Dollar and yen extended recent rally as global stocks dive following weakness in US equities overnight. S&P 500 dropped -1.95% to close at 1042. Japanese Nikkei followed by gapping lower and dropped -1.83% to 9891 and closed below 10000 level again. Crude oil fell to as low as 77.03 and remains soft there while gold recovers mildly after diving to as low as 1026.9. Comparatively, yen is the stronger one with USD/JPY fell to as low as 90.24 so far and is set to extend this week's fall. The calendar is busy today and the main focus will be on Q3 Advance GDP report from US which should would be a important test on the sustainability of the current rebound in dollar and yen.

Economists expect US GDP to grow an impressive 3.0% in Q3, the first expectation since second quarter of 2008 and the largest rise in two years, driven by consumer spending and residential investment. The expectation is indeed quite high and any downside surprise there could trigger another round of selloff in equities which would in turn boost dollar and yen. S&P 500 index's sharp fall yesterday has sent it through the medium term trend line support decisively, which is an indication that whole medium term rebound from 666.8 has completed at 1101.36. Nevertheless, the index is still sitting on 55 days EMA for the moment. The reaction to today's GDP report, whether S&P 500 will fall further away from the trend line, or rebound strongly from the 55 EMA will have significant implication on the medium term outlook in stocks and thus risk sentiments and dollar and yen.

/

Looking at the dollar index, the break of near term trend line resistance is inline with our view that a short term bottom is at least formed at 74.97. Further rise should be seen to 77.47 resistance next and decisive break there will add much credence to the case that whole five wave decline from 89.62 has also completed too. In such case, we'll be looking at the prospect of 38.2% retracement of 89.62 to 74.94 at 80.54 in the least bullish scenario. However, a break below 75.89 minor support will turn bias neutral first and mix up the outlook.

/

The RBNZ decided to keep its OCR unchanged at 2.5% and stated it would maintain the current low level of interest rate until 2H10. While NZD plunges after the news as it was less hawkish than market expectation, it was inline with our forecast as the statement has turned more neutral. More in RBNZ Left Policy Rate At 2.5%. Tone Less Dovish But Still Missed Market Expectation. New Zealand Trade deficit narrowed to NZD -424M in September.

Japanese industrial production rose more than expected by 1.4% mom in September and dropped -18.9% yoy. Corporate Services price index dropped -3.2% yoy in September. Australia leading indicator rose 1.8% in August.

Looking ahead, Germany unemployment rate is expected to climb to 8.3% in October. Eurozone confidence indicators are all expected to show further improvement in October. Canada IPPI is expected to rise 0.1% mom in September and RMPI is expected to rise 1.0%. US Q3 GDP is expected to show 3% annualized growth. Initial jobless claims are expected to drop slightly to 523k.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.4651; (P) 1.4745; (R1) 1.4800; More

EUR/USD's fall extended further to as low as 1.4682 so far and intraday bias remains on the downside for the moment. Current decline is expected to continue to 1.4483 support next. On the upside, above 1.4770 minor resistance will turn intraday outlook neutral and bring recovery. But upside should be limited well below 1.5061 high and bring another fall.

In the bigger picture, the case of topping in EUR/USD continues to build up with medium term trend line support now taken out. Whole rally from 1.2456, which is treated as the third leg of the corrective pattern that started at 1.2329, might have completed at 1.5061 already, on bearish divergence condition in daily MACD. Break of 1.4483 support will add much credence to this case and bring deeper fall to 38.2% retracement of 1.2456 to 1.5061 at 1.4066 for confirmation. Break there will target 61.8% retracement at 1.3451 and below. On the upside, above 1.5061 is needed to invalidate this bearish case. Otherwise, risk will now remain on the downside.

/

Economic Indicators Update

GMTCcyEventsActualConsensusPreviousRevised
20:00NZDRBNZ Rate Decision2.50%2.50%2.50% 
21:45NZDTrade Balance (NZD) Sep-424M-675M-725M-719M
23:50JPYIndustrial Production M/M Sep P1.40%1.10%1.80%1.60%
23:50JPYIndustrial Production Y/Y Sep P-18.90%-19.30%-19.00% 
23:50JPYCorporate Service Price Y/Y Sep-3.20%-3.30%-3.50% 
0:00AUDConference Board Leading Index Aug1.80%--0.70%1.00%
8:55EURGerman Unemployment Change Oct 15K-12K 
8:55EURGerman Unemployment Rate Oct 8.30%8.20% 
10:00EUREurozone Economic Confidence Oct 84.482.8 
10:00EUREurozone Consumer Confidence Oct -18-19 
10:00EUREurozone Industrial Confidence Oct -22-24 
10:00EUREurozone Services Confidence Oct -8-9 
12:30CADIndustrial Product Price M/M Sep 0.10%0.50% 
12:30CADRaw Materials Price Index M/M Sep 1.00%3.70% 
12:30USDGDP (Annualized) Q3 A 3.00%-0.70% 
12:30USDGDP Price Index Q3 A 1.40%0.00% 
12:30USDCore PCE Q/Q Q3 A 1.50%2.00% 
12:30USDInitial Jobless Claims 523K531K