• USD: Mixed, improving risk appetite and earnings optimism
  • JPY: Lower, Japanese investors seek to put money to work abroad, selling in cross trade
  • EUR: Higher, European equities rise, Philips electronics earnings beat estimates, German prices fall
  • CHF: Higher, inflation continues to fall, threat of SNB intervention, Zew index and retail sales due this week
  • GBP: Lower, CEBR says UK interest rates may stay at record low until 2011
  • CAD and AUD: AUD & CAD higher, Australian banks to hike rates faster than the RBA, crude and gold rise

Overview     
USD traded mixed to start the week weakening versus the EUR and commodity currencies and gaining versus the JPY and GBP. USD decline was attributed to ongoing concern about USD reserve status and improving risk appetite as equity markets rally in Europe and the US. Fresh concern about USD reserve status was generated by a Bloomberg report which says that 63% of new central bank reserves were converted into the EUR or JPY in Q2 2009. Earnings optimism fuels demand for European and US equities. Report of better than expected earnings at Royal Philips Electronics of Europe sparked a 1% rally in European equities. The trade will be focused on this week's earnings reports from the US. GBP was pressured by a report that the Center for Economics and Business Research (CEBR) says that BOE interest rates could remain low for the next five years and UK PM Brown warns about the risk to the UK economy of an early exit from quantitative ease. CEBR went on to say that they expect the BOE to again expand quantitative ease. JPY traded lower pressured by profit-taking sparked by improving risk sentiment and report that Japanese investors are looking to place funds to work abroad as the global recovery gains traction. Commodity currencies continue to benefit from improving risk appetite with the AUD supported by report that Australian banks are likely to begin to raise rates at a faster pace than the RBA and CAD supported by firming metals prices. USD remains vulnerable to improving risk appetite, anticipation that the Fed will maintain low yields for some time to come and speculation that there is no US or G-7 consensus on the need to support the USD. The UK Telegraph reported that the US policy of benign neglect for the USD is dangerous, but the Financial Times says that strong US economy needs a weaker USD. Trading conditions were thin due to holidays in Japan, Canada and the US.

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

Upcoming US data:
On October 13th US September Treasury budget will be released 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 ending10/13 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
Japanese markets were closed for holiday Monday. JPY initially traded lower pressured by profit taking sparked by improving risk sentiment and selling in cross trade. Better than expected earnings at Europe's biggest consumer electronics maker Philips sparked a 1% rally in European equities and demand for the EUR/JPY cross. AUD/JPY traded higher supported by improving risk appetite and RBA rate hike speculation. JPY was also pressured by report that Japanese investors are beginning to place money abroad as they become more confident in the global recovery. Expatriation of investment funds from Japan may help to limit JPY upside. In addition, an analyst at Bank of Tokyo Mitsubishi warns that the USD is likely to stabilize as the Fed shifts focus towards tightening of monetary policy and rhetoric becomes more hawkish. Friday, Fed Chairman Bernanke indicated that the Fed was in discussions about when to tighten monetary policy and exit quantitative ease. A Fed rate hike is not likely before mid-2010. Focus turns to Tuesday's start of a two-day BOJ policy meeting. The trade will be looking to see if the BOJ is considering ending its corporate bond buying plan or if the BOJ expresses concern about JPY strength.

This 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 91.63 the September 24th high.

EUR
EUR traded higher Monday supported by improving risk appetite as equity markets rally in Europe and the US and by gains in cross trade to the JPY and GBP. As noted above, Europe's major electronics manufacturer posted better than expected earnings which fueled demand for European equities and the EUR. EUR gains versus the GBP were attributed to the CEBR report which indicates that the BOE was likely to maintain interest rates at a record low level into 2011. This sets up the potential that the ECB may raise interest rates well ahead of the BOE. There was limited reaction to report the German wholesale prices declined 0.2% in September, the trade had expected 0.3% rise. The decline in German wholesale prices confirms continued low inflation risk in the EU. This will likely encourage the ECB to maintain current the level of interest rates. The ECB elected to hold interest-rate policy steady at 1% last Thursday. Focus turns to Tuesday's release of German Zew business confidence indicator. The trade expects the ZEW to confirm continued improvement in business outlook in Germany.

