• USD: Lower, stocks rally, construction spending, ISM and pending home sales rise
  • JPY: Lower, Japan's PM says JGB issuance must be below ¥44 trln, tracking stocks
  • EUR: Higher, manufacturing PMI rises to 18 month high
  • CHF: Higher, manufacturing PMI weaker than expected, KOF at 17 month high, threat of intervention
  • GBP: Mixed, manufacturing PMI rises to a two-year high, UK government to break up banks
  • CAD and AUD: AUD & CAD higher, RBA rate hike speculation, higher price of gold and crude


Overview     
USD starts the week lower pressured by improving risk appetite sparked by report of better than expected manufacturing PMI data from Europe, Asia and the US. AUD outperformed supported by RBA rate hike speculation, an upgrade of Australia's fiscal and economic outlook report of a sharp rise in Australian Q3 house prices. GBP underperformed with upside limited by weak UK bank shares and report that the UK government plans to split a number of UK banks including RBS. UK manufacturing PMI rose to its best level in almost 2 years. The UK manufacturing PMI helps limit selling pressure in the GBP. Commodity currencies were supported by a sharp rise in the price of gold and crude as improvement in manufacturing PMI points to expansion of the global recovery. China's PMI for October rose to 55.2 from 54.3. Strong Chinese and US PMI data adds to demand for the commodity currencies. US economic data was strong with September construction spending rising, October ISM beat expectations and pending home sales were up for the eight straight month. Stocks traded at the day's highs and USD at the day's lows after the release of today's US economic data. The stock rally fuels risk appetite.

This week's focus turns to central bank meetings in Australia, the US, the EU and UK and Friday's release of US unemployment. The RBA meet Tuesday and the central bank is expected to hike rates 25bps. The Fed meets on Tuesday and Wednesday and is expected to hold monetary policy unchanged. In light of the improving outlook for the US economy the Fed may drop its language that interest rates will remain low for an extended period. The ECB and BOE meet on Thursday. The ECB is expected to leave monetary policy unchanged. There is a great uncertainty over whether the BOE will elect to expand its asset purchase program as UK GDP posted a negative result. US unemployment is expected to rise to a new 26 year high but nonfarm payroll job losses will likely be less than 200k. The trade will be monitoring closely central bank policy decisions and how they may impact global liquidity and the economic recovery. The US unemployment report will be key to investor risk sentiment and speculation about whether the US recovery is sustainable. FX price direction remains closely correlated to equities and risk sentiment.

Today's US data:
September construction spending rose 0.8%, a -0.3% reading was expected. October ISM rose to 55.7, a reading of 53 was expected. October pending home sales rose 6.1%.

Upcoming US data:
On November 3rd September factory orders will be released expected at 1% compared to -0.8% last month along with domestic auto sales for October. The FOMC begins a two policy meeting on November 3rd. On November 4th October ADP employment and nonmanufacturing ISM Index will be released. The GDP report is expected at -188k compared to -254k last month and nonmanufacturing ISM is expected at 51.8 compared to 50.9 last month. On November 5th initial jobless claims for week ending 10/31 will released expected at 521k compared to 530k last week. Q3 productivity and unit labor costs will also be released on November 5th. Q3 productivity is expected at 5.5% compared to 6.6% last month and unit labor costs are expected at -4.5% compared to -5.9% last month. On November 6th October nonfarm payroll and unemployment will be released. The nonfarm payroll is expected at -175k compared to -263k last week and the unemployment rate is expected to rise 0.1% to 9.9%.

JPY
JPY opened higher initially supported by safe haven flows sparked by a sharp decline in the Nikkei. The Nikkei closed 232 points lower following the sharp decline in Wall Street Friday and in reaction to report that CIT filed for bankruptcy. European equity markets recovered and US equities traded higher in reaction to report of stronger than expected manufacturing PMI data. JPY gains were limited by selling in cross trade to the AUD and EUR with AUD supported by RBA report Q3 house prices rose sharply and EUR supported by report that EU   manufacturing PMI rose to its best level in 18 months. GBP/JPY traded lower with GBP pressured by report that the UK government may breakup a number of UK banks. There was limited reaction to a statement from PM Hatoyoma that the JGB issuance must be below ¥44 trln. JGB yields have been rising partly because of concern about the potential for a large issuance of bond to finance the Japanese government's plans to boost the domestic economy. The trade continues to digest last week's decision by the BOJ to end its corporate bond support plan and begin its exit from the credit markets. The BOJ elected to hold monetary policy unchanged Friday and began withdrawing from the credit market. The BOJ said it will extend its low interest rate loans by three months from December to March but then would end the loan program. The BOJ will end its corporate bond and commercial paper buy plan in December. The BOJ's decision to end its liquidity program is a sign that the BOJ has confidence in the Japanese economic recovery. The trade will look to Wednesday's release of the BOJ policy minutes for further insight into BOJ outlook for Japan's economy. Last week Japan reported that retail sales for September rose a strong 0.9%. JPY traded to the day's lows as stocks rally in reaction to strong US economic data.

