• USD: Lower, stocks rise, risk appetite improves as Q3 GDP beats expectations
  • JPY: Lower, industrial and manufacturing output rise, tracking equities
  • EUR: Higher, German unemployment falls, EU economic and industrial sentiment rise
  • GBP: Higher, mortgage loans rise to 18 month high
  • CAD and AUD: AUD & CAD higher, hawkish comments from Australia's finance minister, risk is back on

Overview     
USD and JPY traded lower Wednesday as US advanced Q3 GDP rises more than expected. The stronger than expected US GDP report sparked a rally in equities and helped to boost risk appetite as the data confirms that the US economy is emerging from recession. Jobless claims data was mixed, with first time weekly claims posting a modest decline and continuing jobless claims falling to the lowest level since March 21st. AUD outperformed supported by hawkish comments from Australia's finance minister that interest rates won't stay at current emergency levels. EUR was supported by report of improving EU economic sentiment and an unexpected decline in German unemployment. GBP rallied to a six-week high versus the EUR supported by report that UK mortgage loans rose to an 18 month high. The key question is whether today's report of improvement in US GDP can be sustained or does the gain reflect a temporary rebound fueled by government incentive plans to boost auto and housing sales. FX price direction remains closely correlated to equities and risk sentiment.

Today's US data:
US advance Q3 GDP rose by 3.5%, a 3.2% rise was expected. Jobless claims for week ending 10/24 fall 1k to 530k, a reading of 525k was expected.

Upcoming US data:
On October 30th September personal income and consumption will be released expected at 0.1% and -0.5% respectively along with Chicago October PMI expected 49.1 compared to 46.1 last month's and final October Michigan sentiment expected unchanged at 69.4.

JPY
JPY traded lower pressured by improving risk appetite as US Q3 GDP beats expectations and US equities rally. The Nikkei closed 184 points lower. The decline in the Nikkei initially sparked safe haven flows to the JPY. Japan's economy continues to improve with industrial output reported higher for the seventh month in a row. September output rose by 1.4%. In addition, manufacturing output rose 3.1% in October and 1.9% in November according to METI. Inventories fell to the lowest level in 21 years. These reports will likely encourage the BOJ to soon begin to withdraw stimulus and exit its bond support program. There are reports that the BOJ may end the corporate support plan as early as Friday. The Japanese government wants the BOJ to continue with the corporate bond purchase plan and is lobbying the BOJ to maintain accommodative monetary policy to support the recovery. According to a Reuters report the BOJ and government plan to hold regular meetings to discuss views on the economy. Japan's finance minister does not share the same optimism about Japan's economy as the BOJ. A rift is emerging between the finance ministry and BOJ over whether the BOJ should begin an exit strategy from its corporate bond support plan. If the BOJ ends the support plan too soon it may put the Japanese economic recovery at risk.

On October 30th September CPI will be released expected at -0.1% compared to 0.3% last month along with September household spending, unemployment housing starts and construction orders. Household spending is expected to fall 1% compared to a 1.9% rise last month. The unemployment rate is expected to rise to 5.7% from 5.5%. Housing starts are expected to rise 4% compared to -9.4% last month, and construction orders are expected to fall 30% and -25.2% last month.

Key technical levels to watch in USD/JPY include support at 90.24 the October 29th low with resistance at 92.55 the September 21st high and 9330 the September 7th high.

EUR
EUR traded higher supported by improving risk sentiment as US Q3 GDP beats expectations and interest reaction to improving EU economic data. EUR firmed ahead of today's US GDP report supported by report of improving EU economic sentiment and industrial sentiment and report of an unexpected decline in German unemployment. EU October economic sentiment rose to 86.2 from 82.8 in September and October industrial sentiment improved to -21 from -24 last month. German October unemployment rate unexpectedly declined to 8.1% from 8.2% last month. The improvement in EU economic outlook may bring forward ECB plans to exit unconventional monetary policy measures. The ECB's Weber said that the ECB will soon announce its exit strategy. There is focus on widening of a central bank policy divide as the Norges Bank hiked interest rates Wednesday and Australia raised interest rates at the beginning of the month. This contrasts with expectation that Fed will remain on hold at least until mid-2010. Fed policy outlook is negative for USD if risk appetite continues to improve. It's interesting that the New Zealand central bank elected to hold interest rate policy steady at a record low 2.5% today and indicated that they don't plan to raise rates until the second half of 2010. We wrote a piece earlier which discussed the fact that central banks and governments coordinated monetary ease but do not have a similar plan to coordinate exit strategies. This means that central banks that are first to hike rates will likely lead to increased demand for their currency. This week's price action in the EUR 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 October 30th EU October HICP will be released along with October unemployment. The HICP is expected unchanged at -0.3% with the unemployment rate rising to 9.7% from 9.6% last month.