This week's EU economic calendar includes the October 13th release of German October Zew index expected at -57 compared to -58.3 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 the October 6th low with resistance at 1.4818 the October 8th high.

CHF
CHF traded higher Monday supported by improving risk sentiment as equity markets rise in Europe and the US. CHF has generally been supported by broad dollar weakness and general negative USD sentiment with gains limited by the ongoing threat of SNB intervention. Last week Switzerland reported that consumer prices declined more than expected. The decline in consumer prices will increase pressure on the SNB to take action to limit CHF appreciation, CHF appreciation tightens monetary conditions and contributes to deflation risk. It was rumored last week that the SNB had intervened twice to support the EUR/CHF cross above 1.5100. EUR/CHF traded 1.5180 at the time of this writing in Monday's trade. This week's Swiss economic calendar includes producer prices for September on Tuesday, Zew investor sentiment Thursday and Friday's release of retail sales for August expected at 0.3% compared to 1% last month. The Swiss October Zew index is expected at 59 compared to 58 last month. Expect USD/CHF support at 1.0170 the September 23rd low with resistance at 1.0453 the October 1st high.

GBP
GBP traded lower pressured by report that the Center for Economics and Business Research (CEBR) expects that the BOE will keep interest rates at a record low 0.5% until at least 2011 and in reaction to a statement from UK PM Brown that ending of quantitative ease at this time would imperil the UK recovery. CEBR officials also said they expect the BOE to expand quantitative ease and EUR/GBP cross traded at a six month high. GBP downside was limited by improving risk appetite as equity markets rally in Europe and the US. The weekend UK press was filled with articles about the USD with the Financial Times reporting that a strong US economy needs a weaker USD and the UK telegraph reporting that US policy of benign neglect for the USD is dangerous. Last Thursday the BOE elected to keep monetary policy unchanged and maintain its current level of asset purchases at £175bln. 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. Focus turns to Tuesday's release of UK CPI. If CPI continues to fall below the BOE's 2% target below inflation may encourage the BOE to expand quantitative easing measures. If inflation begins to rise it will encourage the BOE to maintain its current level of asset purchases. UK CPI is expected to rise 1.3% y/y compared to 1.6% last month with core CPI expected at 1.7%

This 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 1.5700 with resistance at 1.6127 the September 30th high.

CAD
Canadian markets were closed for Thanksgiving holiday Monday. CAD traded one-year high versus USD supported by Friday's 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 was also supported by optimism about the global recovery and rise a price of gold and crude. The 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.  BOC rate hike speculation could propel the CAD to parity. This week's key focus will be Friday's release of September CPI. The BOC has pledged to maintain record low yields as long as inflation remains in check. RBC analysts recommend buying of CAD because they expect the BOC to hike rates sooner than the Fed. The trade will also be looking for statements about CAD strength.

This 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 expected at 1% compared to 5.5% last month. Friday September CPI will be released expected at -0.8% y/y.

The technical outlook for CAD is positive as USD/CAD trades below 1.0500. Look for near-term support at 1.0175 the July 28th low with resistance at 1.0551 the October 9th high.

AUD
AUD traded at a fresh 14 month high supported by rate hike expectation, stronger equities and rising price of crude and gold. The Sunday Telegraph reports that Australian regional banks are expected to hike interest rates faster than the RBA. Friday, RBA watcher Kevin Rudd said the improvement in Australian employment could lead to 50bps RBA rate hike in November. AUD was the best performing currency last week rallying 4% versus the USD. Last 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. Last Tuesday, the RBA raised interest rates 25 basis points 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 was also supported by gains in cross trade to the JPY. AUD/JPY cross rallied to a two month high. 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.

This week's Australian economic calendar includes Tuesday's release of Westpac consumer confidence expected at 6% compared to 5.2% last month and Wednesday's release of CPI expected at 3.7% compared to 3.5% last month.

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.