- USD: Lower, tracking equities, Yahoo beats expectations, Yellen says the Fed in no hurry to raise rates
- JPY: Lower, BOJ's Nishimura says the BOJ must maintain monetary easing for sustained recovery
- EUR: Higher, rallies above 150 as stock rise on positive US earnings
- GBP: Higher, BOE voted unanimously to hold rate policy and the level of asset purchases are changed
- CAD and AUD: AUD & CAD higher, tracking equities, BOC says strong CAD undermining recovery
USD traded mixed Wednesday and the GBP and NDZ rallied. The early USD rally was attributed to a drop in risk appetite as equity markets decline and the price of crude traded below $79 a barrel. GBP was supported by the release of the MPC minutes for the BOE October policy meeting. According to the MPC minutes the BOE voted unanimously to maintain the current level of asset purchases and to hold rate policy steady. In addition, BOE Governor King said interest rates will have to rise at some point. The GBP surged in cross trade. The GBP surge added support to the USD versus the JPY and EUR. JPY was pressured by a statement from the BOJ's Nishimura that risk to Japan's economy remains high. NDZ rallied in reaction to a statement from the Governor of the RNBZ that strong NDZ will not be an obstacle to raising rates. Commodity currencies initially traded lower with CAD pressured by BOC warning about the impact of strong CAD on the Canadian economy and signal that the BOC is unlikely to elect an earlier rate hike. AUD initially traded lower pressured by report that China may be preparing to tighten monetary policy and in reaction to weaker equities. CAD and AUD downside was limited by a rebound in equities. There was little reaction to a report that Qatar's oil minister says the debate will continue whether to use the USD for oil trade or to a statement from the economist Connolly that he believes that the US faces a series of asset bubbles unless the US lets the USD fall another 25%. USD rally stalled in reaction to a statement from the Fed's Yellen that the Fed is preparing the ground work for tightening but will not tighten for the next several months. The main drivers for the Forex trade remain risk appetite and Fed policy outlook.
The Fed's beige book will be released after this report is posted.
Upcoming US data:
On October 22nd, initial jobless claims will be released expected 510k compared to 514k last month. Leading indicators for September will also be released on October 22nd expected at 0.5% compared to 0.6% last month. On October 23rd September existing home sales will be released expected at 5300k compared to 5100k last month.
JPY traded lower pressured by significant selling in cross trade to the GBP and in reaction to comments from the BOJ's Nishimura. GBP/JPY cross rallied over 1.5% with the GBP supported by a short covering in reaction to today's release of the BOE's MPC minutes for the October policy meeting. The MPC minutes indicate that the BOE unanimously voted to maintain the current level of asset purchases and interest rates. GBP had been underperforming because of speculation that the BOE would expand its asset purchase plan. It appears that the BOE is more confident in the UK economic recovery and is moving closer towards a pause in its quantitative ease. Nishimura warned that risks remain high for the Japanese economy and that the BOJ must maintain monetary easing for sustained economic recovery. He went on to say that ending the BOJ's corporate bond purchase plan is different than exiting easy monetary policy. It will be interesting to see how Japan's long-term bond yields react to Nishumura's call for the BOJ to maintain easy monetary policy. JGB yields rose to their highest level in two months Tuesday in reaction to report that the Japanese government will have to increase JGB issuance to cover the growing Japanese budget deficit. Japan is faced with a $66bln tax revenue shortfall. The likelihood of larger bond issuance from Japan sent Japanese bond yields higher. The higher bond yields helped to support the JPY in Tuesday's trade. There was little reaction to report that BOJ Q3 corporate fund demand survey was unchanged.
On October 22nd September trade balance would he release expected in ¥285 mln compared to ¥186 bln last month along with August all industry activity expected at 0.7% compared to 0.5% last month.
Key technical levels to watch in USD/JPY include support at 90.08 the October 20th low with resistance at 91.33 the October 16th high.
