EU Morning Report – USD gains the most in two month!

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The USD gained versus the JPY for the first time in five days after Fed chairman Bernanke signaled tighter rates is coming on improved economic outlook.

• The USDJPY rose above 89.20 from as low as 88.00 after Bernanke said the Fed is ready to tighten monetary policy once the economy improves.  Bernanke warned that the US Federal Reserve must continue to prop up the economy for an extended period by cannot do so indefinitely for fear of triggering an inflationary surge.  The yen dropped against all its major counterparts after Japan’s machinery orders gained less than expected, adding to signs its recovery will trail that of other economies.
• Last week’s worse-than expected NFP report dented confidence in the economic recovery.  However, yesterday’s data encouraged optimism as it showed gains in retails sales and a nine-month low in unemployment claims.  Initial jobless claims fell to 521,000 by the 3^rd of October from 544,000 in September reaching the lowest level since the beginning of the year.
• The European Central Bank on Thursday cautioned against hopes of a speedy economic recovery in the 16-nation euro zone as it left benchmark interest rates at a record low 1% on Thursday for the fifth month in a row.  Trichet reiterated the Group of Seven’s statement on currencies stating that excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.  On a more positive note, Trichet said that the region’s economy is emerging from a period of ‘free fall’ and that there are increasing signs of normalization.
• Gold declines after a five-day rally that took the yellow metal to a fresh historical high of 1062.70 as the USD plummeted.  The commodity retreats to 45 in Asia today but analysts believe the correction will be short-lived.  Crude oil rallied to an intra-day high at .55 a barrel after a US report showed initial jobless claims dropped.  Today crude oil retreats back towards the a barrel as the USD rebounds following Bernanke’s shift to a hawkish tone in terms of the timing of an exit strategy.

Currency to watch out for: EURUSD & USDJPY

• The EURUSD pivot point is at 1.4790 with a preference to enter into short positions at 1.4780
• The USDJPY pivot point is at 88.70 with a preference to enter into long positions at 88.75

Today’s calendar and market movers:

• UK PPI Output expected to drop to 0.1%
• Canada Employment Change expected to drop to 5,000
• US International Trade expected to drop to -33 billion dollars

Stocks:

• US stocks closed higher Thursday with the Dow +0.63%, the S&P +0.75% and the NASDAQ +0.64%.
• As of 06:15 GMT the Nikkei is trading at 1.87% and the Hang Seng at 0.17%

Daily Forex Report - USD extends losses as jobless claims decline

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• USD: Lower, jobless claims fall to lowest level since January, stocks rise in reaction to Alcoa’s earnings
• JPY: Higher, no sign yet of MOF intervention, current account surplus widens less than expected
• EUR: Higher, ECB unchanged, German industrial production rises
• GBP: Higher, BOE unchanged, maintains current level of QE
• CAD and AUD: AUD & CAD higher, Australia unemployment rate unexpectedly drops

  Overview     
  USD traded lower Thursday as the AUD rallies to a fresh 14 month high in reaction to report of an unexpected decline in Australia’s unemployment rate. The USD was also pressured by sharp gains in the US equity market sparked by report of better than expected earnings forecast from Alcoa. The rally in US equities contributes to improving risk appetite and optimism about the US and global recovery. The ECB and BOE left monetary policy unchanged as expected. International concern about the decline of the USD is growing. Tuesday the UN repeated its call to create a new reserve currency to replace the USD. It was reported that central banks in South Korea, Taiwan, Philippines and Thailand were intervening to try to limit today’s USD decline. And, the Financial Times reports that President Obama is under fire over the decline of the USD. US jobless claims declined more than expected falling to the lowest level since January. Continuing claims were also sharply lower. USD remained on the defensive after the jobless claims report. The data raises hope that the US economy is recovering. USD experienced a modest and temporary recovery versus the EUR in reaction to comments from ECB President Trichet that US support for strong USD is important and there is no campaign for EUR to become a reserve currency. The USD is likely to continue to weaken unless there is a credible threat of coordinated intervention or the Fed signals the potential for a rate hike.

  Today’s US data:
  Jobless claims for the week ending 10/30 declined by 33k to 521k, a reading of -545k was expected. Wholesale inventories for October declined by 1.3%.

  Upcoming US data:
  On October 9th August trade balance will be released expected at -32 bln compared to -31.92 bln last month.

  JPY
  JPY traded higher supported by broad USD weakness and indication that Japanese officials are unlikely to intervene at the current level. The most recent comments from Japan about the possibility of intervention were made by Japan’s Finance Minister Fujii Wednesday. Fujii said that the current JPY level was consistent with acceptable market activity and that JPY rally reflects weak USD and the impact of low US interest rates. Fujii went on to say that Japan is prepared to intervene if JPY moves become abnormal but it’s best to let the markets determine FX levels. Fujii’s comments were seen as a signal that Japanese officials are comfortable with JPY strength. In addition the IMF says that JPY strength reflects fundamentals. The trade is likely to continue to test how far Japan is willing to allow the JPY to rise with the key question, what does Japan consider as abnormal price movement for the JPY. We suspect that the risk of intervention from Japan will remain low unless the pace of the JPY rally accelerates. Rumors continue to circulate that the MOF may be bidding for USD/JPY around 8800. JPY gains were limited by report of a smaller than expected August current account surplus. Japan’s August current account surplus rose 10.4% to ¥1.17 trln, market consensus was for a rise of 12.7% to ¥1.96 trln. Exports were reported down 37.1% and imports declined by 42.8%. The continued weakness in Japan’s export sales may intensify concern about the impact of the JPY rise on exports and increase pressure on the new Japanese government to take action to slow the rate of the JPY rally. The MOF released a study which concluded that the impact of strong JPY was limited for Japanese companies’ earnings.

