Commodities Extend Weakness as Investors Avoid Risks

Oil prices extend weakness for a third consecutive day as global risk aversion jumps amid Goldman's case. WTI crude oil price slides to 80.8 in European session, after plummeting -2.69% to 83.24 last Friday. Declines in heating oil and gasoline also accelerate with losses of -3% and -2% respectively.

After disclosing production of 29.26M bpd in March (+5.6% y/y), OPEC will probably increase shipment, by +0.9%, in the 4 weeks ending on May 1. This further increases oil supply which is already in a surplus in the market. Member countries are boosting production regardless insufficient demand.

In an interview over the weekend, Qatar's oil minister Abdullah bin Hamad al-Attiyah said there's no need for a special meeting before its October meeting but he mentioned that recent rally in oil price was is 'not related at all to there being a shortage...We see that inventories are at their highest'.

Natural gas has fallen in consolidative phase since April. However, resumption of inventory builds indicates risk of price is to the downside. Gas supply will likely remain ample in coming years as large producers are not going to cut output despite slump in prices.

Although Algeria's energy minister Chakib Khelil plans to seek commitments from 11 gas exporting nations to reduce output, both Russia and Qatar, respectively the biggest and the third-biggest holders of the world's reserves, will probably refuse to collaborate.

Gold price slides due to broad-based decline in commodities and weakness in the Euro. Currently trading at 1130, the benchmark contract fell to as low as 1124 earlier today. Despite the fall, gold's performance is relatively resilient when compared with oil prices. Some investors buy gold as they lose confidence on currencies on Greece's issue.

Talks on Greece involving the European Commission, the IMF and the European Central Bank have been delayed until April 21 as a volcanic ash cloud disrupted air travel. The market expects the EU and the IMF will impose tough conditions for the rescue package for Greece. The spread between Greek and German 10-year government debt widened +32 bps to 462 bps, the highest level since October 1998.

JPY weakens again on weak bond market. Pound rebounds as Moody's declares no revision to UK credit rating in the Works.

USD outlook remains in suspended animation awaiting today's US Advance Retail Sales.

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MAJOR HEADLINES – PREVIOUS SESSION

• China Nov. Producer Price Index fell -2.1% YoY vs. -2.4% expected and -5.8% in Oct.
• China Nov. Purchasing Price Index fell -3.6% YoY vs. -4.0% expected and -8.4% in Oct.
• China Nov. Consumer Price Index rose +0.6 YoY vs. +0.4% expected and -0.5% in Oct.
• China Nov. Retail Sales rose 15.8% YoY vs. 16.5% expected and 16.2E in Oct.
• China Nov. Industrial Production rose 10.3% YoY vs. 10.2% expected and 9.4% in Oct.
• China Nov. New Yuan Loans totaled 294.8B vs. 250B expected and 253B in Oct.
• China Nov. Trade Balance fell to $19.1B vs. $24.3B expected and $24B in Oct.
• Japan Nov. Consumer Confidence fell to 39.9 vs. 40.7 expected and 40.8 in Oct.

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THEMES TO WATCH – UPCOMING SESSION

(all times GMT)

• UK Nov. PPI Input/Output (0930)
• Canada Oct. New Housing Price Index (1330)
• US Nov. Import Price Index (1330)
• US Nov. Advance Retail Sales (1330)
• US Dec. Preliminary University of Michigan Confidence (1500)
• US Oct. Business Inventories (1500)

Market Comments
US treasury futures continued to slide and Asian equity markets ticked higher in the Asian session, helping to underline the recent support in USDJPY, which has come some 150+ pips off its recent lows. Chinese data appears strong save for the shrinking Trade Balance number, which underlines the idea that China is trying to stimulate its way into the future. Many are raising questions about the quality of Chinese growth, but for now, the market seems to be willing to take it more or less at face value. The USD has been treading water against developing Asian currencies for about two months now in a shrinking range. Today's Chinese data failed to provide a catalyst for any action.

