• USD: Higher, existing home sales surge 9.4%, equity markets trade lower as the data at fails to lift stocks
  • JPY: Lower, BOJ forecasts that deflation pressures will continue into 2011
  • EUR: Lower, EU composite PMI rose to a 22 month high, gains in cross trade to GBP
  • GBP: Lower, UK Q3 GDP posts a surprise decline, early withdrawal of stimulus unlikely
  • CAD and AUD: AUD & CAD lower, Australia's import/export prices decline, BOC says intervention an option

Overview     
USD traded mixed Friday with GBP sharply lower and EUR trading at a new high for 2009. GBP was pressured by report of an unexpected decline in UK Q3 advance Q3 GDP and  the EUR was supported by gains in cross trade to GBP and in reaction to report that EU composite PMI rose to a 22 month high. Today's economic data from Europe shows that the UK economy is still in recession and the EU economy is emerging from recession. The unexpected decline in UK GDP may force the BOE to consider expanding quantitative ease. JPY traded lower pressured by a BOJ report which says that deflationary pressures will continue through 2011. Commodity currencies traded lower despite firmer equity trade in Europe with the CAD pressured by a statement from BOC Governor Carney that intervention is an option and AUD pressured by report of falling Q3 export and import prices. US existing home sales came in much stronger than expected. The USD traded higher in reaction to the strong housing data as the trade debates how much of an impact the expected expiration of the tax credit for first home buyers impacts existing home sales. Some may argue the strength of today's existing home sale report reflects the pulling forward of home sales because of the tax credit and that when the tax credit expires demand for homes may drop in the same way the demand for autos declined after the expiration of the cash for clunkers program. Bloomberg reports that Nomura research warns that US risks a lost decade like Japan if stimulus is withdrawn too soon. Upcoming US auto and existing home sale data will be a good test of the efficacy of the Nomura warning. At some point the private sector will have to carry the US recovery as government incentives and low prices are the main reason exiting home sales have improved. USD may benefit from speculation that today's strong US housing data increases the risk of an earlier Fed rate hike. The Fed's Plosser said he will be one of the Fed members to call for an earlier rate hike.

Today's US data:
Existing home sales for September rose by 9.4% to 5.57 mln units, a reading of 5.35 mln was expected. Inventories of existing home sales dropped 7.5% to a 7.8 month supply. This was the lowest level of inventories in two and a half years. Average home sale price declined by 8.5% to 174,900k.

Upcoming US data:
Next week's US economic calendar includes the October 27th release of Case Shiller August home price index expected at -12.1% compared to -13.3% last month. October consumer confidence will also be released on October 27th expected at 54.3 compared to 53.1 last month. On October 28th September durable goods will be released expected at 1.3% compared to -2.6% last month. September new home sales will also be released on October 28th expected 444k compared to 429k last month. 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 that 0.1% and -0.5% respectively along with Chicago October PMI expected 49.1 compared to 46.1 last month's and final October Michigan sentiment expected unchanged at 69.4.

JPY
JPY traded lower pressured a BOJ report which says that deflationary pressures will continue in Japan for the third straight year. According to the BOJ report inflation is expected to fall by 1.3% in 2010 and 1% in 2011. Deflationary pressures will force the BOJ to maintain accommodative monetary policy. Thursday, Japan reported another sharp drop in export sales and the Japanese press indicated that BOJ may be 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%. 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 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. JPY traded to the day lows after the release of stronger than expected US existing home sales.

Next weeks Japanese economic calendar includes the October 28th release of September retail sales expected at -0.2% compared to 1% last month. 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 92.08 the September 22nd high and 9330 the September 7th high.

