• USD: Mixed, recovers from 14 month low as the equity market rally stalls
  • JPY: Lower, Japan's finance minister calls on the government to reduce its spending projections
  • EUR: Higher, German investor confidence posts modest decline
  • GBP: Lower, UK inflation falls to a five-year low, housing and retail sales improve
  • CAD and AUD: AUD & CAD lower, profit-taking emerges at new 14 month high/copper prices decline

USD traded at 14 month low Tuesday as gold hits fresh record high, crude prices traded higher and the Russian finance minister says he expects the trend of diversification of reserves to continue. GBP underperformed pressured by report of weaker than expected UK inflation. EUR traded at a fresh high for the year ignoring report of a slight dip in German economic sentiment. CHF was supported by report of a modest rise in Swiss producer and import prices. Swiss September produce and import prices rose 0.2%. JPY edged higher despite rising geo-political tensions as North Korea may be preparing to launch more short range missiles. There was little reaction to a statement from the Fed's Bullard warning that medium inflation risk may be higher. Bullard's statement may increase the risk of an earlier Fed rate hike. USD posted a modest rebound sparked by weaker US equity markets with AUD pressured by profit taking and report that China's copper imports are expected to slow.  USD remains vulnerable to improving risk appetite, anticipation that the Fed will maintain low yields for some time to come and speculation that there is no US or G-7 consensus on the need to support the USD. USD is approaching extreme oversold and this could set the stage for a technical rebound.

Today's US data:
The September Treasury Budget will be released after this report is posted.

Upcoming US data:
On October 14th September retail sales will be released expected to fall by 1.4% compared to 2.7% rise last month. Ex autos retail sales are expected to rise by 0.2%. August business inventories will also be released on October 14th expected at -0.8% compared to -1% last month along with September import prices expected at 0.2% compared to 2% last month. On October 15th September CPI will be released expected at 0.2% compared to 0.4% last month. Initial jobless claims for the week ending10/13 will be released October 15th expected at -515k compared to -521k last week along with October Philly Fed survey expected at 12.5 compared to 14.1 last month. On October 16th September industrial production will be released expected at 0.2% compared to 0.8% last month along with September capacity utilization expected 69.8 compared to 69.6 last month and October University of Michigan consumer sentiment expected unchanged at 73.5.

JPY edged higher with gains limited by selling in cross trade to the EUR and AUD. Report that North Korea may launch additional short range missiles had limited impact on JPY trade. JPY was supported by report that Japan's finance minister is calling on the government cut their 2010/11 spending plans. Japan's new government pledged to increase spending to boost the Japanese domestic economy. Investors are concerned that the increase in spending will add to Japan's already large debt burden. If the Japanese government can rein in the costs of its proposals it would encourage capital flows to the JPY. There was little reaction to report that Japan's September money supply rose 2.2%. Initial EUR and AUD cross gains were attributed to optimism about the global recovery and speculation that central bank diversification out of USD reserves will likely continue. AUD/JPY turned lower tracking weaker US equities. Focus turns to the conclusion of the BOJ policy meeting Wednesday. The trade will be looking to see if the BOJ is considering ending its corporate bond buying plan or if the BOJ expresses concern about JPY strength.

On October 14th September corporate goods prices will be released expected to fall by 0.3% compared to a flat reading last month. BOJ policy meeting will be held on October 14th. On October 15th, revised August industrial output will be released expected at 1.8% compared to 2.1% in the original report.

Key technical levels to watch in USD/JPY include support at 88.01 the October 7th low with resistance at 91.63 the September 24th high.

EUR traded at a new high for the year despite report of weaker than expected German investor sentiment. German October investor sentiment declined to 56 from 57.7 last month. The current account conditions index posted a modest improvement rising from -74 in September to -72.2 in October. Today's report of weaker than expected German investor confidence will likely encourage the ECB to maintain steady monetary policy. The modest decline in German investor sentiment may generate concern about the strength of the EU recovery but improving optimism about the global recovery helped to boost demand for the EUR along with speculation that the diversification of global reserves will continue. The Russian finance minister says that he expects the trend of global reserves diversification continue. There also was a report that China and Russia would like to expand the use of the Rouble in the Yuan bilateral trade. This would further reduce the use of the USD for global trade. Bloomberg carried an article which suggests that President Obama's effort to lead the world economic recovery by spending the US out of recession is undermining the USD .The article suggests that unprecedented US budget deficit, near zero interest rates coupled with weak growth is pressuring the USD. In addition, as optimism improves about the global economy there is less demand for USD as a safe haven. Focus turns to Wednesday's release the EU industrial production. The trade expects EU industrial production to post modest improvement.

On October 14th August industrial production will be released expected at 0.1% compared to -0.3% last month. September HICP will be released expected at 0.4% compared to 0.3% last month. On October 16th August trade balance will be released expected at 13.2 bln compared to 12.3 bln last month.

