• USD: Higher, IMF official says no reason to start shifting reserves away from USD
  • JPY: Lower, MOF to intervene if JPY moves become abnormal
  • EUR: Lower, EU Q2 GDP revised lower, Lagarde says talk of replacing USD in oil transactions is speculation
  • GBP: Lower, consumer confidence rose to its highest level since April 2008
  • CAD and AUD: AUD & CAD lower and is, profit-taking emerges as global equity market rally stalls

Overview     
USD posted a modest rebound Wednesday as profit-taking emerged after the JPY rallied to a 9 month high and AUD traded at a fresh 14 month high. The rebound in the USD is attributed to comments from IMF officials that they do not see a reason for a shift out of USD reserves at this time and statement from the French Finance Minister Lagarde that replacing the USD as the global reserve currency is speculation and not on the current agenda. The USD traded sharply lower Tuesday in reaction to reports that oil producer nations are considering replacing the USD for settlement of oil transactions with a basket of currencies. There was also a report Tuesday that the UN is calling for a new global reserve currency to end USD supremacy. USD rebound is also attributed to uncertainty about the risk of intervention from Japan, report of a downgrade of EU Q2 GDP growth and comments from the Fed's Hoenig. Japan's Finance Minister Fujii said that Japan would take action if FX moves become abnormal. The key question is what Japan sees as abnormal price movement in the JPY. EU Q2 GDP was revised to -0.2% from the original report of a 0.1% decline. In addition Swiss unemployment was reported to have risen to a 11 year high. Hoenig said that the Fed will have to remove its very accommodative policy sooner than later.  Noble prize winning economists Stiglitz says that the global recession is far from over. Stilglitz's comments inject a bit of caution into the current optimism about the global recovery. USD is also supported by technicals as the USD approaches extreme oversold levels. Focus turns to Thursday's ECB and BOE central bank policy meetings. The trade will be looking for clues to possible timing of an exit strategy from the ECB and there is uncertainty as to whether the BOE may cut its remuneration rate paid on commercial bank deposits.

Today's US data:
US consumer credit for August will be released after this report is published.

Upcoming US data:
On October 7th August consumer credit will be released expected at seat -8.9 bln compared to -21.6 bln in July. On October 8th initial jobless claims for the week ending 10/03 will be released expected at -545k compared to -551K last week. August wholesale sales and inventories will also be released on October 8th with wholesale sales expected at 0.6% and inventories expected at -0.5%. October 9th August trade balance will be released expected at -32 bln compared to -31.92 bln last month.

JPY
JPY traded at a nine month high versus the USD as Japan signals acceptance of the current level of the JPY. Japan's Finance Minister Fujii said that the current JPY level is consistent with acceptable market activity and that JPY rally reflects weak USD and the impact of low US interest rates. Fuji went on to say that Japan is prepared to intervene if JPY moves become abnormal but it's best to let the markets determine FX levels. Fuji's comments were seen as a signal that Japanese officials are comfortable with JPY strength. In addition the IMF says that JPY strength reflects fundamentals. The trade is likely to continue to test how far Japan is willing to allow the JPY to rise with the key question, what does Japan consider as abnormal price movement for the JPY. We suspect that the risk of intervention from Japan will remain low unless the pace of the JPY rally accelerates. Rumors continue to circulate that the MOF may be bidding for USD/JPY around 8800. JPY rally stalled at this level and the JPY turned lower for the day. There was also report of a defense of 8800 barrier options in the OTC market. JPY price action raises suspicions that the MOF may have been in supporting the USD. 

On October 8th August current account will be released expected at ¥0.12 trln compared to ¥1.27 trln last month. On October 9th August machinery orders will be released expected at 3.2% compared to -9.3% last month.

Key technical levels to watch in USD/JPY include support at 88.01 the October 7th low with resistance at 90.63 the September 25th high.

EUR
EUR drifted lower as the equity market rally stalls and EU Q2 GDP was revised lower. EU Q2 was revised to -0.2% from -0.1%. Report that the Swiss unemployment rate rose to its highest level in 11 years at 3.9% adds concern about the outlook for growth in Europe. On the positive side, German August manufacturers' orders were reported up 1.4%. The German manufacturing orders report was overshadowed by the EU GDP revision. EUR  was also pressured by a statement from ECB's Liikanen that the EU recovery would be  would be sluggish and comments from the French Finance Minister Lagarde the talk of replacing the USD in oil transactions is speculation and not on the current agenda. This week's main focus will be Thursday's ECB policy meeting. The ECB is widely expected to hold policy steady and the trade will be looking to the press conference following the ECB meeting for the ECB's outlook for the EU economy and for possible clues to the timing of an exit strategy from unconventional policy measures. The ECB is expected to acknowledge that the EU economy is improving but that the growth outlook remains uncertain. The ECB has tied the timing of the end of its accommodative monetary policy to price stability. Today's comments from ECB's Liikanen suggest that ECB policy will be on hold for some time.