  On October 9th August machinery orders will be released expected at 3.2% compared to -9.3% last month.

  Key technical levels to watch in USD/JPY include support at 88.01 the October 7th low with resistance at 90.13 the September 30th high.

  

  EUR
  EUR traded higher supported by report of better than expected German industrial production and the ECB decision to leave monetary policy unchanged. German August industrial production rose by 1.7%. The rise in German production is an indication that the EU economy continues to improve. The ECB left monetary policy unchanged as expected. In the press conference following the ECB rate decision ECB President Trichet said that interest rates are appropriate and that it’s too early to draw conclusions about its bank auctions. His comments suggest that it’s too soon to consider an exit strategy from the ECB’s unconventional policy measures. Earlier this year the ECB extended its auctions from six months to 12 months for bank loans.  Recent demands for loans at the auctions have been weak. The ECB essentially is allowing banks to borrow below its 1% overnight rate. Last week the EU banks took €75 bln loans from the ECB and a total of €400 in June. This is an indication that the ECB is not getting a big increase of liquidity from its bank auctions.  Trichet says there is no campaign for international use of the EUR. Trichet repeated his call for a strong dollar. ECB officials have become increasingly concerned about weak USD. The EUR declined from day’s highs after Trichet’s comments about strong USD and EUR reserve status.

  German August trade balance will be released on October 9th expected at 12.8 bln compared to 12.4 bln Last month.

  The technical outlook for the EUR has improved as EUR trades back above 1.4700. Expect EUR support at 1.4650 with resistance at 1.4804 the September 24th high.

  

  GBP
  GBP traded higher as the BOE elects 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. Prior to the November meeting the BOE will receive updated inflation data and this will help the central bank evaluate the impact of quantitative ease. At the August BOE policy meeting three members of the policy board including BOE Governor King voted for an additional increase in the asset purchase program of £25 bln. At the September BOE policy meeting the vote was unanimous to maintain the current level of asset purchases. There remains an outside chance that the BOE will decide to expand quantitative ease by £25 bln to £200 bln at the November policy meeting. 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. GBP was supported by BOE’s decision to maintain current level of its remuneration rate it pays on commercial bank assets at 0.5%. Focus turns to Friday’s release of UK PPI and trade balance.

  On October 9th September PPI will be released expected flat compared to 0.2% last month. August trade balance will also be released on October 9 expected at -6.234 bln compared to-6.479 bln last month.

  The technical outlook for GBP has improved as GBP trades above 1.6000. Expect near-term support at 1.5858 the October 7th low with resistance at 1.6127 the September 30th high.

  

  CAD
  CAD traded higher supported by improving risk sentiment and the record rise in the price of gold. Canada’s September housing starts rose by 150.1k. Canadian housing starts report was close to market expectation and had limited impact on the CAD trade. CAD is trading at one year high supported by optimism about the global recovery and a rally to a new record high in the price of gold. Tuesday’s surprise RBA rate hike contributes to in today’s report of an unexpected drop in Australia’s unemployment rate fuels optimism about the global recovery. Gold traded above 50 an ounce reflecting weak USD. Tuesday, Canada reported a sharp improvement and manufacturing PMI and a modest rise in August building permits. Canada’s September Ivey PMI rose to 61.7 from 55.7 last month, a reading of   Canada’s August building permits rise 7.2%, the trade was looking for an 8% rise. These reports contribute to optimism about the Canadian economic recovery. Focus turns to Friday’s release of Canadian unemployment and trade balance.

  On October 9th September unemployment will be released expected to rise 0.1% to 8.8% to fund growth at 5k compared to 27k last month along with August trade balance expected at -0.95 bln compared to -0.750 bln last month.

  The technical outlook for CAD is positive as USD/CAD trades below 1.0600. Look for near-term support at 1.0335 the September 29th 2008 low with resistance at 1.0715 the October 6th high.

  

  AUD
  AUD traded at fresh 14 month high supported by report of unexpected decline in Australia’s unemployment rate and a record rise in the price of gold. 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. Tuesday, the RBA raised interest rates 25 bps to 3.25% and signaled that more rate hikes may be needed. In the policy statement accompanying the RBA rate decision the RBA said that they see the global economy resuming growth that China’s growth is strong and that inflation was likely to move close to target. The RBA rate hike contributes to optimism about the global recovery. 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 technical outlook for the AUD is positive as AUD rallies above 9000. Expect AUD support at 8924 the October 8th low with resistance at 9075 the August 8th high and 9200.

