• USD: Higher, housing starts rise less than expected, PPI falls more than expected, stocks slide
  • JPY: Higher, JGB yields rise to a two month high as Japan's bond issuance may top ¥50 trln
  • EUR: Lower, EU and ECB officials express concern about EUR strength, German PPI contracts
  • GBP: Higher, public sector borrowing hit a record high in September
  • CAD and AUD: AUD & CAD lower, hawkish RBA minutes, BOC rate policy steady - warns on growth

Overview     
USD traded at a new 14 month low in overseas trade pressured by a statement from Fed Chairman Bernanke calling for action on global imbalances and improving risk sentiment fueled by report of better than expected earnings at Apple. Bernanke's comments imply that a weaker USD will be needed to redress global trade imbalance. The NY Fed also said that it is testing exit strategies but this should not be read as a sign the Fed is about to withdraw liquidity. AUD initially rallied in reaction to hawkish RBA policy minutes but turned lower in US trade pressured by a drop in crude and US equities. USD erased early looses with EUR gains limited by comments form EU and ECB officials expressing concern about the weak USD with an advisor to French President Sarkozy warning that at some point Europe may have to act against EUR strength. In addition, an unidentified Chinese government official called for the reversal of the USD decline. GBP gains were limited by report that UK public sector borrowing hit a record high in September. JPY edged higher despite report that Japan plans to sell more bonds to cover the recent shortfall in tax revenue caused by the global recession. JPY was supported by rise in JGB on yields. The rise in JGB yields reflects concern about additional supply. The BOC elected to hold rate policy steady as expected, expressed concern about CAD strength and CAD traded lower. The BOC says strong CAD offsets good economic news. US economic data was mixed with PPI falling more than expected and housing starts rising less than expected. USD edged higher after the release of today's data as the reports point to a fragile US economic rebound and equities turned lower. The main driver for the Forex trade remains risk appetite.

US data:
September PPI falls 0.6%, a 0.1% rise was expected. Core PPI falls 0.1%. September housing starts rise 0.5% to 590k, a reading of 610k was expected.

Upcoming US data:
On October 22nd, initial jobless claims will be released expected 510k compared to 514k last month. Leading indicators for September will also be released on October 22nd expected at 0.5% compared to 0.6% last month. On October 23rd September existing home sales will be released expected at 5300k compared to 5100k last month.

JPY
JPY traded higher supported by gains in cross trade and in reaction to weaker than expected US housing starts report. Intensified rhetoric from EU and ECB officials about the strength of the EUR coupled with report that UK public sector borrowing rose to a record high in September sparked selling a EUR and GBP in cross trade. The weaker than expected US housing starts report injected a modest uptick in risk aversion which sparked light demand for the JPY. JPY rallied despite a statement from Japan's Finance Minister Fujii that Japan plans to sell more bonds to finance its widening budget shortfall. Fujii suggests that JGB issuance may top ¥50 trln to cover the shortfall in tax revenue caused by the global recession. JGB 20 year by yields hit a two-month high in reaction to the news of more bond issuance. The rise in the JGB yields added support to JPY. Japanese exporters were featured buyers of the JPY.

On October 22nd September trade balance would he release expected in ¥285 mln compared to ¥186 bln last month along with August all industry activity expected at 0.7% compared to 0.5% last month.

Key technical levels to watch in USD/JPY include support at 89.27 the October 15th low with resistance at 91.33 the October 16th high.

EUR
EUR traded at a fresh 14 month high in overseas trade supported by improving risk sentiment and in reaction to comments from Fed Chairman Bernanke calling for action on global imbalances. EUR gains were limited by comments from EU and ECB officials expressing concern about EUR strength. ECB President Trichet expressed concern about excessive FX volatility, French Finance Minister Largarde says the Eurogroup reiterated its desire for strong USD and an advisor to French President Sarkozy said that at some point EUR strength will become unbearable and EU would have to act. According to this advisor 1.5000 EUR is a disaster for the EU economy. It remains unlikely that EU officials are prepared to authorize physical intervention to try and slow the rate of the EUR but verbal intervention is likely to intensify if the EUR continues to rise. EU and ECB are concerned that the strength of the EUR will exert more deflationary pressures, erode export demand and could choke off EU recovery. EUR gains were also limited by report that German producer prices contracted by 0.5% in September. This week's key focus will be the release of German IFO and EU industrial orders. Many analysts expect EUR to soon top 1.5000 supported by optimism about the global recovery.