Elsewhere, the greenback seems to have gone into some kind of suspended animation here, refusing to give a sign of what it wants to do after mounting a comeback and now more or less continuing to ward off weakness despite relatively strong risk appetite elsewhere. The pound found considerable relief overnight after rumors of a Moody's revision to the UK's AAA reading on its sovereign debt. Moody's was out denying the rumors point blank. This sent GBPUSD back over 1.6300 before Londoners even arrived for work and EURGBP back toward the interesting 0.9020/00 zone of support, a break of which would look significant. The pound has survived Brown and company's attack on bank bonuses relatively well, something that adds another arrow the rare pound bull's quiver.

Chart: EURGBP
EURGBP getting interesting as we head into the European session, considering the obvious focus on the 0.9020/00 support area (flatline and the skimming along the 21-day moving average). If this area gives way soon, the pair could go on for a full test of the 200-day moving average below 0.8900 again.

Looking ahead
All eyes are on the US retail sales data today. A mild improvement is expected despite chain store sales reporting a small drop for the month in same store sales. The US 10-year note benchmark deserves plenty of attention today as it is now trading up against a near 1-month high at the psychologically significant 3.50% level. JPY crosses have been the big movers of late and the kind of volatility we have seen is likely to persist .As for the USD, it feels like today is the today that we either see confirmation or rejection of the recent rally after two days of going absolutely nowhere.

AUDUSD Finally Breaks the 8-month Old trendline, triggering a stop fest. EURUSD hanging on to support by a thread so far - Forex Market Update

AUDUSD finally breaks the 8-month old trendline, triggering a stop fest. EURUSD hanging on to support by a thread so far.

Little news shaking the markets, as much of recent activity seems to be about position adjustments.

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MAJOR HEADLINES – PREVIOUS SESSION

• New Zealand Oct. Credit Card Spending fell -0.4% YoY vs. -2.3% in Sep.
• Japan BoJ left target rate unchanged at 0.10% as expected
• Germany Oct. Producer Prices out at 0.0% MoM and -7.6% YoY vs. +0.1%/-7.5% expected, respectively

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THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• New Zealand Oct. Visitor Arrivals (Sun 2145)
• Australia New Motor Vehicle Sales (Mon 0030)
• Japan Oct. Supermarket Sales (0500)

Market Comments:

The move in risk aversion in the European session provided a big boost to the greenback, and EURUSD is pounding on the local support just above 1.4800 as we write this, and AUDUSD has collapsed through support and triggered a stop-fest now that the multi-touch trendline stretching back to March of this year has been broken. USDCAD. JPY was also stronger and JPY crosses, especially in the higher beta pairs, took a trip back to the south after a strong bounce late yesterday. Today's NZDJPY chart shows an interesting head and shoulders developing.

Chart: NZDJPY
New Zealand turned suddenly very vulnerable on the combination of the sell-off in risk and the OECD report encouraging the RBNZ to keep rates low due to a fragile economy. The combination has led to some impressive downside for NZDJPY, which now appears to be developing a rather large head and shoulders formation. It will be interesting to watch the behavior of the pair if the neckline is breached in coming weeks.

PBOC chief underlines weak yuan policy
In case we were in doubt about China's stance on the yuan, the PBOC governor Zhou said yesterday that China is "passive" on the value of the US dollar. It certainly appears that China is either in no rush at all to move on the yuan, or is using rhetoric as a smokescreen for actual plans to loosen up yuan policy in order to avoid overspeculation ahead of the fact (lower odds). Interestingly, in Bill Gross' latest commentary, he suggests that China is likely to change its yuan policy over the next 6 months.  Does he know something we don't? In any case, Zhou's comments are likely helping to give EUR support outside of EURUSD and EURJPY becuase it suggests that the reserve diversification trade will not slow in coming months.

Negative yield on some US treasuries
An interesting article in the FT points out that some of the shortest term treasuries in the US are yielding less than zero percent as banks scramble to present the cleanest possible balance sheets by year end.  Six-month bills dropped to a record low yield of 13 bps - lower than during the crisis last year. The article points out that all major US banks have a year end that coincides with the calendar year-end, whereas in years past, all of the big investment banks reported at the end of November. Nothing is more remarkable than the breaking records in low yields while the headline fret inflation and gold is trading at close to record highs. On that latter point, however, research is circulating that suggests that relative to the supply of money in existence, gold is still quite cheap - see Evan-Pritchards recent piece on gold over at the Telegraph for more on that subject.