  

   

US Morning Notes - USD lower, AUD a 14 month high as unemployment falls

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FX Highlights

• The USD is trading lower as unemployment falls in Australia and AUD surges, gold trades at a fresh record high and US equities are set to open sharply higher supported by better than expected earnings outlook from Alcoa, the rally in US equities contributes to improving risk appetite, the Financial Times reports that President Obama is under fire over the declining USD, central banks in South Korea, Taiwan Philippines and Thailand were reported intervening to try to limit the USD decline, BOE and ECB hold rate policy unchanged
• Focus turns to today’s release of US jobless claims and wholesale sales and inventories, Canada’s housing starts and the ECB press conference
• Japan’s current account surplus rises 10.4% y/y, analysts at Nomura said that Japan will not intervene at current levels but this could change, JPY higher
• Australia’s September employment rate falls 0.1% to 5.7%, 40.6k new jobs created, AUD at fresh 14 month high
• German August industrial production rises 1.7%, ECB unchanged, EUR higher
• BOE holds monetary policy unchanged and maintains the current level of asset purchases, scale of quantitative ease to be kept under review, GBP higher
• US consumer credit declines by 12 bln, consumer credit is at its lowest level since July 2007
• Proposed US healthcare bill to cost 829 bln over the next 10 years and the OMB says the bill would reduce the US budget deficit by more than bln
• U.S. Congress has yet to pass legislation to extend unemployment benefits, benefits for 400K unemployed ran out at the end of September
• US equity markets set to open higher, European equities 1% higher, Nikkei closed 37 points higher

Upcoming Events

• US - Thursday, initial jobless claims for week ending 10/03 will be released expected at 540k compared to 551k last week along with August wholesale sales and inventories expected at 0.7% and -1% respectively
• CAN - Thursday, September Housing starts will be released expected at 148k compared to 150.4k last month

EU Morning Report – USD resumes its decline ahead of key central bank meetings

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After a short lived comeback yesterday, the USD resumes its decline trading at a two week low against the euro, ahead of key central bank meetings.

• The greenback is under pressure as signs the global economy is recovering, boosting demand for higher-yielding assets.  The USD fell against most of its major counterparts as Asian stocks rally ahead of a German report forecasted to show industrial output rose for a second month and Japan’s machine orders climbed in August.
• The Australian dollar rose 1.2% to 90.20 US cents, the highest level since August 2008, from 89.12 in New York yesterday.  The number of people employed rose 40,600 last month from August 2008 according to the statistics bureau in Sydney against expectation of a 10,000 decline in jobs.  The jobless fell to a better-than-expected seasonally adjusted 5.7% in September from 5.8% the previous month.
• Alcoa Inc., the largest US aluminum producer, cut jobs and raw-material costs faster than analysts projected in the third quarter, producing a profit when most had estimated a net loss.  Alcoa posted profit of 4 cents a share and the company’s sales, which dropped 34% from the previous year, also beat analysts’ forecasts.
• The ECB will hold its main refinancing rate a record low of 1%, and the Bank of England will keep its main rate at an all-time low of 0.5%, according to market estimates.  Both central banks meet today.  Investors will be closely watching the wording of any accompanying remarks.
• Crude oil collapsed to 68.90 after a two day rally as petroleum product inventories increased more than expected.  Today in Asia, energy prices rebound as the dollar weakens.  Crude oil recovers almost .5 to .36.  Gold continued its rally, despite a comeback in USD yesterday, breaking above the 50 making a new record for a third day at 54.23.

Currency to watch out for: EURUSD & GBPUSD

• The EURUSD pivot point is at 1.4700 with a preference to enter into long positions at 1.4710
• The GBPUSD pivot point is at 1.5925 with a preference to enter into long positions at 1.5935

Today’s calendar and market movers:

• German Industrial Production expected to rise to 1.6%
• UK Official Bank Rate expected to remain at 0.5%
• ECB Minimum Bid Rate expected to remain at 1.0%
• US Unemployment Claims expected to drop to 540,000

Stocks:

• US equities were mixed on Wednesday with the Dow lower 0.1% the S&P and the NASDAQ up 0.3%.
• As of 06:15 GMT the Nikkei is trading at 0.34% and the Hang Seng at 0.39%.

Daily Forex Report - XAU and AUD continue on its march. Eyes on ECB and BoE

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XAU and AUD continue on its march. Eyes on ECB and BoE

CURRENCY TRADING SUMMARY – 8^th October (00:30GMT)

U.S. Dollar Trading (USD) had a less eventful day pairing back a modest rebound. The IMF did plenty to stem any further USD losses after stating that they saw no need for a shift out of the dollar reserves, which was further re-iterated by French Finance Minister Lagarde; that replacing the USD as the global reserve currency was purely speculation. In US share markets the DJIA closed down a mere 5.67 points (-0.06%) whilst the NASDAQ was slightly higher by 2.10 points (0.16%). Looking ahead, key data includes US Jobless claims which are forecasted to come in at 543k as opposed to the previous 551k seen previously.  