This week's Japanese economic calendar includes the November 4th release of the minutes for the BOJ policy meeting. On November 6th September leading indicators will be released expected at 1% compared to 0.8% last month.

Key technical levels to watch in USD/JPY include support at 88.35 the October 9th low with resistance at 91.80 the October 28th high.

EUR
EUR traded higher supported by report that EU manufacturing PMI rose to its best level in 18 months. EU October manufacturing PMI rose to 50.7 from 49.3 last month The EU manufacturing PMI report suggests that the EU economy is expanding and this is a positive for global economic outlook and contributes a slight rebound in risk appetite. Last week's EU economic data was mixed with Germany posting an unexpected decline in unemployment and EU HICP annual inflation remaining in negative territory. This week's key focus will be Thursday's ECB policy meeting. The ECB is widely expected to leave interest rate policy unchanged at 1% but it is unclear if the ECB is ready to lay out the details for an exit strategy from unconventional policy measures. In addition, the trade will be looking to see whether the ECB sees the recent improvement in EU economic data as strong enough to warrant a shift to a more hawkish bias. Last week the ECB's Weber said that the ECB would begin to discuss an exit strategy. The big question is whether the current recovery in the global economy is sustainable. The EU and global recovery will likely be uneven and weak. This suggests that the ECB will remain cautious and l be in no hurry to change monetary policy. In addition, EU inflation remains in check. The trade will be monitoring the press conference following the ECB policy meeting for clues as to the timing of when the ECB plans to begin its exit strategy. The EUR has failed to rise back above 1.5000. This generates speculation that the EUR may be vulnerable to further weakness. The trade is closely watching uptrend support around 1.4600. A break of this level could signal a deeper downside technical correction for the EUR.

On November 4th September PPI will be released expected at 0.2% compared to 0.4% last month. On November 5th EU September retail sales will be released expected at 0.3% compared to -0.2% last month. ECB meet on November 5th. No policy change expected.

The technical outlook for the EUR is mixed as the EUR fails to hold above 1.5000. Expect EUR support at 1.4650 the October 7th low with resistance at 1.4928 the October 27th high.

CHF
CHF traded higher tracking the improvement in risk appetite as European equities rebound and US equities trade higher in reaction to the report of improving PMI data in the UK, EU and the US. CHF gains were limited by report of weaker than expected Swiss PMI and ongoing threat of intervention. Swiss October PMI dropped to 54 from 54.3 last month a reading of 55 was expected. Last week Switzerland reported that the KOF index rose to its highest level in 17 months. There were rumors last week that the SNB intervened in the EUR/CHF cross after the cross dropped to a one-month low with the CHF supported by the release of strong Swiss KOF. This weeks Swiss economic calendar includes Thursday's release of October CPI expected flat compared to 0.6% last month and Friday's release of October unemployment expected at 4.2% compared to 4.1% last month. Expect USD/CHF support at 1.0015 the July 15th 2008 low with resistance at 1.0360 the October 29ht high.

GBP
GBP traded mixed erasing an early loss that was sparked by report that the UK government plans to break up a number of UK banks including RBS. GBP downside was limited by report that UK CIPS manufacturing PMI rose to its highest level in almost 2 years reported at 53.7 from 49.9 last week. The rise in the PMI suggests that the UK   manufacturing economy is expanding. Last week the UK reported that consumer confidence rose to 21 month high.  Today's UK banking and economic news further clouds the outlook for BOE policy. The BOE meet on Thursday and it remains unclear whether the BOE will elect to expand quantitative ease. Central banks are beginning their exit from extraordinary monetary policy measures with the BOJ announcing that they have started their exit strategy and ECB officials indicating that they may soon announce their exit plans. Because of the uncertain outlook for the UK recovery the BOE is expected to be the last to exit accommodation and may actually be forced to expand policy measures. The main focus for GBP trade apart from the risk appetite is BOE policy outlook. In light of last week's report of a surprise decline in UK Q3 GDP the BOE may elect to expand its asset purchase plan at next week's policy meeting. GDP is considered a lagging indicator and the BOE may look at recent reports on manufacturing PMI and consumer confidence is data that confirms the UK economy is improving. The BOE meet on November 5th and are expected to decide whether to extend the current size of the asset purchase plan of £175 bln. The BOE's decision will be crucial to the outlook for the GBP because a number of central banks and governments are preparing to withdraw stimulus. Based on the UK GDP report it may be difficult for the BOE to refrain from adding additional stimulus. Recent GBP price action has found that the GBP benefits on BOE decision to hold the current level of asset purchases and weakens if the BOE elects to expand quantitative ease. A Reuter's poll of 62 economists shows that 19 expect no change in BOE asset purchases, 22 look for an increase of £25 bln and 21 look for 50 bln. The impact of the BOE decision may be limited as focus returns to risk appetite.

