• USD: Higher, Bernanke says Fed to tighten when the economy improves sufficiently, trade deficit narrows
  • JPY: Lower, Fed rate hike speculation, Japan's core machinery orders rise
  • EUR: Lower, German trade balance narrows as exports drop
  • GBP: Lower, UK producer prices rise in September trade deficit narrows
  • CAD and AUD: AUD & CAD higher, Canada posts an unexpected drop in unemployment

Overview     
USD rebounded versus European currencies and the JPY and traded weaker against the commodity currencies Friday. USD rebound was attributed to a statement from Fed Chairman Bernanke that the Fed will tighten monetary policy when the economy improves. Bernanke went on to say that accommodative policy will likely be needed for an extended period. One of the major reasons for the USD decline is low US interest rates and ultra-loose Fed policy. Bernanke's comments put the trade on notice that the Fed is considering exit strategies and the eventual end of accommodation. The New York Times reports that the Fed is split over the timing and pace of tightening once the decision is made to hike rates. EUR was pressured by report of an unexpected drop in German exports. GBP traded lower despite report that September factory gate prices rose for the seventh month in a row. The CAD surged to one year high supported by report that Canada's unemployment rate unexpectedly declined in September and Canada created 30k new jobs last month. The AUD traded higher supported by RBA rate hike speculation as RBA watcher Kevin Rudd says improvement in the Australian employment outlook could lead to 50bps rate hike in November. US August trade balance posted a modest improvement as exports rise to their highest level for 2009. USD rebound will likely be short-lived as threat of Fed tightening remains many months away and there is no indication that the US or G-7 nations are ready to intervene in support of the USD. USD also remains vulnerable to optimism about the global recovery.

Today's US data:
US August trade balance narrowed to 30.7 bln, a reading of -32 bln was expected

Upcoming US data:
Next week's US economic calendar includes the October 13th release of US September Treasury budget expected that 62.5 bln compared to 45.7 bln last month. On October 14th September retail sales will be released expected to fall by 1.4% compared to 2.7% rise last month. Ex. autos retail sales are expected to rise by 0.2%. August business inventories will also be released on October 14th expected at -0.8% compared to -1% last month along with September import prices expected at 0.2% compared to 2% last month. On October 15th September CPI will be released expected at 0.2% compared to 0.4% last month. Initial jobless claims for the week ending 10/13 will be released October 15th expected at -515k compared to -521k last week along with October Philly Fed survey expected at 12.5 compared to 14.1 last month. On October 16th September industrial production will be released expected at 0.2% compared to 0.8% last month along with September capacity utilization expected 69.8 compared to 69.6 last month and October University of Michigan consumer sentiment expected unchanged at 73.5.

JPY
JPY traded lower pressured by comments from Fed Chairman Bernanke which indicate that the Fed is considering when to tighten monetary policy and exit quantitative ease. There was little reaction to today's report that Japan's August core machinery orders rose 0.5% or to a statement from Japan's Finance Minister Fujii that it will be up to the BOJ to decide when to ends its corporate funding program. JPY is trading near a nine month high versus the USD supported by speculation that Japanese officials will not intervene to try to weaken the JPY at current levels, rising US budget deficit and low US interest rates. USD has replaced the JPY as the global funding currency as it is now cheaper to borrow in the USD than in the JPY. This may partly explain why Japanese officials are reluctant to consider intervention because of the recognition that USD is pressured by weak fundamentals and intervening in this environment would likely be counterproductive. 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.

Next week's Japanese economic calendar includes October 13th release of September money supply expected at 0.2% compared to 0.3% last month. On October 14th September corporate goods prices will be released expected to fall by 0.3% compared to a flat reading last month. BOJ policy meeting will be held on October 14th. On October 15th, revised August industrial output will be released expected at 1.8% compared to 2.1% in the original report.

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 lower pressured by Bernanke's comments indicating that the Fed is considering a timeframe for raising interest rates and in reaction to report an unexpected decline in German exports. Low US interest rates coupled with aggressive Fed measures to boost liquidity have contributed to weakening of the USD. The USD would be supported by a Fed rate hike but a Fed rate hike is unlikely before mid-2010. USD will find limited support from Bernanke's comments. In addition, the ECB and other major central banks will also be considering the timing for their exit strategies. The European press Thursday talked about the possibility of a coordinated tightening of monetary policy from the major G-7 nations. ECB President Trichet made comments similar to Bernanke's. Trichet said that liquidity measures will need to be phased out as the economy recovers. Trichet's comments may fuel speculation about ECB rate hikes. ECB elected to hold rate policy steady at Thursday's policy meeting and gave no indication that the ECB is in any hurry to raise interest rates. The German trade balance narrowed to 8.1 mln from 14.1 mln last month. The narrowing of the trade balance reflects an unexpected drop in exports along with a 1.1% rise in imports. The German trade data suggests that the EU economic recovery remains uncertain.

Next week's EU economic calendar includes the October 13th release of German October Zew index expected at -72 compared to -74 last month. On October 14th August industrial production will be released expected at 0.1% compared to -0.3% last month. September HICP will be released expected at 0.4% compared to 0.3% last month. On October 16th August trade balance will be released expected at 13.2 bln compared to 12.3 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 lower despite report of improvement in UK factory prices. GBP decline was attributed to speculation that today's comments by Bernanke that the Fed is thinking about the timing of an exit strategy from accommodative policy may be a sign that the Fed is considering moving up its timetable for a possible Fed rate hike. UK producer prices rose 0.4% in September, the trade was looking for 0.1% decline. The rise in UK producer prices is another indication that the BOE's quantitative ease is having impact on UK inflation outlook. UK August trade balance narrowed to 6.24 bln. UK trade balance was at its narrowest level since 2006. The narrowing of the trade balance reflected a drop in imports and exports. Thursday the BOE elected 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. 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.

Next week's UK economic calendar includes the October 13th release of September RPI expected unchanged at 0.5%. On October 14th August unemployment will be released expected unchanged at 7.9% with the claimant count at 17k and average earnings at 1.7%.

The technical outlook for GBP is mixed as GBP fails to hold 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 one-year high versus USD supported by report of an unexpected decline in Canada's employment rate and a sharp improvement in new jobs creation. Canada's September unemployment rate declined by 0.3% to 8.4% with 30k new jobs created. The decline in Canada's unemployment rate suggests that the Canadian economy is recovering. The 30k new jobs creation would be the equivalent of 300k in the US. The improvement in Canada's unemployment rate follows this week's release of better than expected manufacturing data and dovetails the improvement in Australian jobs growth. Canada's September Ivey PMI rose to 61.7 from 55.7 last month.  CAD is supported by optimism about the global recovery and a rally to a new record high in the price of gold. Today's Canadian employment report may spark speculation that the BOC will drop its pledge to maintain interest rates at a record low 0.25% through mid 2010. The RBA hiked this week and the New York Times reports that the Fed is debating an exit strategy. BOC rate hike speculation could propel the CAD to parity.

Next week's Canadian economic calendar includes the October 13th release of August New House Price index. On October 15th August manufacturing shipments will be released.

The technical outlook for CAD is positive as USD/CAD trades below 1.0500. 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 that RBA watcher Kevin Rudd said the improvement in Australian employment could lead to 50 bps rate hike in November. Thursday, Australia reported an unexpected decline in its unemployment rate. 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 9200.