The Euro (EUR) slipped lower following flat equity markets which failed to contribute to EURJPY demand. EU Q2 GDP was revised lower to -0.2% from -0.1, whilst German Industrial orders were up at 1.4%, doing little to boost confidence. The Euro was further weighed by ECB Liikanen comments that the Eurozone recovery would be sluggish. The Euro traded with a low of 1.4649 and a high of 1.4736 before closing at 1.4685. Much of this weeks focus surrounds today’s ECB announcement in which it is widely expected interest rates would remain on hold, in which post commentary will be listened to attentively for any indication on exit strategies, an rhetoric surrounding EU economy improving with growth outlook uncertain.   

The Japanese Yen (JPY) was key in the USD pairing back some of its weekly losses as profit taking took course following the Japanese Yen trading at a 9 month high. Minister of Finance Fujii mentioned that current levels were consistent with market fundamentals, although prepared to intervene if moves become abnormal, in which markets interpreted as the Japanese Government being comfortable with current levels, a key factor in the Yen strength prior to profit taking. Overall the USDJPY traded with a low of 87.98 and a high of 89.39 before closing the day at 88.57.  UPDATE: Current Account for the month of August seen at 10.4% (Forecast: 8.9%)

The Sterling (GBP) disappointed once more despite UK nationwide consumer confidence rising to its highest level since April 2008, reading at 71 (previous 65). Nonetheless the GBP remains pressured following sharp drops in UK Manufacturing and Industrial Production (-1.9% and -2.5% respectively) adding to concerns that economic outlook remains uncertain. Overall the GBP traded with a low of 1.5856 and a high of 1.5971 before closing the day at 1.5959. The BoE is scheduled to meet on Thursday with the markets widely expecting rates to remain on hold, although pockets of the market forecast the BoE may cut its remuneration paid on commercial deposits, whilst being on alert for any indication of expansion to quantitative easing.    

The Australian Dollar (AUD) set a new 14 month high on Wednesday as the RBA’s Tuesday rate hike still resonates, before profit taking and disappointing housing finance sent the Aussie dollar lower in the US session. Overall the AUD traded with a low of 0.8864 and a high of 0.8651e closing the day at 0.8910. Looking Ahead, Unemployment Rate for the month of September is expected to be released at 5.9 % with a loss of 10k jobs  

Oil & Gold (XAU) XAU traded once again at a new record high for the second successive day touching 1049.70 an ounce, maintaining it attraction as an inflation hedge. XAU closed up US.40 at US44.40. Oil fell on Wednesday following a rise in US inventories by 2.9 million barrels versus the forecasted 1 million. Crude fell by US.31 a barrel to US.57.   

TECHNICAL COMMENTARY                                                            

Euro – 1.4720

Initial support at 1.4581 (Oct 5 low) followed by 1.4467 (Oct 2low). Initial resistance is now located at 1.4844 (Sept 23 high) followed by 1.4908 (August 22 ’08 high)

Yen – 88.55

Initial support is located at 87.981 (Jan 23 low) followed by 87.13 (Jan 21 low). Initial resistance is now at 89.88 (Oct 5 high) followed by 90.41 (Sept 03 high).

Pound – 1.5965

Initial support at 1.5805 (Oct 2 low) followed by 1.5771 (Sep 28 low). Initial resistance is now at 1.6126 (Sep 30 high) followed by 1.6207 (23.6% retracement 1.3503 – 1.7043).

Australian Dollar – 0.8835

Initial support at 0.8760 (Oct 5 low) followed by the 0.8647 (Oct low). Initial resistance is now at 0.9130 (Aug 07 ’08 high) followed by 0.9347 (Aug 04 ‘08 high).

Gold – 1045.20

Initial support at 1015.70 (Oct 6 low) followed by 1000.95 (Oct 5 low). Initial resistance is now at 1050 (Psych. Level) followed by 1100 (Psych Level).

Oil – 69.95

Initial support at 68.55 followed by 67.28.  Initial resistance is now at 71.43 followed by 73.04.

Daily Forex Report - USD rebounds on profit-taking and oversold technicals

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• USD: Higher, IMF official says no reason to start shifting reserves away from USD
• JPY: Lower, MOF to intervene if JPY moves become abnormal
• EUR: Lower, EU Q2 GDP revised lower, Lagarde says talk of replacing USD in oil transactions is speculation
• GBP: Lower, consumer confidence rose to its highest level since April 2008
• CAD and AUD: AUD & CAD lower and is, profit-taking emerges as global equity market rally stalls

Overview     
USD posted a modest rebound Wednesday as profit-taking emerged after the JPY rallied to a 9 month high and AUD traded at a fresh 14 month high. The rebound in the USD is attributed to comments from IMF officials that they do not see a reason for a shift out of USD reserves at this time and statement from the French Finance Minister Lagarde that replacing the USD as the global reserve currency is speculation and not on the current agenda. The USD traded sharply lower Tuesday in reaction to reports that oil producer nations are considering replacing the USD for settlement of oil transactions with a basket of currencies. There was also a report Tuesday that the UN is calling for a new global reserve currency to end USD supremacy. USD rebound is also attributed to uncertainty about the risk of intervention from Japan, report of a downgrade of EU Q2 GDP growth and comments from the Fed’s Hoenig. Japan’s Finance Minister Fujii said that Japan would take action if FX moves become abnormal. The key question is what Japan sees as abnormal price movement in the JPY. EU Q2 GDP was revised to -0.2% from the original report of a 0.1% decline. In addition Swiss unemployment was reported to have risen to a 11 year high. Hoenig said that the Fed will have to remove its very accommodative policy sooner than later.  Noble prize winning economists Stiglitz says that the global recession is far from over. Stilglitz’s comments inject a bit of caution into the current optimism about the global recovery. USD is also supported by technicals as the USD approaches extreme oversold levels. Focus turns to Thursday’s ECB and BOE central bank policy meetings. The trade will be looking for clues to possible timing of an exit strategy from the ECB and there is uncertainty as to whether the BOE may cut its remuneration rate paid on commercial bank deposits.