Looking ahead: Whither the sell-off?
Looking at fundamental inputs into this move in risk aversion and USD rally, it appears that what we are seeing may just be an example of a market adjustment due to over-positioning. Risk inputs still suggest relatively benign conditions, even if they are less benign than in recent months. Still, the risk rally has been of such magnitude in currencies that we could see a considerable further adjustment lower in the riskier trades. If we try to connect the dots between the FT article and the action in bond markets and currencies, one might propose that some of this move is due to significant players taking their chips off the table well ahead of year end, hence the unwind.

Remember that next week contains the US Thanksgiving holiday on Thursday and Friday. Have a great weekend!

USD fights back on Obama's urging China to consider yuan move US core PPI shocks to the Downside - USD Bullish or Bearish?

Lower yields continue to support the JPY. Critical EURJPY support nearing once again.

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MAJOR HEADLINES – PREVIOUS SESSION

• Japan Q3 Housing Loans rose 0.8% YoY vs. +0.4% in Q2
• Switzerland Sep. Retail Sales fell -1.6% YoY vs. -1.0% in Aug.
• Sweden Q3 Total Number of Employees fell -2.8% YoY vs. -1.9% in Q2
• UK Oct. CPI rose +0.2% MoM and +1.5% YoY vs. +0.1/+1.4% expected, respectively
• UK Oct. Core CPI rose +1.8% YoY as expected and vs. +1.7% in Sep.
• UK Oct. RPI rose +0.3% MoM and fell -0.8% YoY vs. +0.1% /-1.0% expected, respectively
• EuroZone Sep. Trade Balance was +6.8B vs. 2.2B in Aug.
• US Oct. Producer Price Index out at +0.3% MoM and -1.9% YoY, vs. +0.5% and -1.8% expected, respectively
• US Oct. PPI ex Food and Energy fell -0.6% MoM and rose +0.7% YoY, vs. +0.1%/+1.4% expected, respectively

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THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• US Sep. Net Long-term TIC flows (1400)
• US Sep. Total Net TIC Flows (1400)
• US Oct. Industrial Production (1415)
• US Oct. Capacity Utilization (1415)
• US Fed's Lacker to Speak (1515)
• US Fed's Pianalto to Speak (1730)
• US Nov. NAHB Housing Market Index (1800)
• US Treasury Secretary Geithner to Testify about G-20 (1930)
• US Weekly API Crude Oil and Product Inventories (2130)
• US Weekly ABC Consumer Confidence (2200)
• Australia Q3 Wage Cost Index (0030)

Market Comments:

The USD and JPY have swept stronger against the market in today's European session. And for once, the USD move has come unaided by a concomitant move in equities to the downside. This is an interesting divergence, to say the least. We wonder if yesterday's decisive move lower in yields, which took the US 2-year, for example, into new territory is serving as a game-changer across markets. After all, if bond buyers are willing to chase these pathetic yields, it strongly suggests more perceived weakness ahead than rallying asset prices would otherwise suggest. Of course, as we have said ad nauseam of late, the rally in asset prices is a side effect of the "liquidity is king" theme that has been playing for some time now. Alternatively, the USD bears might tell us that the USD move was just a bit of position adjustment triggered by Obama calling for China to allow the yuan to appreciate (President Hu, for his part, didn't even acknowledge what Obama said about currency appreciation...), as the consensus is that a Chinese move on the yuan will be largely bullish for the USD relative to the Euro. We prefer to prick up our ears here and listen very closely to the market's pulse, since this move looks interesting. The slavish correlation of the USD with risk appetite has been the be all and end all of currency market moves of late, so any divergence is certainly worth noting.

The moves in JPY crosses have followed the simple logic of compressed interest rate spreads, and EURJPY is now less than a figure from the pivotal 200-day moving average just below 132.00. A close below that level could get something interesting started across the board for non-USD JPY crosses (non-USD since USD and JPY strength tend to be more or less positively correlated) USDJPY has actually bounced a bit on the overall USD strength.