On October 8th German September CPI will be released expected at -0.1%. German August trade balance will be released on October 9th expected at 12.8bln compared to 12.4bln Last month.

The technical outlook for the EUR has improved as EUR trades back above 1.4700. Expect EUR support at 1.4582 the October 5th low with resistance at 1.4804 the September 24th high.

GBP
GBP traded lower despite report that UK nationwide consumer confidence rose to its highest level since April 2008. The September Nationwide consumer confidence rose to 71 compared to 65 in August. GBP continues to underperform and has been pressured by Tuesday's report of a sharp drop in UK manufacturing and industrial production. UK August manufacturing declined by 1.9% and industrial output declined by 2.5%. The sharp drop in UK industrial output suggests that the UK economic outlook remains uncertain and may encourage the BOE to announce additional monetary policy measures because of the risk of a slow economic recovery in the UK. Recent UK economic data has been mixed with construction and manufacturing PMI coming in weaker than expected and services PMI rising to a two-year high. The IMF raised its UK 2010 GDP forecast to 0.9% from 0.2%. The IMF also says that the UK is facing a 2009 financing gap of £215 bln which is 15% of UK GDP. GBP has been underperforming partly because of concern about rising UK government debt along with speculation that the BOE may soon reduce its remuneration rated paid on commercial bank holdings. This week's main focus will be the BOE policy meeting Thursday. The BOE is expected to hold policy unchanged but there is an outside chance that the BOE may cut its remuneration rate it pays on commercial deposits. The trade will be looking to see whether the BOE decides to expand quantitative ease. Market consensus is that the BOE is leaning towards cutting the remuneration rate. The remuneration rate is currently at 0.5%. The shadow MPC committee says the BOE should extend quantitative ease beyond November. GBP rallied after BOE elected to maintain the current level of its quantitative ease in September. A decision to expand quantitative ease could spark significant selling of the GBP.

The BOE meet on October 8th. On October 9th September PPI will be released expected flat compared to 0.2% last month. August trade balance will also be released on October 9th expected at -6.234 bln compared to-6.479 bln last month.

The technical outlook for GBP is negative as GBP trades below 1.6000. Expect near-term support at 1.5770 the September 28th low with resistance at 1.6049 the October 6th high.

CAD
CAD traded at one year high supported by optimism about the global recovery and a rally to a new record high in the price of gold. Tuesday's surprise RBA rate hike contributes to optimism about the global recovery and is seen as encouraging sign that at least the RBA sees the global economy strengthening. Gold traded near $1050 an ounce reflecting weak USD. CAD turned lower in US session as the rally in global equity markets stalled and profit-taking emerges. Tuesday Canada reported a sharp improvement in manufacturing PMI and a modest rise in August building permits. Canada's September Ivey PMI rose to 61.7 from 55.7 last month, a reading of Canada's August building permits rose 7.2%, the trade was looking for an 8% rise. These reports contribute to optimism about the Canadian economic recovery. No major Canadian economic data was released in today's trade. Canada's PM made positive comments about Canada's fiscal outlook. Harper said that Canada does not have a fiscal deficit. Harper's comments remind investors that Canada's budget outlook is in much better shape than most of the major G-7 nations. Canada's fiscal outlook will allow Canada to better respond to future headwinds to the economy. Focus turns to Friday's release of Canadian unemployment and trade balance.

On October 8th September housing starts will be released expected at 152k compared to 150.4k last month. On October 9th September unemployment will be released expected to rise 0.1% to 8.8% to fund growth at 5k compared to 27k last month along with August trade balance expected at-0.95 bln compared to -0.750 bln last month.

The technical outlook for CAD is positive as USD/CAD trades below 1.0700. Look for near-term support at 1.0335 the September 29th 2008 low with resistance at 1.0765.

AUD
AUD traded at fresh 14 month high in overseas trade supported by Tuesday's RBA rate hike and a new record high the price of gold. Tuesday, the RBA raised interest rates 25 bps to 3.25% and signaled that more rate hikes may be needed. In the policy statement accompanying the RBA rate decision the RBA said that they see the global economy resuming growth that China's growth is strong and that inflation was likely to move close to target. The RBA rate hike contributes to optimism about the global recovery. AUD turned lower in US session pressured by profit-taking and in reaction to report that Australia's August housing finance declined by 0.6%. Loans for new housing however rose by 4.6%. AUD downside was limited by gains across trade to the JPY with JPY pressured by rising risk of intervention. Focus turns to Thursday's unemployment report. The trade will be monitoring closely upcoming Australian economic data to see how the economy responds to Tuesday's RBA rate hike. The RBA rate hike is the first step by the RBA to take back the emergency rate cuts announced to combat the impact of the global financial crisis. It remains to be seen if the RBA is embarking on a start of a tightening cycle.

On October 8th September employment will be released expected to rise 0.1% to 5.9% with employment growth at -10k compared to -27.1k last month.

The technical outlook for the AUD is positive as AUD rallies above 8900. Expect AUD support at 8758 the October 6th low with resistance at 8950 the August 11th high.