Today’s US data:
US consumer credit for August will be released after this report is published.

Upcoming US data:
On October 7th August consumer credit will be released expected at seat -8.9 bln compared to -21.6 bln in July. On October 8th initial jobless claims for the week ending 10/03 will be released expected at -545k compared to -551K last week. August wholesale sales and inventories will also be released on October 8th with wholesale sales expected at 0.6% and inventories expected at -0.5%. October 9th August trade balance will be released expected at -32 bln compared to -31.92 bln last month.

JPY
JPY traded at a nine month high versus the USD as Japan signals acceptance of the current level of the JPY. Japan’s Finance Minister Fujii said that the current JPY level is consistent with acceptable market activity and that JPY rally reflects weak USD and the impact of low US interest rates. Fuji went on to say that Japan is prepared to intervene if JPY moves become abnormal but it’s best to let the markets determine FX levels. Fuji’s comments were seen as a signal that Japanese officials are comfortable with JPY strength. In addition the IMF says that JPY strength reflects fundamentals. The trade is likely to continue to test how far Japan is willing to allow the JPY to rise with the key question, what does Japan consider as abnormal price movement for the JPY. We suspect that the risk of intervention from Japan will remain low unless the pace of the JPY rally accelerates. Rumors continue to circulate that the MOF may be bidding for USD/JPY around 8800. JPY rally stalled at this level and the JPY turned lower for the day. There was also report of a defense of 8800 barrier options in the OTC market. JPY price action raises suspicions that the MOF may have been in supporting the USD. 

On October 8th August current account will be released expected at ¥0.12 trln compared to ¥1.27 trln last month. On October 9th August machinery orders will be released expected at 3.2% compared to -9.3% last month.

Key technical levels to watch in USD/JPY include support at 88.01 the October 7th low with resistance at 90.63 the September 25th high.

EUR
EUR drifted lower as the equity market rally stalls and EU Q2 GDP was revised lower. EU Q2 was revised to -0.2% from -0.1%. Report that the Swiss unemployment rate rose to its highest level in 11 years at 3.9% adds concern about the outlook for growth in Europe. On the positive side, German August manufacturers’ orders were reported up 1.4%. The German manufacturing orders report was overshadowed by the EU GDP revision. EUR  was also pressured by a statement from ECB’s Liikanen that the EU recovery would be  would be sluggish and comments from the French Finance Minister Lagarde the talk of replacing the USD in oil transactions is speculation and not on the current agenda. This week’s main focus will be Thursday’s ECB policy meeting. The ECB is widely expected to hold policy steady and the trade will be looking to the press conference following the ECB meeting for the ECB’s outlook for the EU economy and for possible clues to the timing of an exit strategy from unconventional policy measures. The ECB is expected to acknowledge that the EU economy is improving but that the growth outlook remains uncertain. The ECB has tied the timing of the end of its accommodative monetary policy to price stability. Today’s comments from ECB’s Liikanen suggest that ECB policy will be on hold for some time.

On October 8th German September CPI will be released expected at -0.1%. German August trade balance will be released on October 9th expected at 12.8bln compared to 12.4bln Last month.

The technical outlook for the EUR has improved as EUR trades back above 1.4700. Expect EUR support at 1.4582 the October 5th low with resistance at 1.4804 the September 24th high.

GBP
GBP traded lower despite report that UK nationwide consumer confidence rose to its highest level since April 2008. The September Nationwide consumer confidence rose to 71 compared to 65 in August. GBP continues to underperform and has been pressured by Tuesday’s report of a sharp drop in UK manufacturing and industrial production. UK August manufacturing declined by 1.9% and industrial output declined by 2.5%. The sharp drop in UK industrial output suggests that the UK economic outlook remains uncertain and may encourage the BOE to announce additional monetary policy measures because of the risk of a slow economic recovery in the UK. Recent UK economic data has been mixed with construction and manufacturing PMI coming in weaker than expected and services PMI rising to a two-year high. The IMF raised its UK 2010 GDP forecast to 0.9% from 0.2%. The IMF also says that the UK is facing a 2009 financing gap of £215 bln which is 15% of UK GDP. GBP has been underperforming partly because of concern about rising UK government debt along with speculation that the BOE may soon reduce its remuneration rated paid on commercial bank holdings. This week’s main focus will be the BOE policy meeting Thursday. The BOE is expected to hold policy unchanged but there is an outside chance that the BOE may cut its remuneration rate it pays on commercial deposits. The trade will be looking to see whether the BOE decides to expand quantitative ease. Market consensus is that the BOE is leaning towards cutting the remuneration rate. The remuneration rate is currently at 0.5%. The shadow MPC committee says the BOE should extend quantitative ease beyond November. GBP rallied after BOE elected to maintain the current level of its quantitative ease in September. A decision to expand quantitative ease could spark significant selling of the GBP.

