• USD: Mixed, equities firm, home price index falls less than expected, consumer confidence falls
  • JPY: Higher, supported by repatriation flows, Fujii says bond issuance will not exceed ¥44 trln
  • EUR: Lower, M3 and private sector loan growth slows, tracking equities
  • GBP: Higher, CBI retail sales rise more than expected
  • CAD and AUD: AUD & CAD higher, Australia's NAB business confidence rises, tracking equities

Overview     
USD traded mixed Tuesday as the stock market traded both sides of settlement and US consumer confidence posted an unexpected decline. FX price action was partly limited by uncertainty over whether Monday's sharp USD rebound is a sign of a turn for the USD or just a temporary rebound. Monday's USD rally was attributed to a sharp selloff in US equities sparked by concern about US banks and a spike in US bond yields to a two month high. Six US banks were closed Monday bringing the total to 106 banks that have failed this year in the US. More bank failures are expected before year end. The spike in bond yields reflects this week's record US bond supply and speculation that the recent improvement in US economic data may encourage the Fed to hike interest rates earlier than expected. USD was also supported Monday by report that comments from a research analyst at the Central Bank of China that China should add more EUR and JPY reserves reflected the researchers' personal opinion and not government policy. Government officials in China said that reserve diversification is a long-term goal and is not intended to impact short-term FX volatility. US economic data was mixed with Case Shiller Home price index declining less than expected and consumer confidence declining by more than expected. USD direction remains closely correlated to the direction of the S&P. USD firmed after the release of the consumer confidence report as stocks decline. Stocks returned to higher levels and the USD rebound stalled. The week's main focus will be Thursday's release of US advanced Q3 GDP. US Q3 GDP is expected to show a sharp gain and confirm that the US is emerging from recession. How US equities react to the GDP report will determine the short-term direction for the USD.

US data:
August Case Shiller Home price index fell to -11.3%, a reading of -12.1 was expected. October consumer confidence falls to 47.7, a reading of 54 was expected.

Upcoming US data:
On October 28th September durable goods will be released expected at 1.3% compared to -2.6% last month. September new home sales will also be released on October 28th expected 444k compared to 429k last month. October 29th initial jobless claims for the week ending 10/24 will be released expected at 525k compared to 531k last week. Advanced Q3 GDP will also be released on October 29th expected at 3.2% compared to -0.7% last quarter. 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 at 49.1 compared to 46.1 last month's and final October Michigan sentiment expected unchanged at 69.4.

JPY
JPY traded higher supported by repatriation flows sparked by weaker Asian equity market trade. The Nikkei closed 150 points lower following the triple digit selloff on Wall Street Monday. There was limited reaction to comments from Japan's Finance Minister Fujii that Japan's new bond issuance for fiscal 2010/11 must be below ¥44 trln. JGB bond yields have been experiencing upside pressure because of concern that the Japanese government will have to issue a large amount of bonds to finance the anticipated increase in the Japanese budget. The new Japanese government has pledged to increase spending to boost domestic Growth. Some estimates suggest that Japan's new bond issuance could rise above ¥60 trln. It is not clear if the recent rise in the Japanese bond yields reflects improving Japanese economy or concern about Japan's budget outlook. BOJ officials suggest that Japan's economic outlook has improved. Fujii says that BOJ's outlook is too rosy. A rift is emerging between the BOJ and Finance Ministry over the outlook for Japan's economy. The BOJ indicates that they plan to soon end their bond support plan as the economy improves. Fujji and the Japanese government want the BOJ to continue to support the economy and extend the bond support plan. Japanese press reports that Japanese corporations plan to avoid FX risk and will continue to buy domestic issues. This may help offset the impact when the BOJ ends its bond support plan. JPY gains were limited by selling in cross trade to the AUD and GBP, with AUD supported by report of a sharp rise in Australia Q3 business confidence and GBP supported by report of better than expected UK CBI retail sales. AUD/JPY gains were limited by report that the RBA may be less likely to hike rates 50bps if this week's Australian inflation data remains in check.

This week's Japanese economic calendar includes the October 28th release of September retail sales expected at -0.2% compared to 1% last month. On October 29th September industrial output will be released expected at 1% compared to 1.6% this last month. 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 90.77 the October 22nd low with resistance at 92.55 the September 21st high and 9330 the September 7th high.