Technically speaking
The USD managed to cross to the strong side of the weekly pivot in AUDUSD (0.9297), USDCAD (1.0568), EURUSD (1.4925) and USDCHF (1.0120), all of which are levels worth watching intraday. A sharp move back through these levels suggests we're just seeing some churning in the range for now. The argument that this isn't just a sharp move within the range is enhanced if we get a close through 1.4820 in EURUSD in the sessions ahead, and for example, below 0.9210 in AUDUSD.

Inflation data
Today's UK inflation data was slightly higher than expected, but not enough to serve as a catalyst. US PPI data served up a rather shocking -0.6% drop for the core ex Food and Energy index on month-on-month comparisons and a mere +0.7% YoY, which is the lowest reading since the core PPI dipped sharply in 2002- 03. This is not necessarily a USD-negative development if the idea rubs off that low US inflation could mean lower inflation elsewhere and that too much tightening is priced into the market for other central banks.

Looking ahead
The Industrial Production and Capacity Utilization data out in a bit are a likely to show continued activity pick-up in the US manufacturing sector, which is in the midst of an inventory rebuilding cycle. Tomorrow, GBP is in focus again with the Bank of England minutes. EURGBP is having a try through its 200-day moving average today. GBP seems to be enjoying the low rates environment here much as the JPY is, and the market will be looking for more clues concerning the MPC's feelings about any further quantitative easing moves. Also up tomorrow we have Canadian and US CPI data. Oil prices refuse to break out of the rather high range of late, and the eventual implications for year-on-year inflation comparisons are obvious, since oil was trading below 40 dollars around the beginning of the year. Clearly, after yesterday's Bernanke rhetoric, however, the Fed sees little to worry about on the inflation front.

Chart: AUDUSD, again, again
AUDUSD has teased with the prospect of a turnaround on a couple of occasions lately, and we wonder if today's move is just another of these teases that eventually yields to another leg up or whether we are looking at a genuine turnaround and larger consolidation for the pair. The latter scenario is preferred as long as we close below this week's pivot just below 0.9300 and is enhanced with a close through the recent low at 0.9210 in coming sessions. The monster trendline further below lies in wait as the next step. The relatively dovish RBA minutes overnight have brought the interest rate spreads tighter vs. the USD and suggest that new highs in AUDUSD aren't warranted here. Note the divergence in the momentum for the daily stochastics as well.

Dollar Continued Lower after Bernanke "hiccup"; But Asia hesitates Again - Forex Market Update

RBA minutes suggest a pause in the hiking cycle at the December meeting

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MAJOR HEADLINES – PREVIOUS SESSION

• CA Sep. Manufacturing Sales out at +1.4% m/m vs. +1.7% expected and revised -1.8% prior
• US Oct. Advance Retail Sales out at +1.4% vs. +0.9% expected and revised -2.3% prior
• US Oct. Retail Sales ex-Autos out at +0.2% vs. +0.4% expected and revised +0.4% prior
• US Nov. Empire Manufacturing out at 23.51 vs. 33.0 expected and 34.57 prior
• US Sep. Business Inventories out at -0.4% vs. -0.7% expected and revised -1.6% prior
• JP Q3 Housing Loans out at 0.8% vs. 0.4% prior
• JP Sep. Tertiary Industry Index out at -0.5% vs. +0.2% expected and +0.3% prior
• SI Oct. Non-oil Domestic Exports out at -6.1% y/y vs. +0.2% expected and revised -7.3% prior

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THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• ECB’s Mersch & Quaden to speak (0800)
• Swiss Retail Sales (0815)
• UK CPI (0930)
• UK Retail Price Index (0930)
• UK BOE’s Bailey to speak (0930)
• EU Euro-zone Trade Balance (1000)
• US Fed’s Yellen to speak (1030)
• US PPI (1330)
• US Net Long-term TIC flows (1400)
• US Industrial Production (1415)
• US Capacity Utilization (1415)
• EU ECB’s Stark to speak (1430)
• US Fed’s Lacker to speak (1515)
• EU ECB’s Trichet to speak (1700)

Market Comments:

Fed Chairman Bernanke’s speech on the US economic outlook upset the apple cart of a broader risk rally yesterday as his speech contained specific references to the dollar for the first time since 2008. He commented that the Fed was “attentive to changes in the value of the dollar” and added that Fed policy will be formulated to guard against risks to the dual mandate of price stability and maximum employment. The market reaction was a nervous kneejerk higher for the dollar though this was short-lived after he reiterated that rates would be kept low for an extended period.