The BOE meet on October 8th. On October 9th September PPI will be released expected flat compared to 0.2% last month. August trade balance will also be released on October 9th expected at -6.234 bln compared to-6.479 bln last month.

The technical outlook for GBP is negative as GBP trades below 1.6000. Expect near-term support at 1.5770 the September 28th low with resistance at 1.6049 the October 6th high.

CAD
CAD traded at one year high supported by optimism about the global recovery and a rally to a new record high in the price of gold. Tuesday’s surprise RBA rate hike contributes to optimism about the global recovery and is seen as encouraging sign that at least the RBA sees the global economy strengthening. Gold traded near 50 an ounce reflecting weak USD. CAD turned lower in US session as the rally in global equity markets stalled and profit-taking emerges. Tuesday Canada reported a sharp improvement in manufacturing PMI and a modest rise in August building permits. Canada’s September Ivey PMI rose to 61.7 from 55.7 last month, a reading of Canada’s August building permits rose 7.2%, the trade was looking for an 8% rise. These reports contribute to optimism about the Canadian economic recovery. No major Canadian economic data was released in today’s trade. Canada’s PM made positive comments about Canada’s fiscal outlook. Harper said that Canada does not have a fiscal deficit. Harper’s comments remind investors that Canada’s budget outlook is in much better shape than most of the major G-7 nations. Canada’s fiscal outlook will allow Canada to better respond to future headwinds to the economy. Focus turns to Friday’s release of Canadian unemployment and trade balance.

On October 8th September housing starts will be released expected at 152k compared to 150.4k last month. On October 9th September unemployment will be released expected to rise 0.1% to 8.8% to fund growth at 5k compared to 27k last month along with August trade balance expected at-0.95 bln compared to -0.750 bln last month.

The technical outlook for CAD is positive as USD/CAD trades below 1.0700. Look for near-term support at 1.0335 the September 29th 2008 low with resistance at 1.0765.

AUD
AUD traded at fresh 14 month high in overseas trade supported by Tuesday’s RBA rate hike and a new record high the price of gold. Tuesday, the RBA raised interest rates 25 bps to 3.25% and signaled that more rate hikes may be needed. In the policy statement accompanying the RBA rate decision the RBA said that they see the global economy resuming growth that China’s growth is strong and that inflation was likely to move close to target. The RBA rate hike contributes to optimism about the global recovery. AUD turned lower in US session pressured by profit-taking and in reaction to report that Australia’s August housing finance declined by 0.6%. Loans for new housing however rose by 4.6%. AUD downside was limited by gains across trade to the JPY with JPY pressured by rising risk of intervention. Focus turns to Thursday’s unemployment report. The trade will be monitoring closely upcoming Australian economic data to see how the economy responds to Tuesday’s RBA rate hike. The RBA rate hike is the first step by the RBA to take back the emergency rate cuts announced to combat the impact of the global financial crisis. It remains to be seen if the RBA is embarking on a start of a tightening cycle.

On October 8th September employment will be released expected to rise 0.1% to 5.9% with employment growth at -10k compared to -27.1k last month.

The technical outlook for the AUD is positive as AUD rallies above 8900. Expect AUD support at 8758 the October 6th low with resistance at 8950 the August 11th high.

US Morning Notes - USD mixed, IMF says JPY strength reflects fundamental

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FX Highlights

• The USD is trading mixed to slightly higher as European currencies consolidate ahead of Thursday’s ECB and BOE policy meetings and the equity market rally stalls in Europe, USD rebounds versus JPY after declining to eight and half month low as Japan says it may act if FX moves turn abnormal, Japan’s finance minister says JPY level consistent with acceptable market activity, prepared to intervene if moves become extreme, the German government upgrades its 2009 growth outlook, UK consumer confidence rises to its highest level since April 2008, Swiss unemployment rises to 11 year high, commodity currencies continue to rise as gold hits record high
• Focus turns to today’s release of US consumer credit
• IMF official says he see’s no reason for shift of reserves away from USD
• Japan’s finance minister says current JPY level is not abnormal, prepared to intervene if warranted, weak USD attributed to low US interest rates, best to let markets determine FX levels, IMF’s Kato says that JPY rise reflects fundamentals, JPY lower
• Australia’s August housing finance falls 0.6%, AUD mixed consolidating at a 14 month high
• UK nationwide consumer confidence for September rises to its highest level since April of 2008 at 71 compared to 65 in August, GBP lower
• EU Q2 GDP revised -0.2%, German August manufacturing rose 1.4%, ECB’s Liikanen says EU recovery could be sluggish, EUR lower
• Swiss unemployment rate rises to 11 year high at 3.9%, CHF lower
• French Finance Minister Lagarde says talk of replacing USD in oil transactions is speculation and not on the current agenda
• Fed’s Hoenig says US economy recovering, does not see a double dip recession
• US mortgage applications rise to a four-month high
• Obama administration considering a 3k tax credit for hiring
• U.S. Treasury Secretary Geithner says US will have to save more
• US equity markets set to open higher, European equities mixed, Nikkei closed 108 points higher

Upcoming Events

• US - Wednesday, August consumer credit will be released expected at -8.9bln compared to -21.6 bln last month
• CAN - Wednesday, no major Canadian economic data is due for release today

EU Morning Report – XAU jumps to new record high, inflation fears, USD weakness!

