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  • Euro Consolidates as Exports Dive, Warning That Ireland May Require IMF Aid
  • British Pound Rally Continues Following Comments from BOE's Fisher Signaling End of QE
  • Canadian Dollar Down as CPI Falls for Fourth Straight Month, Bank of Canada Rate Decision Next Week

US Dollar Gains as Risk Appetite Fades, DJIA Closes Back Below 10,000
The US dollar was one of the strongest major currencies, falling only against the British pound, as risk aversion faded and the Dow Jones Industrial Average (DJIA) fell back below 10,000. Looking to the news on hand, US industrial production rose for the third consecutive month in September, this time at a rate of 0.7 percent, while capacity utilization hit a seven-month high of 70.5 percent. Meanwhile, foreign demand for long-term US equities, notes and bonds totaled $28.6 billion in August as, on net, investors bought Treasuries for a third straight month, indicating that international buyers are not shunning US assets. In less positive news, preliminary readings showed that the University of Michigan's consumer confidence index fell to 69.4 in October from a 20-month high of 73.5. The decline was led by a deterioration in the economic outlook, as sentiment on current economic conditions went relatively unchanged. A further breakdown also shows that 1-year inflation expectations shifted from 2.2 percent in September up to 2.8 percent, indicating that consumers anticipate that price pressures are building.

US dollar event risk will start to pick up again next Tuesday, as US housing starts and building permits are projected to have risen for the second straight month in September to 10-month highs, with starts anticipated to hit 610,000 from 598,000 while permits may rise to 590,000 from 580,000. While the unemployment rate is still in the process of rising, the federal government's tax credit for first-time home buyers of up to $8,000 is likely to remain supportive of demand through the end of the year. However, if the program expires as planned on December 1, the growth we've started to see in the housing sector could start to wane.

Related Article: FX Technical Weekly

Euro Consolidates as Exports Dive, Warning That Ireland May Require IMF Aid

The Euro-zone's trade surplus narrowed to 1 billion euros in August from 6 billion euros, as exports fell a seasonally adjusted 5.8 percent from July, the sharpest drop in seven months. European exporters have two main forces working against them: lackluster global growth and the appreciation of the euro. Indeed, Eurogroup Chairman Jean-Claude Juncker said today that there's a risk the currency's gains could impede the region's recovery and that the topic will be discussed at an October 19 meeting in Luxembourg. Furthermore, European Central Bank President Jean-Claude Trichet said on Thursday that it is extremely important that US authorities pursue a strong dollar policy, calling excessive currency volatility an enemy.

Meanwhile, the Irish health and finance ministers offered bleak outlooks for the nation ahead of the December 9 announcement of massive budget cuts as they experience the deepest recession in the Euro-zone. Finance Minister Brian Lenihan said Ireland was on the road to ruin if it failed to reduce spending and control mounting debt, and called the budget a test of our ability to rise above our difficulties while warning that the prepared cuts would look like a picnic when compared to the measures that would be made necessary by waiting. In fact, Health Minister Mary Harney warned that if the government does not slash the budget, then others will come in like the IMF and overnight they will make decisions, suggesting that in such a case, the health budget alone could be cut by 30-40 percent. All told, it's clear that Ireland is in the worst position of the Euro-zone member nations, and presents a risk to the stability of the currency.

British Pound Rally Continues Following Comments from BOE's Fisher Signaling End of QE

The British pound continued its rally and finished Friday as the strongest of the majors as traders anticipate that the Bank of England (BOE) will close down their quantitative easing (QE) program by the end of the year. However, the GBPUSD pair closed right near key resistance formed by the 100 SMA and a falling trendline drawn from the August high near 1.6350/1.6400, and this could prevent further rallies at the start of next week. On Thursday, the Financial Times published an interview with BOE Monetary Policy Committee (MPC) member Paul Fisher, and in it, he said that he feels much more confident now that the asset purchase program is having the scale and speed of impact that we would have hoped for when we started, suggesting that the central bank may not need to continue with the program when it expires as planned toward the end of the year.

Next week's event risk could go a long way to add to this speculation, or refute it completely. On Wednesday, the minutes from the BOE's October meeting will be released and there are a variety of potential comments that could impact the British pound. First, the vote count is likely to show the Monetary Policy Committee (MPC) members were unanimously in favor of neutral policy for both the Bank Rate and the Asset Purchase Facility (APF), but any dovish deviation in this would trigger an immediate pullback in the British pound. The other possible trigger pertains to outlooks for growth and inflation, particularly upgrades or downgrades from previous forecasts, as this would lead traders to shift their expectations for interest rate decisions in 2010, with Credit Suisse overnight index swaps currently pricing in 86 basis points worth of rate hikes by the BOE over the next 12 months.

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Canadian Dollar Down as CPI Falls for Fourth Straight Month, Bank of Canada Rate Decision Next Week

The Canadian dollar eased back on Friday after the release of the nation's consumer price index (CPI) fell for the fourth straight month in September, the longest series since 1953, as energy prices remain low relative to a year ago. Indeed, the annual CPI rate fell to -0.9 percent, but on the other hand, the annual rate of the Bank of Canada's core CPI eased back less than expected to 1.5 percent from 1.6 percent. Nevertheless, the data adds to evidence that the central bank will leave rates unchanged next Thursday, especially as they've already said in recent months that they would maintain a neutral stance through June 2010 and indicated that the Canadian dollar's strength remained a threat to not only growth, but the return of inflation back to target. Overall, indications that the Bank still sees downside risks for inflation could weigh on the Canadian dollar, but as we've seen in the past, the currency is more responsive to changes in the economic outlook.

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