• USD: Lower, improving risk sentiment and speculation the Fed will continue to maintain low yields
  • JPY: Higher, Shirakawa says the economy is picking up, effects of stimulus may be fading
  • EUR: Higher, BBK says German economy improved, concerns grow about EUR strength
  • CHF: Higher, retail sales fall, ZEW investor sentiment at record high, tracking risk sentiment
  • GBP: Higher, MPC's Posen may support expanding QE, Rightmove house prices rise
  • CAD and AUD: AUD higher & CAD mixed, RBA rate hike speculation, position squaring ahead of the BOC

 

Overview     
USD and GBP start the week lower with the USD pressured by improving risk appetite as equity markets rally and by speculation that the Fed will continue to maintain low interest rates. GBP traded lower in reaction to a statement form the BOE's Posen that the BOE must continue quantitative ease. Improving risk appetite encourages demand for high yield currencies with AUD supported by statement from the RBA's Lowe that it's appropriate for interest rates to return to a normal level. JPY traded mixed despite a statement from BOJ's Shirakawa that Japans economy is starting to pick up. EUR traded higher with gains limited by concern about EUR strength. The Financial Times carried a blog urging the ECB to take action on EUR strength. There was limited reaction to a cover story in this weekend's Barron's which says its time for the Fed to raise interest rates. The Barrons' cover story may start the debate over when it will be appropriate for the Fed to hike interest rates. The article calls on the Fed to raise rates to 2% to prevent a liquidity bubble and reduce the risk of a collapse of the USD and inflation. Higher US interest rates would help to limit the USD selling pressure but with credit markets still tight, inflationary pressures in check, continued slack in the economy and rising unemployment the Fed is not expected to begin raising rates until mid-2010. Steven Beckner says the recovery is not strong enough for the Fed to shift policy. The main driver for the Forex trade remains risk appetite.

US data:
October NAHB index will be released later today, a reading of 20 is expected.

Upcoming US data:
On October 20th September housing starts will be released expected at 610k compared to 598k last month. September PPI will also be released on October 20th expected at 0.1% compared to 1.7% last month. 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
JPY edged higher supported by report of improving economic outlook in Japan with the August tertiary industry index reported higher. Japan's August tertiary index rose for the third consecutive month by 0.3% to 97.1. BOJ Governor Shirakawa says that the Japanese economy is starting to pick up corporate funding has improved and expects CPI pressures to lessen. There was little reaction to the release of the BOJ policy minutes for the September 16th-17th meeting. The minutes indicate that BOJ member's see that the impact of the BOJ's corporate bond purchase plan is beginning to wane. This may be an indication that the BOJ is moving closer to an exit strategy from its bond support program. JPY traded mixed in cross trade weakening versus the AUD as RBA officials indicate that interest rates need to return to normal levels. EUR/JPY edged higher with the EUR supported by report from the BBK that the German economy improved in Q3. GBP/JPY traded lower with the GBP pressured by comments from the BOE's Posen that suggest he might be in favor of extending the BOE's asset purchase program. GBP/JPY surged last week with GBP supported by a statement from the BOE's Fischer that the BOE may pause its asset purchase plan. BOE rhetoric about it asset purchase plan will be a key short term driver for GBP/JPY. JPY closed last week near a three week low versus the USD partly because of selling pressure in the GBP/JPY cross.

On October 20th revised August leading indicators will be released expected at 1% compared to 2% at the last report. 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 90.19 the October 15th low with resistance at 91.63 the October 24th high.

EUR
EUR traded higher supported by improving risk appetite and gains in cross to the GBP. A rally in European and US equities sparked demand for the EUR. EUR gains in cross trade to the GBP are attributed to comments from the BOE's Posen that he may favor of extending the BOE's asset purchase plan. EUR was also supported by a BBK report which states that the German economy improved in Q3. EUR gains were limited a Financial Times report urging the ECB to take action on EUR strength. Last week ECB President Trichet said that the EUR was not designed as global reserve currency and that it is extremely important that the US pursue policies to support the USD. Trichet warned that excessive FX volatility is a threat to the global recovery. The trade will be monitoring comments from the EU and ECB officials about the EUR strength. In light of the general negative fundamental outlook for the USD physical intervention from the ECB remains unlikely. EUR maybe approaching extreme overbought as trade notes that Friday's CFTC commitment traders report for the IMM showed the noncommercial spec long in the EUR is at its highest level since the EUR traded at 1.6000.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.

This week's EU economic calendar includes the October 20th release of German September PPI expected at 0.2% compared to 0.5% last month. 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 it 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 1.4968 the October 16th high.

CHF
CHF traded higher Monday supported by improving risk appetite as global equity markets continue to rise. Last week's Swiss economic data was mixed with retail sales posting an unexpected 1% decline in August but the ZEW investor confidence index rose to a record high. Swiss economic data has had limited impact on CHF with CHF primarily supported by improving risk sentiment. EUR/CHF cross remains fairly steady above 1.5100. If the cross falls below this level we anticipate that SNB officials will once again raise the threat of intervention to try and stop CHF appreciation versus the EUR. This week's economic calendar is light with the only major report Thursdays release of the October trade balance expected at 1.25 bln compared to 1.79 bln last month. Expect USD/CHF support at 1.0119 the October 15th low with resistance at 1.0453 the October 1st high.

