Forex Market Update

The meltdown of the three FX stooges: USD, JPY and GBP, continues, as equities notch new highs.

Banking Holiday in Canada and United States today - though US equity markets will be open.

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MAJOR HEADLINES – PREVIOUS SESSION

• New Zealand Sep. QV House Prices fell -1.1% YoY vs. -2.8% in Aug.
• Germany Sep. Wholesale Price Index fell -0.2% MoM vs. +0.3% expected
• Sweden Sep. AMV Unemployment Rate out at 5.3% vs. 5.4% expected and 5.5% in Aug.

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THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• US National Economic Council's Summers to Speak (1615)
• US Treasury's Krueger to Speak (1715)
• New Zealand Retail Sales (2145)
• UK Sep. BRC Retail Sales Monitor (2301)
• UK Sep. RICS House Price Balance (2301)
• Australia Sep. NAB Business Conditions (0030)

Market Comments:

The USD meltdown continued this week after a brief respite on Friday after Bernanke threw out a snippet of rhetoric suggesting that rate. With equities jumping higher again in the Asian and European sessions today, the greenback and its low yielding fellow travelers, the pound sterling and Japanese Yen, didn't stand a chance, and all three weakened again versus the high flying Loonie especially, which continues to find support from the shockingly strong  Canadian employment report from Friday.  Crude oil tacking on to recent gains fueled further gains for the currency, and likely also helped NOK notch new highs vs. the Euro in Asia before backing off in the European session today.

Today is one of those odd "half holidays" in the US in which banks - and therefore the treasury market - are closed for the day, while equity markets will be open for business.

Reserve accumulating central banks are the primus motor of the moves in currencies here, as US and UK policies are seeing major banks shun the fiscally hopeless and low yielding currencies and diversifying especially into Euros, and the Yen to a lesser extent. A Bloomberg article this morning cites Barclay's Capital tally of the latest quarter's accumulation of FX reserves at over $400 billion. Barclay's also estimates that 63% of new reserves are being funneled into Euros and Yen. This was for the quarter ending in June, and there is certainly no sign of a change of behavior since then, in fact, the trend only seems to have strengthened. If the Chinese economy is doing so well, we ask again, then why have they not signaled that it is time to allow the renminbi to begin appreciating again? And while Europe has begun to complain about the unfair strengthening of its currency, why have the complaints not been more belligerent?

With the current persistent trends very clear and powerful, we have a look at coincident indicators and any event risks on the horizon that might provide a pivot point in the action. On the former, the strength in the Aussie, to take an example, is outpacing differentials in interest rates and is beginning to feel overdone, particularly as the last leg of Aussie appreciation has shown an acceleration in an already very well established trend. Usually, such aggravated action cannot be sustained for long, so we might expect sideways consolidation at minimum soon. Speculative positioning suggests that long Aussie positions have been crowded for some time, as well. In the case of CAD, the recent data surprise triggered moves in interest rates that fully justify the latest strengthening. And the over-riding theme of high risk appetite feeding the weaker USD will continue as long as equity markets are rallying.

As for upcoming event risks, the most interesting items on the calendar this week are Wednesday's US Advance Retail Sales and US FOMC minutes. The former is very important for measuring the strength of end demand, as our outlook suggests that end demand will not bounce back enough to provide a strong recovery due to private balance sheet deleveraging and weak wage growth. The FOMC minutes could be interesting due to the continued signs of a divided Fed, so we'll look for signs of the split widening or the hawks' impatience growing. Thursday's jobless claims number will be important for showing whether the trend toward fewer jobless claims continues now that we have entered the seasonally most important part of the year for employment. (Still interesting that more claims were filed last week than for the same week last year, just to show how much further we need to go to get real improvement rather than "less badness"). Then on Thursday we have the first two of the regional US manufacturing surveys.

Chart: GBPUSD
GBPUSD managed to stave off new lows today below 1.5800 as GBP, USD and JPY fight for lowest spot on the currency totem pole. Today's low and the 1.6110 area are the two key trigger areas for GBPUSD's next larger move now.