- USD: Lower, jobless claims fall, productivity soars, unit labor costs decline, stocks surge
- JPY: Lower, supported by a dip in risk appetite as equities decline in Asia
- EUR: Higher, ECB leaves interest rates unchanged, Trichet sees pick up in economic activity
- GBP: Higher, BOE expands its asset purchase plan by £25 bln, industrial and manufacturing output rise
- CAD and AUD: AUD higher & CAD lower, hawkish comments from RBA Governor Stevens, deficit widens
USD traded mixed to lower Thursday as investors digest the impact of Wednesday's decision by the Fed to maintain low interest rates for an extended period and today's decision by the BOE to maintain current level of interest rates and expand its asset purchase plan. The BOE will expand its asset purchases by £25bln. GBP firmed in reaction to the BOE's decision to expand liquidity as the size of the increase was smaller than market expectations. The ECB held rate policy steady as expected. In the press conference following the ECB policy decision ECB president Trichet made positive comments about EU economic outlook and signaled the first steps towards an exit strategy from non-conventional policy measures. His comments boosted demand for the EUR. AUD was supported by hawkish comments from RBA governor Stevens that neutral policy is higher than current yields JPY traded higher supported by risk aversion as equities decline in Asia. US economic data was positive with jobless claims dropping to the lowest level since January, Q3 productivity rose the most in six years and unit labor costs declined by more than expected. The drop in the jobless claims may encourage analysts to revise their nfp estimates lower. The surge in productivity and lower labor costs cuts two ways. Employers are doing more with less and the cost of labor is going down. This could encourage employers to maintain current levels of employment or begin to increase hiring. It will depend on how confident employers are in the sustainability of the US recovery. Many employers may choose to increase hours worked instead of hiring new employees. In addition, US retailers posted better than expected October sales. US equities rallied sharply in reaction to today's data but the reaction in the Forex market was muted. There was little reaction to a statement from and NYU economist Roubini that he expects the USD to rise 20% over the next six months and that the end rally in risk assets may end abruptly.
US October unemployment will be released Friday. US unemployment is expected to rise to a new 26 year high but nonfarm payroll job losses will likely be less than 200k. 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:
Jobless claims for week ending 10/31 declined by 20k to 512k, a reading of 521K was expected. Jobless claims were at the lowest level since January. Q3 productivity rose 9.5%, a 5.5% rise was expected. Q3 unit labor costs dropped by 5.2%, a 4.5% decline was expected.
Upcoming US data:
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%. September wholesale inventories and consumer credit will also be released on November 6th. Wholesale inventories are expected to fall 1% and consumer credit is expected at -10bln.
JPY traded higher supported by a spike in risk aversion as equities markets decline in Asia. The Nikkei index closed 127 points lower. There was limited reaction to the release of the BOJ minutes for the 13/14th policy meeting. The minutes state that funding conditions remain severe at smaller firms and that most BOJ members agreed to maintain accommodative policy. The Nikkei carried a report which states that the BOJ blames government policies for job losses and lower wages. A rift appears to be brewing between the Japanese government and the BOJ over the outlook for Japan's economy and the BOJ's decision to begin an exit from its corporate bond support plan. BOJ officials have been generally more up beat about the outlook for Japan's economy and the Japanese government has increased pressure on the BOJ to maintain actions to support economy. JPY upside is limited by report of a bigger than expected decline in US jobless claims and stronger US equity market trade. The jobless claims report boosted demand for equities and encouraged a rewind of risk.
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 89.18 the November 2nd low with resistance at 91.80 the October 28th high.
EUR traded higher supported by a recovery in risk appetite sparked by release of better than expected US jobless claims and a huge jump in US Q3 productivity. EUR reaction to the ECB's decision to hold rate policy was mixed as the decision was widely expected. The ECB elected to hold rate policy changed at 1%. Positive comments from ECB President Trichet about the outlook for the EU recovery sparked mild demand for the EUR. Trichet said that the inventory cycle and exports have boosted the economy. Trichet also said that he sees a pickup in economic activity in the second half of the year and expects the EU to experience a gradual recovery. Trichet's comments are seen as hawkish and set the stage for the eventual exit from unconventional policy measures. EUR gains were short lived as investor's square positions ahead of Friday's release of US nonfarm payroll for October. EU economic data was mixed with September retail sales reported down 0.7%.