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Gold jumps to a new record high to as much as 45 after breaching the peak of 33.9 made in March 2008.

• Demand for the ‘yellow metal’ came amid U.S. dollar weakness and renewed inflation fears, making gold an attractive alternative investment, especially after the G7 failed to voice a unified support for a stronger dollar over the weekend.
• The dollar dropped against most major currencies amid fresh doubts about its status as the world’s reserve currency.  The greenback was negatively affected by several reports hit the newswires yesterday stating that the Gulf state oil producers, together with China and Russia, have held talks aimed at replacing the dollar as the currency for pricing oil.
• The reports proposed to adopt a basket of currencies including gold to set oil prices in order to reduce volatility and depreciation associated with the dollar.  These reports have been denied by Saudi Arabia and Russia.  However, just the question of a pricing change had an immediate negative impact on the U.S. dollar and the currency failed to rebound.
• Manufacturing output fell by 1.9% in August against popular expectation of a rise of up to 0.4%.  The overall production output fared even worse, declining by 2.5% to its lowest level since 1987!  Britain’s economic recovery is in question and this may force the Bank of England to maintain its rates at current levels of 0.5%.
• Today marks the traditional start to earnings season when Alcoa reports third-quarter results after the opening bell.  The second quarter results came in better than expected, but much of the growth came as of cost-cutting from layoffs and compensation reductions.  Alcoa shares rallied 3.5% Tuesday in a strong session for US equities.

Currency to watch out for: EURUSD & Crude Oil

• The EURUSD pivot point is at 1.4670 with a preference to enter into long positions at 1.4680
• Crude Oil pivot point is at 70.25 with a preference to enter into long positions at 70.75

Today’s calendar and market movers:

• EU Final GDP expected to read at -0.1%
• German Industrial Orders expected to drop to 1.2%
• US Crude Oil Inventories expected to add 2 million barrels

Stocks:

• US stocks rose on Tuesday with the Dow up 1.37%, the S&P up 1.37% and the NASDAQ up 1.71%.
• As of 06:15 GMT the Nikkei is trading at 1.11% and the Hang Seng at 1.86%.

Daily Forex Report - RBA first to pull the trigger, as XAU trades at record high of 1,043

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RBA first to pull the trigger, as XAU trades at record high of 1,043

CURRENCY TRADING SUMMARY – 7^th October (00:30GMT)

U.S. Dollar Trading (USD) slipped to record lows versus Gold following speculation that Arab states were in secret meetings to trade Oil in non-Dollar denominated contracts, ending the use of USD pricing for the highly sought commodity. Reports in the Independent UK implied that a move to a basket of currencies were favoured, including the Euro, Yuan, Yen and Gold, were later denied by Russian, Kuwait and Saudi officials. Which did little to prevent the Dollar from slipping further against the commodity currencies. In US share markets, the DJIA gained 131.50 pts (+1.37%) whilst the NASDAQ also gained 19.43 points (+1.46%).      

The Euro (EUR) took advantage of the USD weakness, adding to its post G7 weekend moves. Tuesdays move was largely on the back of the Independent newspaper report that Oil producing nations were in talks to cease pricing oil in USD with a shift to a basket of currencies including the Euro. The EUR also was boosted by further gains against the GBP following disappointing UK production figures, despite ECB officials downplaying chance of an early rate hike. The Euro traded with a low of 1.4644 and a high of 1.4744 before closing the session at 1.4715. Euro zone GDP figures for the second quarter are expected to be confirmed at -0.1%, whilst German Industrial orders are forecasted to be released at 1.3% (Previous: 3.5%)  

The Japanese Yen (JPY) man of the hour, Japanese Finance Minister Fujii was outspoken once more indicating that USD weakness had been discussed at the G7 meeting. The USDJPY traded with a low of 88.60 and a high of 89.65 before closing the day at 88.76.

The Sterling (GBP) was one of the only currencies to have lost ground against the USD on Tuesday following poor readings in UK manufacturing and Industrial Production falling 1.9% and 2.5% respectively. Over all the GBP traded with a low of 1.5874 and a high of 1.6047 before closing the day at 1.5938

The Australian Dollar (AUD) was one of the stars on Tuesday following the RBA being the first G20 Central Bank to hikes rates, moving by 25 bpt, in which the official cash rate now sits at 3.25%. Furthermore, the RBA upgraded its growth forecasts to 3% GDP in 2010 adding fuel to another possible rate hike by the end of the year. The AUD traded at fresh 14 month highs throughout the day reaching 0.8920 having traded at a low of 0.8753 before closing at 0.8905.  

Oil & Gold (XAU) were both in the spotlight with Oil being the key driver for much of the USD weakness following the Independent report of Arab states in talks to flee USD denominated contracts. However Oil rallied as the US Energy Information raised forecasts of consumption by 170k barrels for the 4^th quarter of 2009. Crude rose by US 47 cents to US 70.88 a barrel. XAU soared to all time highs of 1,043.45 on the back of the UK independent report that USD would be dropped as the peg currency for Oil, in which the safe haven commodity was most attractive.    

