• USD: Lower, report that some countries may drop USD for oil trades, oil-producing nations deny the report
  • JPY: Higher, report Japan in discussions to end USD based trading in crude oil
  • EUR: Higher, general negative USD sentiment and gains in cross trade to GBP
  • GBP: Lower, manufacturing and industrial output fall more than expected
  • CAD and AUD: AUD & CAD higher, RBA hikes rates, gold trades at an 18 month high

Overview     
USD and GBP traded lower and the AUD surged in Tuesday's trade. USD was pressured by a report in the Independent newspaper titled the Demise of the Dollar. The Independent newspaper report says that oil-producing nations along with Japan and China are discussing replacing the USD with a basket of currencies to price oil transactions. According to the Independent report, the basket of currencies would include the JPY, Chinese Yuan, EUR and gold. JPY, EUR and gold rallied in reaction to the Independent newspaper report. Arab state officials denied the report but the damage was done. JPY was also supported by a statement from Japan's finance minister that nations should not pursue policies that weaken their currencies. These comments reduce the risk of intervention to weaken the JPY. True or not USD reaction to the Independent newspaper report shows how negative sentiment is towards the USD. GBP traded lower pressured by report of much weaker than expected UK manufacturing and industrial output data. GBP had traded higher initially in reaction to report of another rise in UK house prices. CHF traded higher despite report that Swiss CPI was flat in September and posted an annual decline of 0.9%. AUD traded at a 14 month high supported by report of a 25bps rate hike by the RBA. USD was also pressured by improving risk sentiment as equity markets surge in Europe and the US.

This week's US economic calendar is relatively light and focus will turn to central bank policy meetings in the UK and EU Thursday. The trade will be looking for clues to possible timing of an exit strategy from the ECB and there is uncertainty as to whether the BOE may cut its remuneration rate paid on commercial bank deposits. The trade will also be monitoring the direction of equities and risk sentiment.

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

Upcoming US data:
On October 7th August consumer credit will be released expected at seat -8.9 bln compared to -21.6 bln in July. On October 8th initial jobless claims for the week ending 10/03 will be released expected at -545k compared to -551K last week. August wholesale sales and inventories will also be released on October 8th with wholesale sales expected at 0.6% and inventories expected at -0.5%. October 9th August trade balance will be released expected at -32 bln compared to -31.92 bln last month.

JPY
JPY traded higher primarily supported by the Independent newspaper report which suggests that oil producing nations are considering the pricing of oil in a basket of currencies instead of the USD. According to the report the JPY would be one of the currencies included in this basket. Oil-producing nations were quick to deny the Independent report. There was limited reaction to comments from Japan's Finance Minister Fujii that the G-7 discussed the weak USD and that he is against competitive currency devaluations. Fuji went on to say that it is undesirable for individual nations to take a weak currency policy. Fuji's comments indicate that Japan is becoming increasingly concerned about the strength of the JPY but are unlikely take action at this time. It remains unclear whether Japan will elect to intervene to try and stem JPY rise. As noted in earlier reports the threat of intervention will increase if the pace of the JPY rise accelerates and becomes one-sided in its price direction. Rumors are circulating that MOF may intervene if USD/JPY trades below 8800. There was limited reaction to a Reuters report that the Japanese ministers are pressuring the BOJ to avoid ending its emergency funding program. In light of today's RBA rate hike the trade will be focusing more on the potential timing for other central banks to begin exit strategies from accommodative policy. JPY price direction will key on risk sentiment. Risk of intervention remains low unless JPY rise become excessive.

This week's Japanese economic calendar includes the October 7th release of August preliminary leading indicators expected at 2.2% compared to 2% last month. On October 8th August current account will be released expected at ¥0.12 trln compared to ¥1.27 trln last month. On October 9th August machinery orders will be released expected at 3.2% compared to -9.3% last month.

Key technical levels to watch in USD/JPY include support at 88.60 the October 2nd low with resistance at 90.63 the September 25th high.

EUR
EUR traded higher supported by a report in the Independent newspaper that oil producing nations may stop pricing oil in USD and by gains in cross to the GBP. Oil-producing nations said they are not in talks on replacing the USD but the USD remained on the defensive. EUR gains in cross trade to the GBP are attributed to report that UK August manufacturing and industrial output came in much weaker than expected. EUR rallied despite comments from ECB officials which downplayed the potential for an early ECB rate hike. ECB's Liikanen said that the central bank will exit nonconventional monetary policy when the economy allows. ECB's Ordonez says that he sees a slow recovery and expects inflation to remain low for some time. This week's main focus will be Thursday's ECB policy meeting. The ECB is widely expected to hold a policy steady and the trade will be looking to the press conference following the ECB meeting for the ECB's outlook for the EU economy and for possible clues to the timing of an exit strategy from unconventional policy measures. The ECB is expected to acknowledge that the EU economy is improving but that the growth outlook remains uncertain. The ECB has tied the timing of the end of its accommodative monetary policy to price stability. Today's comments from ECB's Liikanen and Ordonez suggest that ECB policy will be on hold for some time.

On October 7th Q2 GDP will be released expected at -2%. On October 8th German September CPI will be released expected at -0.1%. German August trade balance will be released on October 9th expected at 12.8 bln compared to 12.4 bln Last month.