On November 4th October consumer confidence Index will be released expected at 71.3 compared to 71 last month along with October's CIPS services PMI expected at 55.9 compared to 55.3 last month. On November 5th September industrial production will be released expected at -1% compared to -2.5% last month. The BOE meet on November 5th and it is uncertain whether the BOE will elect to expand its asset purchase program and if so by how much. On November 6th October PPI will be released expected unchanged at 0.5%.

The technical outlook for GBP is mixed as GBP trades fails to hold above 1.6400. Expect near-term support at 1.6251 the October 26th low with resistance at 1.6580 the October 30th high.

CAD
CAD traded higher supported by optimism about the global recovery as manufacturing PMI's rise in Europe the US and China and in reaction to firmer crude and gold prices. China's PMI for October rose to 55.2 from 54.3 in September. The rise in China's PMI encourages demand for commodity currencies because the PMI report points to improving export demand from Asia. The price of gold rallied $20 an ounce. CAD is rebounding from last week's losses that were inspired by report of weaker than expected Canadian GDP and threat of intervention. Canada's August GDP declined by 0.1%, 0.1% is rise was expected. This marked the first monthly GDP drop since May and signals weaker outlook for Canada's recovery. The GDP decline reflects weaker demand for energy and manufacturing and the impact of strong CAD on Canada's export demand. The GDP report may encourage speculation that the BOC will have to maintain accommodative policy for a longer period and that's BOC officials may step up for more intervention. The trade continues to debate whether the BOC will continue to try and talk the CAD lower. There were no major Canadian economic releases in today's trade. This week's main focus will be Friday's release of Canada's unemployment. CAD price direction will continue to track crude and equity markets.

This week's Canadian economic calendar includes the November 5th release September building permits expected at 2% compared to 7.2% last month along with IVEY PMI index for October expected at 62 compared to 61.7 last month. On November 6th October unemployment will be released expected unchanged at 8.3% with employment growth at 6K compared to 31k last month.

The technical outlook for CAD is negative as USD/CAD trades above 1.0600 and breaks trend line resistance. Look for near-term support at 1.0652 the October 30th low with resistance at 1.0930.



AUD
AUD traded sharply higher supported by RBA rate hike speculation, report of higher Australian house prices and report of improving manufacturing PMI in Europe, Asia and the US. AUD was also supported by report that Australia's government upgraded its fiscal and economic forecasts. The Australian government expects 1.5% GDP in 2009/ 10 and 2.75% in 2011 with inflation at 2.25%. AUD rebounded from early losses that were sparked by weaker equity market trade on news of CIT bankruptcy. This week's main focus will be Tuesday's RBA policy meeting. Analysts at Westpac suggest that the RBA will hike rates 50bps Tuesday. Market consensus is the RBA will likely hike rates by just 25 basis points. Australia's Q3 house prices rose 4.2%. The house price rise may increase pressure on the RBA to make a more aggressive rate hike. The rise in PMI's in Europe and Asia encourages optimism about the global recovery and boosted risk appetite in demand for high-yield currencies like the AUD.  AUD has experienced choppy price action over the last few days with the price moves dovetailing the direction of global equity markets and risk sentiment. Recent statements from the RBA indicate that this inflation outlook will be one of the key determinants of rate policy. Australian Q3 CPI was released Wednesday. The headline CPI came in slightly above expectations but the annual rate posted the smallest gain since second quarter of 1999. It can be argued that the CPI data makes it unlikely that the RBA will make aggressive rate hikes in the months ahead. The CPI report is unlikely to sway RBA policy decision at this week's meeting. The RBA was the first major industrial nation's central bank to hike rates as the global recession appeared to be ending. RBA rate hike speculation and risk sentiment are the key drivers for AUD trade. The RBA raised rates 25bps to 3.25% at the start of October and AUD has been trading near a 14 month high supported by speculation that the RBA would continue to hike rates in November and December with a number of analysts looking for possible 50bps as early as November. Australia's CPI report suggests that RBA rate hikes may less aggressive. RBA policy meeting will be held on November 3rd. A 25bps rate hike is expected but the CPI report may contribute to uncertainty about the RBA policy outlook.

RBA meet and November 3rd and are expected to hike rates 25bps to 3.50%. On November 4th September building approvals will be released expected 2.5% compared to -0.1% last month along with September retail trade expected at 0.6% compared to 0.9% last month.  

The technical outlook for the AUD is mixed to as AUD fails to hold above 9200. Expect AUD support at 8906 the November 2nd low with resistance at 9175 the October 30th high.