GBP
GBP traded lower pressured by report that the BOE's Posen wants the BOE to continue quantitative ease and he may be in favor of expanding the size BOE's asset purchase plan. Last week the GBP experienced a sharp short covering rally in reaction to a statement from the BOE's Fischer that it may be time for the BOE to pause its asset purchase plan. Posen says that the exit strategy from quantitative ease will depend on the recovery and inflation and the recovery just isn't there yet. In contrast, last Thursday Fischer said that the recent improvement in asset prices and confidence is confirmation that BOE's quantitative ease program is working. Fischer's comments appeared to reduce the odds that the BOE will elect to extend quantitative ease at the November policy meeting. GBP has been underperforming partly pressured by speculation that the BOE may expand quantitative ease. BOE policy outlook is the key short-term driver for GBP trade. At the start of October The BOE elected to keep monetary policy unchanged and maintain its current level of asset purchases at £175 bln. 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 the October 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 pausing quantitative ease in November. The trade will also continue to monitor rhetoric from BOE officials in regard to their view on the BOE's asset purchase plan. GBP downside was partly limited by report of improving housing data. October Rightmove house price index rose 2.8% compared with 0.6% rise last month. There was little reaction to a CBI report that says the UK risks a GBP crisis if public finances are not controlled. This week's main focus will be Wednesday's release of the BOE minutes for the October meeting and Friday's release of Q3 GDP. 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.

This week's UK economic calendar includes the October 20th release of September public sector borrowing expected at 16.501 compared to 16.119 last month. On October 21st October CBI orders will be released expected at -46 compared to -48 last month. MPC minutes for the October policy meeting will also be released on the 21st. On October 23rd Q3 GDP will be released expected at -0.1% compared to -0.6% last month.

The technical outlook for GBP has improved as GBP trades above 1.6200. Expect near-term support at 1.6215 the October 16th low with resistance at 1.6470 the September 23rd high.

CAD
CAD traded mixed initially supported by improving risk sentiment as equity markets rally and in reaction to report of strong foreign investment flows. Equity markets continue to benefit from better than expected US earnings reports and optimism about the global recovery. Net investment flows to Canada rose by 5.8 bln in August, the trade had expected inflows of 1 bln. This marks the biggest net foreign investment purchases since June which totaled 10.6 bln. CAD gains were limited by position squaring in front of Tuesday's BOC policy meeting and a modest drop in crude oil prices. CAD gains were also limited by a report that two of the US biggest ports saw imports drop sharply in September. This may be a bad sign for Canada's export outlook. Focus turns to Tuesday's BOC policy meeting. The BOC is expected to leave policy unchanged at 0.25% and to reaffirm its commitment to maintain yields at this level through June of 2010. Last week Canada reported that its CPI declined for the fourth straight month. The BOC has pledged to maintain low yields at the current level as long as inflation remains in check. The CPI report will likely encourage the BOC to maintain steady monetary policy at this week's meeting. Last Thursday, Canada reported much weaker than expected manufacturing shipments for August. The drop in manufacturing shipments reflects the impact of the strong CAD on Canada's export sales. Tuesday, Canada's PM Harper expressed concern about the strength of the CAD and how that strength could choke off the Canadian economic recovery. Harper's comments heighten the risk of intervention to try to limit CAD gains. If the CAD continues to rally we look for more verbal intervention from the BOC. Physical intervention seems unlikely unless a consensus emerges among G-7 nations on the need for coordinated intervention to support the USD.  The BOC may address the strength of the CAD at Tuesday's policy meeting.

On October 20th August wholesale sales will be released expected at 1% compared to 2.8% last month along with September leading index expected at 0.8% compared to 1.1% last month. BOC policy meeting is scheduled for October 20th.August retail sales will also be released on October 20th expected at 0.9% compared to -0.6% last month. 

The technical outlook for CAD is mixed as USD/CAD trades above 1.0400. Look for near-term support at 1.0288 the October 16th low with resistance at 1.0551 the October 9th high.

AUD
AUD traded higher supported by fresh RBA rate hike speculation and improving risk sentiment as equity markets rally. The RBA's Lowe says it's appropriate to go back to more normal monetary policy. Lowe's comments fuel speculation that the RBA will continue to raise interest rates. According to the AFR however the RBA will take a wait and see approach and upcoming data will be key to deciding on the next rate move. The trade will continue to closely watch statements from the Army about monetary policy outlook and sentiment towards the global recovery. Thursday China will release its third-quarter GDP report. A number of analysts expect China's third-quarter GDP to 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 is also supported by improving outlook for Australia's domestic economy. Last week Australia reported that consumer confidence rose to a two-year high. The RBA is expected to hike rates 25bps in November and December raising the overnight rate to 3.75%. The main risk to AUD is rally has reached extreme overbought.

This week's Australian economic calendar includes the October 21st release of September new car sales expected at 2% compared to -6.9% last month. 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 9113 the October 19th low with resistance at 9300 the August 5th 2008 high.