• USD: Mixed, housing starts and building permits drop sharply, CPI rises
  • JPY: Lower, JAL may be on the verge of bankruptcy, monitoring the debate over the Yuan
  • EUR: Higher, current account slipped to deficit, construction output falls, gains in cross to GBP
  • GBP: Lower, MPC split on quantitative ease, discussed possible cut in the remuneration rate
  • CAD and AUD: AUD lower & CAD higher, Australia's leading indicators rise, Canada's CPI turns higher

Overview     
After a two-day rally the USD was back on the defensive Wednesday pressured by the return of risk appetite as equity markets rally in Europe and gold trades at a new record high. A statement from Fed Chairman Bernanke that US interest rates would remain low for extended period and maybe longer if unemployment continues to rise appears to be the latest catalyst for the USD selloff. The fact that the Fed is not prepared to withdraw stimulus at this time fuels demand for commodities and contributes to improving risk sentiment. AUD traded higher supported by RBA rate hike speculation and report of a sharp rise in Australia's Westpac leading index for September. CAD traded higher supported by report of the first rise in Canadian CPI in for five months and by higher commodity prices. European currencies were mixed with GBP gains limited by report that the BOE policy board is split ways on quantitative ease with some members calling for expansion of quantitative ease and others warning of the risks of further expansion of asset purchases. Demand for EUR/GBP cross supported the EUR with EUR gaining despite report of a sharp widening of the EU current account deficit and drop in construction output. US economic data was mixed with CPI rising more than expected and housing starts posting a sharp decline. The CPI rise reflects higher energy and auto prices. USD erased some of its early losses after the release of disappointing US housing data and stocks turned lower. USD upside was limited as today's data will likely encourage the Fed to push the timing for its withdrawal of stimulus further out. In addition, the drop in housing starts may reflect uncertainty about the extension of the first-time tax credit for US home buyers. That tax credit has now been extended and this may offer fresh support to the US housing market. A sustained USD recovery is unlikely until the Fed signals when rate hikes are coming. Dow Jones reports that the Fed's Bullard said that the Fed may not hike rates until 2012.

Today's US data:
October CPI rose 0.3% and the core rate rose 0.2%, a reading of unchanged was expected for headline CPI. The core rate was as expected. October housing starts fall 10.6% to 529k, a rise of 600k was expected. October building permits declined 4%.

Upcoming US data:
On November 19th initial jobless claims for week ending 11/14 will be released expected at 497k compared to 502K last month. October leading indicators and November Philly Fed will also be released on November 19th. Leading indicators are expected to rise by 0.4% compared to 1% last month and the Philly Fed is expected at 12.5 compared to 1.5 last month.

JPY
JPY traded mixed in narrow range trade with early weakness sparked by improving risk sentiment and firmer equity market trade which gave way to broad USD weakness versus the majors. Speculation that the Fed is a long way from a decision to withdraw stimulus and hike interest rates pressured the USD in Wednesday's trade. There was limited reaction to report that JAL may be on the verge of bankruptcy. JAL may be seeking to merge with one of the US airlines. JPY traded mixed in cross trade weakening versus the AUD with AUD supported by RBA rate hike speculation and strong Australian data in weakening versus the EU are busy you are supported by improving risk sentiment. JPY gained versus the GBP with GBP pressured by report that the BOE policy board is split three ways on whether to expand quantitative ease. There were no major economic reports released in Japan today. The trade continues to monitor the debate over the value of the Yuan. Yuan revaluation speculation may fuel demand for the JPY as a proxy for Asian currency appreciation should China begin to indicate that it is bending to international pressure to allow the Yuan to rise. Officials from the IMF Wednesday urged China to revalue its currency.

On November 19th September all industry activity will be released expected at 0.6% compare to 0.9% last month along with revised September leading indicators expected at 0.8%.

Key technical levels to watch in USD/JPY include support at 88.35 the October 9th low with resistance at 90.62 the November 12th high.

EUR
EUR traded higher supported by firmer equity market trade in Europe and gains in cross trade to the GBP. Efforts by Fed Chairman Bernanke to reassure investors that the US favors a strong USD appeared to have fallen on deaf ears and the trade elected to focus on Bernanke's comments that interest rates will remain low for an extended period. EUR gains in cross trade to the GBP are attributed to the release of the MPC minutes for the BOE's November policy meeting. The MPC minutes indicated a three-way split of BOE board members on whether to expand asset purchases or maintain the current level of asset purchases. EUR gains were limited by report of sharp widening of the EU current account balance and selling sparked by report of an unexpected sharp drop in US housing starts data. EU current account slipped to a deficit of 5.4bln in September from a 0.6bln surplus last month. In addition EU construction output fell 1.1% in September. The drop in the EU construction output suggests that the EU recovery will likely be weak and uneven. US equities drifted lower after the release of today's disappointing US housing data and this took some of the shine off of the improvement in risk appetite sparked by rallies in equity markets in Europe and Asia.