EUR opened lower pressured by weaker equity market trade and a sharp selloff in cross trade to the GBP. Weaker equity market trade sparked USD demand as Wall Street closed lower late Tuesday and the losses extended into Wednesday's trade. The EUR decline was short lived as equities erase early looses in reaction to better than expected earnings at Yahoo and the Fed's Yellen says the Fed will be in no rush to tighten. As noted above, GBP is experiencing a significant short covering rally after the release of the MPC minutes for the BOE's October policy meeting appear to greatly reduce the likelihood that the BOE will consider expanding its asset purchase program anytime soon. Verbal intervention has limited impact. It's not clear what the long-term impact will be of increased EU and ECB rhetoric expressing concern about EUR strength but the fact that the EUR was unable to break above 1.5000 has encouraged some liquidation selling. ECB President Trichet expressed concern about excessive FX volatility, French Finance Minister Largarde says the Eurogroup reiterated its desire for strong USD and an advisor to French President Sarkozy said that at some point EUR strength will become unbearable and EU would have to act. According to this advisor 1.5000 EUR is a disaster for the EU economy. It remains 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 are concerned that the strength of the EUR will exert more deflationary pressures, erode export demand and could choke off your recovery. EUR was also pressured by report of Russian central bank intervention in support of the RUB. This week's key focus will be the release of German IFO and EU industrial orders. Many analysts expect EUR to soon top 1.5000 supported by optimism about the global recovery.
On October 22nd EU August current account will be released expected at 9 bln compared to 8.8 bln last month. On October 23rd EU October manufacturing PMI will be released expected at 49.5 compared to 49.3 last month along with October services PMI expected at 51.2 compared to 50.9 last month. German October IFO index will also be released on October 23rd expected it 90 compared to 91.3 last month along with August industrial orders expected at 1% compared to 2.6% last month.
The technical outlook for the EUR is positive as EUR trades above 1.4900. Expect EUR support at 1.4829 the October 19th low with resistance at 1.4994 the October 20th high.
GBP traded sharply higher 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. EUR/GBP traded over 1% lower. In addition, BOE Governor King was quoted in the Herald newspaper that at some point interest rates will have to rise. The MPC minutes greatly reduce the risk that the BOE will expand quantitative these and sets the groundwork for future BOE rate hikes. The National Institute for Economic and Social Research says that the BOE should pause its quantitative ease after the economy emerges from recession. This institute expects GDP to expand by 0.7% in Q4. Friday's release of UK advanced Q3 GDP will be key to whether the GBP rally can be sustained. The report is likely to show that the UK economy is expanding. BOE members see signs of growth. The GDP report will be key to whether the UK economy is at the start of a sustainable recovery. A strong GDP reading would greatly reduce the risk of expansion of the BOE's quantitative ease. GBP rallied despite by report that CBI Manufacturing orders came in at -51 versus -48 last month.
On October 23rd Q3 GDP will be released expected at 0.2% compared to -0.6% last month.
The technical outlook for GBP has improved as GBP trades above 1.6400. Expect near-term support at 1.6328 the October 20th low with resistance at 1.6660 the September 15th high and 1.6835 the August 7th high.
CAD opened lower pressured by lower crude prices and in reaction to Tuesday's BOC policy meeting. 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. The BOC is seen open to possibility of intervention to try to weaken the CAD. Crude prices slipped below $79 a barrel in early trade then turned higher midsession. US equities rallied as well. CAD reversed early looses tracking the recovery in crude and US equities. Thursday the BOC will release its Monetary Policy Report (MPR) and BOC Governor Carney will hold a press conference. The trade will be looking at the MPR report and Carney's press conference for clues to whether the BOC is seriously considering intervention and if the BOC expands on its concern about the outlook for Canada's recovery. No major Canadian economic data was released in today's trade.
August retail sales will also be released on October 22nd expected at 0.9% compared to -0.6% last month.
The technical outlook for CAD is negative as USD/CAD trades above 1.0500. Look for near-term support at 1.0466 the October 20th low with resistance at 1.0632 the October 8th high.
AUD traded mixed initially pressured by weaker equity market trade, report that China may be preparing a shift in monetary policy and selling in cross trade to the NDZ. The weaker equity market trade reduces demand for high yield currencies as risk appetite slipped a bit. NDZ was supported by statement from Iran RBNZ Governor Bollard that strong NDZ is not an obstacle to raising interest rates. US equities erased early losses and AUD turned higher for the day. There is a report 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. China's GDP will be released Thursday and the GDP number could top 9%. The outlook for China's economy remains key to the global recovery and an Australia's export outlook. AUD is trading 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. AUD downside was limited by improving outlook for Australia's domestic economy. Australia's September new vehicle sales rose 2.9% and Westpac leading index rose by 1.7%. This was the first rise in the West Bank index since September 2008. There is an interesting article on AFR which suggests that there is to the Austrian economy emerge the RBA can act as lower interest rates. The main risk to AUD is the rally has reached extreme overbought.
On October 23rd Q3 import and export prices will be released with export prices expected at -2% import prices expected at -2.5%.
The technical outlook for the AUD is positive as AUD holds out above 9100. Expect AUD support at 9181 the October 20th low with resistance at 9312 the October 20th 2008 high.