EUR
EUR traded lower extending Monday's sharp selloff. EUR upside was limited by selling in cross trade to the GBP with GBP supported by report of better than expected UK CBI retail sales. EU economic data was mixed with September M3 rising by 1.8% and September private sector loans declining by 0.3%. These reports will have limited impact on the outlook for ECB policy. The ECB is widely expected to maintain steady rate policy through year end. In overseas trade Monday the EUR traded at a new high for 2009 supported by optimism about global recovery and report that China should increase EUR and JPY reserves. The EUR reversed to close sharply lower Monday tracking a triple digit selloff in US equities and in response to a statement from China that China's reserve diversification is a long-term goal. The selloff in US equities was sparked by weaker bank stocks pressured by news that six more US banks had failed. The EUR's failure to hold above 1.5000 may encourage a deeper downside technical correction. EU and ECB officials are expected to continue verbal intervention if the EUR returns to the 1.5000 level. EUR traded to the day's lows after the release of an unexpected drop in US consumer confidence. EUR downside was limited by US equity market gains.

On October 29th, German September retail sales will be released expected at 0.2% compared to -1.5% last month along with German October unemployment expected unchanged at 8.2%. EU October business climate will also be released on October 29th expected at -2.50 compared to -2.07 last month. 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 report of better than expected retail sales data and statement from the BOE's Posen. UK October CBI retail sales rose to +8 from +3 last month, a reading of +5 is expected. The expectation component of the CBI survey also showed gains. The CBI retail sales rise suggests that the UK economy is emerging from recession. The trade is trying to digest the impact of Friday's report of weaker than expected UK Q3 GDP. UK advanced Q3 GDP declined by 0.4%, a 0.2% rise was expected. The UK GDP report raises concern that the UK economy has yet to emerge from recession. The GDP report may increase pressure on the BOE to expand its asset purchase program. Posen says that weak UK GDP does not imply anything for the November BOE forecasts. His comments may reduce speculation that the BOE will expand quantitative ease at the November policy meeting. 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. The GBP was supported earlier last week by the BOE's decision to maintain its current level of asset purchases and interest rates and by the MPC minutes which seemed to reduce the risk that the BOE will expand quantitative ease. BOE policy outlook and decision on whether to maintain or expand the size of its asset purchase program will be key to the direction of the GBP. The MPC minutes indicated that the BOE will be closely looking at upcoming inflation data to assess whether quantitative ease is maintained or expanded. Key focus will be the November 5th BOE policy meeting. Weak UK Q3 GDP has increased the risk that BOE will expand QE at the November meeting. GBP gains were limited by report of weaker than expected US consumer confidence.

On October 29th September consumer credit, money supply mortgage applications and mortgage lending will be released. The consumer credit is expected at -0.299 bln compared to -0.309 bln last month with mortgage approvals expected at 50k and mortgage lending expected at 1.0210 bln. On October 30th, October GFK is expected at -14 compared to -16 in September. 

The technical outlook for GBP is mixed as GBP trades below 1.6400. Expect near-term support at 1.6240 the October 19th low with resistance at 1.6500.

CAD
CAD traded higher in tight range trade. CAD was supported by a statement from BOC Governor Carney. Carney said that he does not expect a double dip recession in Canada despite strong CAD. This statement may reduce risk of intervention. The trade ignored a report from Export Development Canada which warned that if CAD remains at current overvalued level recession could return. Canada's August job insurance claims rose 8.2%.CAD continued to rally despite the report of higher than expected rise in August job insurance claims. CAD traded lower Monday pressured by a statement from the IMF warning that CAD strength could slow the Canadian recovery and by weaker oil prices. The IMF expects Canada's economy to contract by 2.5% 2009 and grow by 2% in 2010. The IMF noted that the Canadian economy has shown resilience even in the face of strong CAD. 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.

This week's Canadian economic calendar includes the October 29th release of September IPPI and RMPI expected that 0.3% and 2.8% respectively. On October 30 of 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 1.0500 the October 25th low with resistance at 1.0717 the October 27th high.

AUD
AUD traded mixed initially supported by report of a sharp jump in Australia's business confidence. Australia is Q3 NAB business confidence index rose 20 points to 16. This marked the highest level for any of the index since Q1 2002. The business confidence report is confirmation that the Australian domestic economy is likely to continue to improve. AUD gains were limited by weaker equity market performance report that RBA watcher McCrann sees less of a chance 50bps rate hike around the RBA if inflation remains in check. This week's key focus will be Wednesday's release of Australia's CPI. Australian press carried a report Monday which suggests the RBA may pause its rate hike cycle if CPI comes in weaker than expected. The next RBA policy meeting will be held on November 3rd. A 25bps rate hike is expected but Wednesday's CPI report may contribute to uncertainty about the RBA policy outlook. RBA policy uncertainty may limit AUD upside.  

On October 28th Q3 CPI will be released expected at 0.8% compared to 0.5% last month. 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 struggles to hold above 9200. Expect AUD support at 9054 the October 14th low with resistance at 9299 the October 22nd high.