA upgraded its outlook for Australia's growth and inflation and indicated that interest rates will need to gradually rise. The trade expects the RBA to hike rates 25bps in December. The trade will closely monitor this week's release of Australian unemployment data for clues to whether the RBA will be encouraged to rates next month.

On November 12th October unemployment will be released expected unchanged at 5.7% and jobs growth at10k.

The technical outlook for the AUD is positive as the AUD rallies above 9200. Expect AUD support at 9185 the November 9th low with resistance at 9345 the August 4th 2008 high.