The technical outlook for the EUR is mixed as the EUR fails to trade back above 1.5000. Expect EUR support at 1.4808 the November 17th low and 1.4740 with resistance at 1.4999 the November 17th high and 1.5065 the October 23rd high.

GBP
GBP traded mixed with gains limited by the release of the MPC minutes for the BOE November policy meeting. The MPC minutes state that BOE policy board members are split three ways on quantitative ease with some members calling for expansion of quantitative ease, others warning about the risks of a greater expansion of quantitative ease and other members looking for a pause in the asset purchase plan. BOE board member Myles called for a £40bln expansion in asset purchases to help ensure UK economic recovery. BOE board member Dale warned about the risk of expanding purchases and how it may be costly to undo the impact of the additional stimulus. The MPC minutes suggested that the BOE discussed the possibility of cutting the remuneration rate the central bank pays on bank deposits it holds for UK commercial banks. GBP downside was partly limited by report that UK November CBI manufacturing orders rose to their best level in a year improving to -45 from -51 last month. The CBI report showed a sharp increase in demand for UK exports. It appears that weak GBP is helping to boost demand for UK exports by making the export prices more competitive. Most of the impact of today's release of the MPC minutes was on the cross trade with GBP weakening versus the JPY and EUR. The GBP has performed quite well despite uncertainty about the BOE's plans for its asset purchases. Bloomberg carried a report which suggests that some investors are looking to pick up UK assets in anticipation that the asset purchase plan will ultimately boost UK economic outlook. The next key focus will be Friday's release of UK retail sales.

On November 19th October money supply and public-sector borrowing will be released. The money supply is expected is to rise by 0.9% compared to 0.8% last month. Public-sector borrowing is expected to widen to 15.062bln from 14.812bln last month.  Also on November 19th, October retail sales will be released expected at 1% compared to 2.4% last month.

The technical outlook for GBP is positive as GBP trades above 1.6700. Expect near-term support at 1.6670 the November 16th low with resistance at 1.6875 for November 16th high and 1.7045 the August 5th high.

CAD
CAD traded higher supported by report of a rise in Canada's CPI and in reaction to firmer crude prices and record high price of gold. Canada's headline CPI declined by 0.1% and the core rate rose by 0.1%. This marked the first rise in Canada's core CPI in five months. BOC members are focused on Canada's core inflation rate and the modest rise in the October CPI is unlikely to encourage the BOC to make any changes in their plans to maintain current record low yields through June 2010. CAD continues to track the price of crude and metals and found additional support from this week's release of better than expected manufacturing shipments data and improvement in Canada's trade deficit as exports are rising despite strong CAD.  The fact that Canada's export sales and manufacturing shipments are rising despite strong CAD may reduce the risk of intervention. CAD gains were limited by weaker than expected US housing starts and a decline in US equity markets.

On November 19th September net foreign investment will be released expected at 3.06bln compared to 5.08bln last month along with October leading index expected at 0.7% compared to 1.1% last month and September wholesale sales expected at 1% compared to -1.4% last month.

The technical outlook for CAD is positive as USD/CAD trades below since 1.0600. Look for near-term support at 1.0465 the November 17th low with resistance at 1.0610 the November 10th high and 1.0700.

AUD
AUD traded mixed initially supported by strong Australian economic data, RBA rate hike speculation, and rising price of commodities with gold trading at record high. Australia's Westpac September leading index jumped to 5.8% from 3.7% last month and Q3 wage price index rose by 0.7%. RBA watcher McCrann said that he expects the RBA hike rates 25 bps in December. Despite the aforementioned Australian economic data and the RBA rate outlook today's AUD rally was quite unimpressive. Some analysts note that the RBA policy minutes released Tuesday suggested that the pace of tightening is open to question and the RBA minutes may be seen as less hawkish. There could be an argument that the RBA will hike rates 25 bps in December and pause. The rate hike speculation is already discounted by the recent rally in AUD. The limited reaction in the AUD today could be a technical sign that the AUD is overbought. In addition the price action may raise suspicions of RBA intervention try to limit AUD gains. The AUD has stutter stepped at times during its current 15 month rally and today's price action may be nothing more than another stutter step. Investors may also be digesting yesterday's warning from the IMF at the global recovery to be sluggish and today's report of a sharp drop in US housing starts and building permits. US housing data may generate concern about the strength of the US recovery. AUD should remain well supported on breaks by RBA outlook and optimism about global economic recovery.

The technical outlook for the AUD is positive as the AUD rallies above 9200. Expect AUD support at 9210 the November 12th low with resistance at 9405 the November 16th high.