EUR
EUR traded at a new high for 2009 of 1.5044 supported by report EU flash composite PMI rose to its highest level in 22 months and by sharp gains in cross trade to GBP after the release of a surprise decline in UK Q3 GDP. EU October composite PMI rose to 53 compared to 51.1 in September and August industrial orders rose 2%, manufacturing index rose 50.7 from 49.3 in October and the services in next increased to 52.3 from 50.9 September. The PMI reports suggest that the EU economy will experience 0.4% GDP growth in Q4. EUR gains were limited by report of a smaller than expected rise in German IFO and weaker US equity market trade. German October IFO rose to 91.9 compared to 91.3 last month reading of 92.3 was expected. Today's EU economic data suggests that the EU economy is emerging from recession and the modest rise in the German IFO is an indication that the rise of the EUR s not significantly impacting business sentiment in Germany. EUR cross gains to GBP are attributed to the UK GDP report which suggests that the UK economy has yet to emerge from recession. The trade will continue to monitor statements from EU and ECB officials about the strength of the EUR. It's 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 officials 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 PMI and German IFO reports suggest that the impact of the EUR rally has been limited. EUR consolidated above the day's lows as the trade is not sure if the surge in existing home sales is a true indicator of a bottom in the housing market because the rise partly reflects government tax credits for first time buyers. The tax credits make it hard to asses the underlying strength of the US housing market.

Next week's EU economic counter includes the October 26th release of German November GFK index and CPI. GFK is expected at 5 compared to 4.3 last month and CPI is expected at unchanged at -0.4%. On October 27th EU M3 for September will be released expected 2.7% compared to 2.5% last month. 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 a t-0.3% with the unemployment rate rising to 9.7% from 9.6% last month.

The technical outlook for the EUR is positive as EUR trades above 1.5000. Expect EUR support at 1.4943 the October 23rd low with resistance at 1.5200.

GBP
GBP traded sharply lower pressured by report on a surprise decline in UK advanced Q3 GDP. UK Advanced Q3 GDP declined 0.4%, a 0.2% rise was expected. The UK GDP report indicates that the UK economy has yet to emerge from recession and the data has significant implications for BOE policy outlook. The GBP has experienced a significant rally over the past few trading sessions primarily supported by speculation that the BOE would soon pause in its asset purchase program. This speculation has been fueled by recent UK economic data that has shown improvement in retail sales, housing market and services PMI. Today's report of an unexpected drop in UK GDP will likely force the BOE to reconsider expanding its asset purchase plan because the data indicates that the asset purchases have not yet posted the UK economy out of recession. Thursday the UK reported a flat reading on retail sales. The flat reading for UK retail sales generates concern about the strength of the UK recovery. 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 today's UK GDP report will increase the risk that the BOE will expand the size of 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.

Next week's UK economic calendar includes the October 25th release of the BOE Asset Purchase Facility Quarterly Report. CBI distributive trades for October will be released on October 27th expected at 1% compared to 3% last month. 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 1.0210bln. 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 1.6240 the October 19th low with resistance at 1.6660 the September 15th high.

CAD
CAD traded lower pressured by weaker equities and report of strong US existing home sales.  CAD decline is also attributed to a statement from BOC Governor Carney in the press conference following Thursday's release of the BOC MPR report that intervention is an option. The verbal intervention seemed to have some impact on the CAD trade over last 24 hours. The MPR report states that the BOC expects the CAD to remain strong and that the risks to the Canadian economy have diminished. The MPR went on to say that labor market has stopped deteriorating, and consumer spending is expected to grow through 2011. 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.

Next week's Canadian economic calendar 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 1.0500. Look for near-term support at 1.0350 low with resistance at 1.0632 the October 8th high.

AUD
AUD traded lower pressured by report that Australia's import and export prices came in below expectation and in reaction to a slight dip in risk appetite as UK GDP posts an unexpected decline. Australia's Q3 export prices fell 9.3% and import prices declined by 3%. It appears that continued strength in global equity markets is having less of a positive impact on risk sentiment and demand for high yield currencies. This may reflect speculation that China may soon begin to withdraw economic and fiscal stimulus as the Chinese economy posted strong growth in the third-quarter. 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.

Next week's the Australian economic calendar includes the October 26th release of  Q3 PPI expected at -2.5% compared to -2.7% last month. On October 28 Q3 CPI will be released expected at 0.8% compared to 0.5% last month. 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 positive as AUD holds above 9200. Expect AUD support at 9181 the October 20th low with resistance at 9312 the October 20th 2008 high.