TECHNICAL COMMENTARY                                                            

Euro – 1.4710

Initial support at 1.4581 (Oct 5 low) followed by 1.4467 (Oct 2low). Initial resistance is now located at 1.4844 (Sept 23 high) followed by 1.4908 (August 22 ’08 high)

Yen – 88.95

Initial support is located at 88.61 (Oct 2 low) followed by 88.24 (Sep 28 low). Initial resistance is now at 89.88 (Oct 5 high) followed by 90.41 (Sept 03 high).

Pound – 1.5905

Initial support at 1.5805 (Oct 2 low) followed by 1.5771 (Sep 28 low). Initial resistance is now at 1.6126 (Sep 30 high) followed by 1.6207 (23.6% retracement 1.3503 – 1.7043).

Australian Dollar – 0.8895

Initial support at 0.8676 (Sept 29 low) followed by the 0.8587 (Sept 28 low). Initial resistance is now at 0.8943 (76.4% retrace 0.9850-0.6009) followed by 0.9130 (Aug 07 ‘08 high).

Gold – 1038.30

Initial support at 1015.70 (Oct 6 low) followed by 1000.95 (Oct 5 low). Initial resistance is now at 1050 (Psych. Level) followed by 1100 (Psych Level).

Oil – 71.35

Initial support at 70.18 followed by 69.16.  Initial resistance is now at 72.09 followed by 72.98 High).

Special FX Report - ECB & BOE meetings Thursday, RBA hikes first

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The European Central Bank (ECB) and Bank of England (BOE) will hold monetary policy meetings on Thursday October 8th. At the September ECB policy meeting the ECB elected to hold interest rates at a record low and indicated they were in no hurry to withdraw stimulus. At the May policy meeting the ECB reduced interest rates to a record low 1%, expanded its repo auctions from six months to 12 months and announced a plan to buy €60 bln in covered bonds. In June, the ECB offered a record 9 bln of cash allotment to banks to improve liquidity. The ECB is widely expected to hold a policy steady at 1% Thursday and the trade will be looking to the press conference following the ECB meeting for the ECB’s outlook for the EU economy and possible clues to the timing of an exit strategy from unconventional policy measures. The ECB is expected to acknowledge that the EU economy is improving but that the growth outlook remains uncertain. The ECB has tied the timing of the end of its accommodative monetary policy to price stability. ECB’s Liikanen said that the central bank will exit nonconventional monetary policy when the economy allows. ECB’s Ordonez says that he sees a slow recovery and expects inflation to remain low for some time. Comments from ECB’s Liikanen and Ordonez suggest that ECB policy will be on hold for some time. Steady ECB policy decision is already discounted and the impact of ECB meeting for the EUR should be limited. If the ECB were to surprise and hint that the timetable for its exit strategy will be moved forward the EUR could extend this weeks rally.

At the September BOE policy meeting the BOE elected to continue its plan to buy £175 bln in asset purchases to try and boost UK growth and to hold its overnight rate unchanged at 0.5%. The BOE overnight rate has remained at a record low 0.5% since March. In June, divisions on the BOE policy board emerged with BOE Governor King and two other policy members seeking an expansion of the asset purchase program to £200 bln. In September the BOE policy board unanimously agreed to maintain the asset purchase plan at £175 bln. The unanimous decision to maintain the current level of asset purchases was seen as an indication that the BOE is more confident about the UK economic outlook and sees less of a need to expand accommodative policy. GBP has been underperforming partly because of speculation that the BOE may soon reduce its remuneration rate paid on commercial bank holdings. The remuneration rate is currently at 0.5%. The BOE is expected to hold policy unchanged but there is an outside chance that the BOE may cut its remuneration rate it pays on commercial deposits. The trade will be looking to see whether the BOE decides to expand quantitative ease. Market consensus is that the BOE is leaning towards cutting the remuneration rate and maintaining the current level of asset purchases. The shadow MPC committee says the BOE should extend quantitative ease beyond November. GBP rallied after BOE elected to maintain the current level of its quantitative ease in September. A decision to expand quantitative ease or cut the remuneration rate could spark significant selling of the GBP.

The RBA hiked rates 25 bps to 3.25% Tuesday and signaled that more rate hikes may be needed as the economy strengthens. The rate hike was seen as a surprise by some analysts. The fact that the RBA is the first major central bank to hike rates will intensify speculation about which central bank will be the next to follow the RBA. Rate hikes by the Fed or ECB are not expected until mid 2010 at the earliest and the BOE may not be finished easing policy. In the policy statement accompanying the RBA rate decision the RBA said that they see the global economy resuming growth that China’s growth is strong and that inflation was likely to move close to target. The RBA noted that the overnight interest rate is at a historically low level. The 3% benchmark rate was the lowest since 1949. This would suggest that the RBA may consider more rate hikes down the road. It’s not clear that other central banks are as confident as the RBA about the outlook for the global economy. The RBA rate hike will have limited influence at Thursday ECB and BOE policy meetings.