The technical outlook for the EUR has improved as EUR trades back above 1.4700. Expect EUR support at 1.4566 the October 2nd low with resistance at 1.4804 the September 24th high.

GBP
GBP traded mixed initially rising above 1.6000 in reaction to report of rising UK home prices then turned lower after the release of much weaker than expected UK industrial production and manufacturing output.UK  September Halifax home prices rose by 1.6% compared to an 0.8% rise in August. UK August manufacturing declined by 1.9% and industrial output declined by 2.5%. The sharp drop in UK industrial output suggests that the UK economic outlook remains uncertain and today's data may encourage the BOE to announce additional monetary policy measures because of the risk of a slow economic recovery in the UK. Recent UK economic data has been mixed with construction and manufacturing PMI coming in weaker than expected and services PMI rising to a two-year high. The IMF raised its UK 2010 GDP forecast to 0.9% from 0.2%. The IMF also says that the UK is facing a 2009 financing gap of £215 bln which is 15% of UK GDP. GBP has been underperforming partly because of concern about rising UK government debt along with speculation that the BOE may soon reduce its remuneration rated paid on commercial bank holdings.  GBP was less impacted by today's report that oil producing nations may replace the USD with a basket of currencies because the GBP would not be one of the currencies included in the new basket.  This week's main focus will be the BOE policy meeting Thursday. The BOE is expected to hold policy unchanged but there is an outside chance that the BOE may cut its remuneration rate it pays on commercial deposits. The trade will be looking to see whether the BOE decides to expand quantitative ease. Market consensus is that the BOE is leaning towards cutting the remuneration rate. The remuneration rate is currently at 0.5%. The shadow MPC committee says the BOE should extend quantitative ease beyond November. GBP rallied after BOE elected to maintain the current level of its quantitative ease in September. A decision to expand quantitative ease could spark significant selling of the GBP.

The BOE meet on October 8th. On October 9th September PPI will be released expected flat compared to 0.2% last month. August trade balance will also be released on October 9th expected at -6.234 bln compared to-6.479 bln last month.

The technical outlook for GBP is negative as GBP trades below 1.6000. Expect near-term support at 1.5770 the September 28th low with resistance at 1.6127 September 30th high.

CAD
CAD traded higher supported by improving risk sentiment as equity markets rally and by a surge in the price of gold. CAD was also supported by spillover from the sharp rise in the AUD sparked by today's RBA rate hike and report of a surge in Canada's manufacturing PMI. The RBA rate hike suggests that the Australian central bank has confidence in the global recovery. Canada's September Ivey PMI rose to 61.7 from 55.7 last month, a reading of 56.1 was expected. The EIA revised its oil demand forecast for 2010 and crude prices traded more than one dollar a barrel higher. CAD benefits from the rise in crude prices and signs of improving global economic outlook. CAD was also supported by broad USD weakness sparked by speculation that oil producing nations will replace oil payment in USD with a basket of currencies. Canada's August building permits rise 7.2%, the trade was looking for an 8% rise.  CAD traded higher Monday, mainly supported by firmer equity market trade and spillover from strength in the commodity currencies in particular a sharp rally in AUD. CAD was also supported by the fact that the G-7 communiqué did not include language singling out USD weakness. The G-7 communiqué repeated its concern about excessive FX volatility and that disorderly movements in exchange rates could threaten the global recovery but made no mention of the USD. Focus turns to Friday's release of Canadian unemployment and trade balance.

On October 8th September housing starts will be released expected at 152k compared to 150.4k last month. On October 9th September unemployment will be released expected to rise 0.1% to 8.8% to fund growth at 5k compared to 27k last month along with August trade balance expected at-0.95bln compared to -0.750bln last month.

The technical outlook for CAD is positive as USD/CAD trades back below 1.0700. Look for near-term support at 1.0660 the September 23rd low and 1.0550 the October 1st low with resistance at 1.0765.

AUD
AUD traded at 14 month high as the RBA raises interest rates 25bps to 3.25% and signaled a hawkish bias. 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 noted that the overnight interest rate is at a historically low level. This would suggest that the RBA may consider more rate hikes down the road. The RBA rate hike generates a number of questions, the first being whether the Australian and global economy is strong enough to withstand the beginning of the tightening cycle. An additional question is whether the RBA rate move will inspire speculation over which central bank will be the first to follow the RBA and tighten policy. In addition today's RBA rate hike may encourage speculation about the timing of exit strategies by the major central banks. Rate hikes by the Fed or ECB are not expected until mid 2010 at the earliest and the BOE may not be finished easing policy. It's interesting to note that part of today's RBA decision to hike rates reflects not only improving Australian domestic economic outlook but also improving confidence in the global recovery. It's not clear that other central banks are as confident as the RBA's about the outlook for the global economy. Australian economic data was mixed with September vehicle sales rising 6.6%. The August trade balance was reported at a larger than expected deficit of A$1.524bln, a deficit of A$ 850 was expected. AUD was also supported by the Independent article that oil-producing nations are considering replacing USD with a basket of currencies for oil transactions and surge in the price of gold.

On October 7th August housing finance will be released expected at -0.5 % compared to -2% last month. On October 8th September employment will be released expected to rise 0.1% to 5.9% with employment growth at -10k compared to -27.1k last month.

The technical outlook for the AUD is mixed with back above 8700. Expect AUD support at 8758 the October 6th low with resistance at 8950 the August 11 th high.