The technical outlook for the EUR is positive as EUR trades above 1.4800. Expect EUR support at 1.4762 the October 13th low with resistance at 1.44910 the August 8th high.

GBP traded mixed initially supported by report of improving UK housing and retail sales data. GBP gains were limited by report that UK annual inflation is at its lowest level in five years. The weak UK inflation may encourage the BOE to expand quantitative ease. UK September RIC's house price balance rose to 22, its highest level in two years. September BRC retail sales rose 2.8%. The BCC says the UK is on the verge of recovery and called on the BOE to expand quantitative ease. Monday the Center for Economic and Business research said they expect the BOE to keep interest rates at record low at least until 2011 and UK PM Brown said that ending quantitative ease now would imperil the UK recovery. Last Thursday 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 today's 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 expanding quantitative ease in November. September CPI rose 1.1% compared to 1.6% last month, a reading 1.3 was expected. The weak UK inflation report sparked selling of the GBP in cross trade with EUR/GBP trading in a six-month low. Focus turns to Wednesday's release of UK unemployment.

On October 14th August unemployment will be released expected unchanged at 7.9% with the claimant count at 17k and average earnings at 1.7%.

The technical outlook for GBP is mixed as GBP fails to hold above 1.6000. Expect near-term support at 1.5700 with resistance at 1.5960.

CAD traded at a 14 month high supported by a record rise in the price of gold, higher crude prices and optimism about global recovery as equity markets close at the year's high Monday. Crude prices traded above $74 a barrel. The rise in the price of gold and crude reflects optimism of the global recovery and impact of weakening USD. The CRB index traded at its highest level for 2009. Canada's New Housing Price Index rises 0.1% in August. The rise in housing price index was slightly below expectation. CAD turned lower after the release of the Canadian housing data and a decline in US equities. CAD started the week higher supported by Friday's report of an unexpected decline in Canada's employment rate and a sharp improvement in new jobs creation. Canada's September unemployment rate declined by 0.3% to 8.4% with 30k new jobs created. The decline in Canada's unemployment rate suggests that the Canadian economy is recovering. The 30k new jobs creation would be the equivalent of 300k in the US. The Canadian employment report may spark speculation that the BOC will drop its pledge to maintain interest rates at a record low 0.25% through mid 2010.  BOC rate hike speculation could propel the CAD to parity. This week's key focus will be Friday's release of September CPI. The BOC has pledged to maintain record low yields as long as inflation remains in check. The continued rally in the CAD will increase the risk of intervention as Canadian officials become increasingly concerned about the strength of the CAD and the impact of CAD strength on the Canadian recovery. In addition, the CAD may be vulnerable to a technical correction has rally reaches extreme overbought.

On October 15th August manufacturing shipments will be released expected at 1% compared to 5.5% last month. Friday September CPI will be released expected at -0.8% y/y.

The technical outlook for CAD is positive as USD/CAD trades below 1.0500. Look for near-term support at 1.0175 the July 28th low with resistance at 1.0451 the October 12th high.

AUD traded a fresh 14 month high in overseas trade with gains limited by liquidation pressures as the rally in US equity market stalls and investors begin to wonder if the AUD rally is too far too fast. Today's WSJ carried an article titled Australia's Fast Recovery Spurs Fears it Overdid Stimulus. AUD is supported by optimism about the global recovery, rising commodity prices and speculation that the RBA will continue to hike rates into year-end. The RBA is expected to hike rates 25 bps in November and December raising the overnight rate to 3.75%. RBA watcher Kevin Rudd said the improvement in Australian employment could lead to 50bps RBA rate hike in November.  NAB business confidence survey declined by 4 to 14. The weaker NAB business confidence reading had limited impact on the AUD trade. AUD was the best performing currency last week rallying 4% versus the USD. Last Thursday, Australia reported an unexpected decline in its unemployment rate. Australia's September unemployment rate declined by 0.1% to 5.7% and Australia created 40.6k in new jobs. The trade had expected a rise in Australia's unemployment rate to 5.9% and 10k loss of jobs. The surprise improvement in Australia's employment rate will fuel speculation that the RBA could elect to make additional rate hikes in November in response to the strengthening of the Australian domestic economy. Last Tuesday, the RBA raised interest rates 25 basis points to 3.25% and signaled that more rate hikes may be needed. AUD will remain well supported on breaks by RBA rate hike speculation with a number of analysts now looking for AUD to reach parity with the USD in the months ahead. AUD traded lower midsession pressured by a decline in US equities and copper. The main risk to AUD is rally is reaching extreme overbought. Look for a possible technical reversal action if today's rally fails to hold.

Wednesday's September CPI will be released expected at 3.7% compared to 3.5% last month

The technical outlook for the AUD is positive as AUD rallies above 9100. Expect AUD support at 8983 the October 12th low with resistance at 9127 the October 13th high.