• USD: Lower, smaller than expected decline in retail sales, stocks trade at new high for 2009
  • JPY: Higher, BOJ upgrades its economic outlook, MOF downplays need for intervention
  • EUR: Higher, EU industrial production rises, ECB's Qauden says recovery is modest and fragile
  • GBP: Higher, pace of UK job losses slows, headline unemployment steady
  • CAD and AUD: AUD & CAD higher, China's exports post smaller decline fueling recovery hope

Overview     
USD traded at a new 14 month low Wednesday as equity markets rally, risk appetite rises and optimism about the global recovery grows. Better than expected earnings at Intel and report of a smaller than expected decline in China's exports fuel optimism about the global recovery. Improving economic data from Europe supports the EUR and GBP with EU industrial production rising and the pace of UK job losses slows. The USD was also pressured by dovish comments from the Fed's Kohn and concern about USD reserve status. Kohn said that the US recovery will be more gradual than V-shaped and deflation is a bigger threat than inflation. Kohn went on to say that US unemployment could top 10% in 2010. Kohn's comments confirm that US interest rates will stay low for an extended period. Low US yields and rising US budget deficit are the major fundamental negatives for the USD. Russia's finance minister said that the USD role as the reserve currency will decline and Russia's president calls for a new supranational currency to replace the USD. These comments revive concern about USD reserve status. JPY traded higher supported by BOJ upgrade their outlook for Japan's economy and a statement from an MOF official downplaying the need for intervention based solely on JPY strength. US economic data was mixed with retail sales declining less than expected import prices posting a modest rise and business inventories declining by more than expected. 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. The trade will be monitoring how the Fed plans to deal with the declining USD.

Today's US data:
September retail sales fall 1.5%, a 2% decline was expected. Ex autos retail sales rose 0.5%. September import prices rose by 0.1%, a 0.2% rise was expected. August business inventories dropped by 1.5%, a 0.9.% decline was expected. FOMC minutes will be released latter in the session.

Upcoming US data:
On October 15th September CPI will be released expected at 0.2% compared to 0.4% last month. Initial jobless claims for the week ending 10/13 will be released on 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
JPY traded higher supported by broad USD weakness, BOJ upgrade of its view on Japan's economy and MOF comments downplaying the need for intervention. Broad USD weakness is attributed to improving risk appetite as global equity markets rally and China reports a smaller decline in Q3 exports. The BOJ elected to hold a policy steady as expected and upgraded its economic outlook for Japan's economy. The BOJ says that economic activity has picked up. The BOJ made no comment on the central bank's corporate bond buying program. Japan's Finance Minister Fujii warned that Japan's economic situation may be weaker than the BOJ view. His comments limited JPY gains. JPY was also supported by a statement from the MOF's Vice Finance Minister Minezaki that Japan should not intervene in Forex markets just because of JPY strength. He went on to say that rapid FX moves are undesirable. This is code warning the markets that Japan will not be tolerate extreme price moves in the JPY. Japan's September corporate goods prices rose by 0.1%. The data had limited impact on today's JPY trade.

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 90.47 the October 12th high.

EUR
EUR traded at a new high for the year supported by improving risk appetite and report of a rise in EU industrial production. The improvement in risk appetite sparked demand for European and US equities and reduced safe haven demand for the USD. EU August Industrial production rose by 0.9%. The trade had expected a 1.2% rise for the EU industrial production. The EU industrial production report is a reminder that the EU recovery remains fragile. ECB's Quaden says that the economic recovery looks modest but fragile. Tuesday Germany reported weaker than expected investor confidence for October. The 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. The DIHK institute expects German GDP to fall by 5% in 2009 and to expand by 1.2% in 2010. ECB's Nowotny says now is not the time for the ECB to talk of an exit strategy. He said it is too early to give the all clear. EUR was also supported by concern about USD reserve status as the Russian president called for the creation of the supranational currency to help stabilize the global economy and reduce reliance on the USD. Part of the recent weakness for the USD is attributed to report of central bank diversification out of USD. Bloomberg reported Tuesday that 63% of new cash reserves were placed in EUR and JPY over the last three months. Wednesday China reported that their reserves rose to 2.27 trln in Q3. The rise in China's reserves represents additional risk to the USD if China elects to continue diversification of its reserves. There was limited reaction to a Financial Times report which indicates that ECB is challenged by the rising EUR. Focus turns to Thursday's release the EU HICP. The trade expects EU inflation to remain in check.

September HICP will be released on October 15th 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 1.4900. Expect EUR support at 1.4762 the October 13th low with resistance at 1.5085 the August 11th high.

GBP
GBP traded higher supported by improving risk sentiment and report of better than expected UK employment data. UK jobless claims benefits post the smallest rise since May of 2008 at 20,800k. Persons claiming unemployment benefits remains at a 12 year high. Headline unemployment rate was steady at 7.9%. Today's UK unemployment data shows that UK has shed jobs slower pace but the UK unemployment situation remains bad. Tuesday the UK reported that annual inflation was at its lowest level in five years. The combination of falling inflation and high unemployment may encourage the BOE to expand quantitative ease in November as the UK economic recovery remains weak. The BCC says the UK is on the verge of recovery and called on the BOE to expand quantitative ease. The Financial Times carried a report which warns that the UK economy is at risk of a double dip recession as the pace of job losses may start to pick up. 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.

The technical outlook for GBP is mixed as GBP fails to hold above 1.6000. Expect near-term support at 1.5708 the October 13th low with resistance at 1.6124 the September 30th high.

CAD
CAD traded at 14 month high supported by higher crude prices and optimism about global recovery as equity markets rally. Crude prices traded above $75 a barrel. Canadian new vehicle sales for August declined by 0.3% in August. The data had limited impact on CAD trade. 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.  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. CAD may be vulnerable to a technical correction as the 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 1.0130 the July 25th 2008 low with resistance at 1.0375 the October 13th high.

AUD
AUD traded a fresh 14 month high supported by rising commodity prices and optimism about the global recovery as US earnings reports beat expectations and China's exports post smaller than expected decline. Positive earnings from Intel and J.P. Morgan suggest that the global recovery is gaining traction and that financial markets are healing. China's September exports declined by 15.2%, a 21% drop was expected. The stronger than expected export data from China adds to speculation that the global economy is recovering. AUD is a commodity-based currency and improving global economic outlook will boost demand for Australian exports. 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 25bps 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.  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 25bps to 3.25% and signaled that more rate hikes may be needed. Westpac consumer sentiment for October rose by 1.7%. Improving Australian consumer confidence adds support to the AUD. 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. The main risk to AUD is rally is reaching extreme overbought.

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 9200.