On October 22nd EU August current account will be released expected at 9 bln compared to 8.8 bln last month. On October 23rd EU October manufacturing PMI will be released expected at 49.5 compared to 49.3 last month along with October services PMI expected at 51.2 compared to 50.9 last month. German October IFO index will also be released on October 23 expected it 90 compared to 91.3 last month along with August industrial orders expected at 1% compared to 2.6% last month.

The technical outlook for the EUR is positive as EUR trades above 1.4900. Expect EUR support at 1.4829 the October 19th low with resistance at 1.4994 the October 20th high.

GBP
GBP traded mixed to higher despite report that UK public sector borrowing rose to a record high in September. UK September public borrowing rose to 19.433 bln from 12.311bln last month. The rise in UK public sector borrowing may generate concern about the UK's AAA bond rating. GBP was supported by improving risk appetite as global equity markets firm in reaction to better than expecting US earning reports. The improvement in US earnings fuel speculation that the global recovery is gaining traction. The main focus for GBP will be this week's release of the MPC policy minutes Wednesday and UK advanced Q3 GDP Friday. The MPC minutes will be looked to for clues to whether the BOE is considering a pause in its asset purchase program or if the BOE sees the need to expand quantitative ease. Last week, the GBP experienced a sharp short covering rally in reaction to a statement from the BOE's Fischer that it may be time for the BOE to pause its asset purchase plan. Monday, BOE's Posen seemed to suggest that he favored an expansion of quantitative ease. The trade will be looking to see if there are divisions on the BOE policy board over quantitative ease. BOE policy outlook is the key short-term driver for GBP trade. At the start of October 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 the October 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 pausing quantitative ease in November. The GDP report will be key to whether the UK economy is at the start of a sustainable recovery. A strong GDP reading would greatly reduce the risk of expansion of the BOE's quantitative ease.

On October 21st October CBI orders will be released expected at -46 compared to -48 last month. MPC minutes for the October policy meeting will also be released on the 21st. On October 23rd Q3 GDP will be released expected at -0.1% compared to -0.6% last month.

The technical outlook for GBP has improved as GBP trades above 1.6200. Expect near-term support at 1.6305 the October 19th low with resistance at 1.6569 the September 17th high.

CAD
CAD traded sharply lower as the BOC left rate policy unchanged at 0.25%, reaffirmed its commitment to keep interest rates low until the end of June 2010 and expressed concern about CAD strength. The BOC changed its inflation forecast of 2% for an extra three months through Q3 2010. The change in the inflation forecast suggests that the BOC may leave yields at record low for longer than originally thought. The BOC policy statement says that strong CAD has hurt Canada's growth and makes it difficult to reach the BOC inflation target. BOC says that strong CAD will more than fully offset recent signs of recent economic growth. Canada's economic data was mixed with September leading index up 1.1%, a 0.8% rise was expected. August wholesale sales declined by 1.4%, a 0.3% decline was expected. The drop in the wholesale sales added to today's CAD sell off.

August retail sales will also be released on October 22nd expected at 0.9% compared to -0.6% last month.

The technical outlook for CAD is mixed as USD/CAD trades above 1.0400. Look for near-term support at 1.0267 the October 20th low with resistance at 1.0551 the October 9th high.

AUD
AUD traded higher in overseas trade initially supported by the release of the October RBA policy minutes which were seen as hawkish. RBA minutes stated concern that if rates stay low for an extended time it will threaten inflation. The RBA went on to say that strong AUD reflects improving market sentiment. AUD was also supported by report that September imports rose by 14%. This is a sign of improving domestic demand in Australia. AUD erased early gains to trade lower tracking weaker US equity market trade and in reaction mixed US economic data. Weaker than expected US housing starts data injects a note of caution about the US and global recovery and this took risk appetite down a notch. The trade will continue to closely watch statements from the RBA about monetary policy outlook and sentiment towards the global recovery. Thursday China will release its third-quarter GDP report. A number of analysts expect China's third-quarter GDP to top 9%. The outlook for China's economy remains key to the global recovery and an Australia's export outlook. AUD is trading near a 15 month high supported by optimism about the global recovery, rising commodity prices and speculation that the RBA will continue to hike rates into year-end. AUD is also supported by improving outlook for Australia's domestic economy. The main risk to AUD is the rally has reached extreme overbought and more statements of concern about weak USD from Europe and China. These statements may increase the risk of coordinated intervention to support USD.

This week's Australian economic calendar includes the October 21st release of September new car sales expected at 2% compared to -6.9% last month. On October 23rd Q3 import and export prices will be released with export prices expected at -2% import prices expected at -2.5%.

The technical outlook for the AUD is positive as AUD holds out above 9100. Expect AUD support at 9113 the October 19th low with resistance at 9312 the October 20th 2008 high.