The technical outlook for the EUR is positive as the EUR trades above 1.4900. Expect EUR support at 1.4702 the November 5th low with resistance at 1.5065 the October 23rd high.
GBP traded mixed to higher supported the BOE's decision to expand its asset purchase plan by less than expected and in reaction to report of improving UK industrial and manufacturing output. The BOE elected to hold rates unchanged at 0.5% and expand its asset purchase plan by £25bln to £200bln. Some analysts have concluded that this may be the last extension of the quantitative ease program by the BOE unless the economy starts to turn down. The smaller than expected increase in the BOE's asset purchase plan is seen as a sign of confidence in the UK economy. Not all forecasters are satisfied with today's BOE decision, Kaletsky calls for the BOE to cut rates to 0.25% and a former MPC member says that the BOE should cut his remuneration rate to zero to encourage bank lending. UK September industrial production rose by 1.6% and manufacturing output rose by 1.7%. The rise in September manufacturing output was the fastest in seven years. Recent UK economic data shows improvement in the housing and consumer sector and today's manufacturing data also points towards recovery. Whether the BOE will continue expanding its asset purchase program will depend on upcoming UK economic data. NIESR says the UK economy contracted by 0.4% in the three months through October. The impact of the BOE decision should be limited as focus returns to risk appetite. GBP upside was limited by the NIESR GDP report and position squaring ahead of tomorrow's release of US nonfarm payrolls.
On November 6th October PPI will be released expected unchanged at 0.5%.
The technical outlook for GBP has improved on today's rally above 1.6500. Expect near-term support at 1.6400 the November 3rd low with resistance at 1.6694 the October 23rd high.
CAD traded mixed initially supported by strong US jobless claims and productivity data. CAD gains were limited by report that Canadian building permits came as expected. Canada's September building permits rose 1.6%. Canada's October Ivey PMI rose to 61.2, a reading of 59 was expected. CAD turned higher today after the release of the better than expected Ivey manufacturing report is. CAD price action was disappointing in light of the sharp rally in US equity markets. Investors were reluctant to put on new positions ahead of Friday's employment reports in the US and Canada. Focus turns to Friday's release of US and Canadian employment reports. Last week Canada reported that August GDP declined by 0.1%, 0.1% 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 unemployment report will be another key indicator of Canada's growth outlook. Canada is expected to have created 10k jobs last month. CAD price direction will continue to track crude and equity markets.
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 mixed as USD/CAD falls below 1.0600. Look for near-term support at 1.0502 the October 26th low with resistance at 1.0872 the November 2nd high.
AUD traded higher supported by hawkish comments from RBA Governor Stevens and stronger US equity market trade. RBA Governor Stevens said that neutral policy is higher than the current level of Australian interest rates. His comments revive speculation that the RBA may hike rates again in December. US equities surged in reaction to report a sharp drop in US jobless claims and soaring US productivity. The jobless claims report suggests that Friday's US employment report will show a continuing moderation in US job losses. The productivity gain suggests that the US Q4 growth may be stronger than expected. Improved US labor market and growth outlook contributes to risk appetite and demand for high yield currencies like AUD. Tuesday the RBA elected to hike rates 25 basis points and gave no indication whether interest rates will be hiking in December. Stevens's comments may encourage speculation that the RBA will hike rates 25bps in December. AUD gains were limited by report that Australia's trade deficit widened last month and vehicle sales rose. Australia's September trade deficit rose to 1.849bln from 1.612bln in August with exports and imports up 5%. October vehicle sales rose 3.4%. AUD price direction will continue to closely track risk appetite equities in the direction of commodity prices.
The technical outlook for the AUD is positive as the AUD rallies above 9100. Expect AUD support at 8961 the November 4th low with resistance at 9175 the October 30th high.