The technical outlook for the EUR is mixed as the EUR fails to hold above 1.5000. Expect EUR support at 1.4675 the October 12th low with resistance at 1.4928 the October 27th high.

GBP
GBP traded higher supported by improving risk sentiment as US Q3 GDP beats expectations and in reaction to report that UK mortgage loans rose to 18 month high. UK mortgage loans rose to 56.215k from 52,970k last month. The UK mortgage loan report is further confirmation that the UK housing market is improving. There appears to be a disconnect between recent UK economic data with Q3 GDP posting an unexpected decline and most of the recent UK economic data pointing towards recovery including today's mortgage data. 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. 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. Monday, the BOE's Blanchflower said that the BOE may expand its asset purchase program by another £50 bln. The Sunday Times however carried a piece warning the BOE not to panic over Friday's GDP report. GDP is seen as a lagging indicator. 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.

On October 30th, October GFK is expected at -14 compared to -16 in September. 

The technical outlook for GBP has improved as GBP trades above 1.6500. Expect near-term support at 1.6335 the October 29th low with resistance at 1.6745 the September 11th high.

CAD
CAD traded higher as investors take on some risk as equities and commodities rebound supported by report of better than expected US Q3 advanced GDP. CAD is rebounding from a three-week low that was inspired by the recent sharp downturn in global equities, dip in risk appetite and verbal intervention. Canadian economic data was mixed as raw material prices and producer prices post an unexpected decline. September IPPI declined by 0.5% and RMPI declined by 1.1%. The decline is mainly attributed to lower petroleum prices. Canada's weekly earnings rose 2% y/y. Today's improvement in risk sentiment and US GDP overshadowed Canada's economic data. The trade continues to debate whether the BOC will continue to try and the CAD lower. Over the past few weeks BOC officials have expressed concern that the strength of the CAD is a threat to the Canadian recovery. Wednesday the BOC's Carney said that he expects the USD to remain the world's reserve currency. He went on to say that intervention is not effective unless backed up by policy. CAD traded lower to start the week pressured by a statement from the IMF warning that CAD strength could slow the Canadian recovery CAD has been underperforming since last week's BOC policy meeting and the release of the Monetary Policy Report Thursday. 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. In a press conference following the release of the Monetary Policy Report BOC Governor Carney said that intervention is an option. Verbal intervention has helped to slow the CAD rally.

On October 30th August GDP will be released expected at 0.1% compared to flat last month.

The technical outlook for CAD is negative as USD/CAD trades above 1.0600. Look for near-term support at 1.0590 the September 17th low with resistance at 1.0825 the October 5th high.

AUD
AUD traded sharply higher supported by hawkish comments from Australia's finance minister and improving risk appetite as US equity markets and commodities firm in reaction to the report of stronger than expected US Q3 GDP. Australia's finance minister said that interest rates won't stay at current emergency levels. His comments suggest that the RBA will continue to hike rates into year-end. 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 AUD has experienced a sharp setback over the last few trading sessions pressured by declining equity markets and a dip in risk appetite as investors begin to question whether the global recovery is sustainable. Today's US GDP report sparked a rebound in risk appetite and fresh hope that the global recovery is sustainable. AUD was also supported by a sharp rally in cross trade to the JPY as risk appetite returns and investors look to reestablish positions in higher yield assets. The trade is continuing to digest Wednesday's release of Australian CPI. 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 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 RBA watcher McCrann sees less of a chance 50bps rate hike from the RBA if inflation remains in check. Australia's CPI report suggests that RBA rate hikes may less aggressive. The next 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. Today's focus was all about return of risk appetite.

 On October 30th September private credit will be released expected at 0.2% compared to 0.1% last month.

The technical outlook for the AUD is mixed to as AUD fails to hold above 9200. Expect AUD support at 8943 the October 29th low with resistance at 9207 the October 28th high.