Yesterday’s data was nothing to shout about, although the headline retail sales numbers suggested retailers may face a better outlook heading into the Christmas period. However, the headlines masked a disappointing report with a hefty negative revision to the previous month’s data and the ex-autos number falling below forecasts. The Empire state manufacturing Index also failed to match expectations (but nevertheless came in at its highest level in 2 years).

With President Obama half way through his historic visit to China one might expect a flood of headlines on discussions, comments and rhetoric. However, it appears all the talking was done at the weekend with both China and Japan warning that US policies were fueling another potential asset crisis in Emerging Asia. Today’s meeting with China Pres. Hu did not produce any market-moving headlines. This morning’s headlines were dominated by news of the financial Memorandum of Understanding and Economic Cooperative Framework Arrangement between Taiwan and China which is an initial door-opening for Taiwan banks to tap into China’s massive market and for banks from both sides to cross-invest.

In stark contrast to Japan and China’s concerns about exceptionally low US rates fueling speculative asset bubbles, the Fed’s Kohn views current asset prices in US markets as not out of line with economic and business prospects. He said one purpose of ultra-low rates was to induce investors to shift into riskier and long-term assets and hence lower the cost and increase the availability of capital to households and businesses. He viewed monetary policy as a blunt instrument in addressing asset bubbles and was of the opinion that when bubbles become extreme then they will be easily spotted, though warned that sometimes we may see more than are actually there.

 The release of the minutes of the RBA meeting for November had nothing new for the markets to digest but looked to confirm that a December pause in the hiking cycle may be on the cards as it mentioned that the pace of future hikes remained an open question. The minutes highlighted the improvement in both global and local economic conditions but acknowledged that there were balanced risks to the outlook for the economy. It also noted that the rise in the AUD might constrain output and dampen inflationary pressures. The AUD had an initial kneejerk jump, but only 10-15 points, before marginally lower yields capped the rally. The chances of a 25bp rate hike at the December meeting fell to just below 50/50 but markets are still pricing in 150bp worth of hikes in one year’s time.

The prospect of a second extra budget in Japan is looking more likely, according to comments from Deputy PM Kan. He noted that cabinet members were concerned about heading into a deflationary situation with the Q3 growth numbers yesterday masking a slide in prices of goods and services that would threaten the corporate profit rebound and hence derail the economic rebound. There was no mention of the size of the spending plan but extensions to subsidies on energy efficient cars and electronics (the measures which largely contributed to Q3’s growth) were being considered. Earlier FinMin Fujii had warned that an increase in bond sales in the next fiscal year would be a “big problem” and reaffirmed his aim to keep new issuances below a total ¥44 tln.

Asia was again hesitant to take risk appetite to new highs and, without any particular new event to drive, most equity markets slid into the red and the dollar staged a mild rebound. However, this is still viewed as a temporary phenomenon and it looks likely that Europe will resume the dollar bear trend. On the data front, we see UK CPI and retail prices and Euro-zone trade balance in Europe while the US session features US PPI, TIC flows, industrial production and capacity utilization.

The Dollar’s recovery stuttered on Friday. Is it back to normal service ?

apanese GDP beats forecasts in Q3 but has a muted impact on currency and equity markets

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MAJOR HEADLINES – PREVIOUS SESSION

• CA Sep. Int’l Merchandise Trade Balance out at –C$0.9 bln vs. –C$1.8 bln expected and –C$2.0 bln prior
• CA Sep. New Vehicle sales out at 1.2% m/m vs. flat expected and revised -0.2% prior
• US Sep. Trade Balance out at -$36.5 bln vs. -$31.8 bln expected and revised -$30.8 bln prior
• US Oct. Import Price Index out at +0.7% m/m, -5.7% y/y vs. 1.0%/-5.5% expected and 0.2%/-12.0% prior resp.
• US Nov. Univ. of Michigan Confidence out at 66.0 vs. 71.0 expected and 70.6 prior
• NZ Q3 PPI Input Prices out at -1.1% q/q vs. flat expected and flat prior
• NZ Q3 PPI Output Prices out at -1.4% q/q vs. +0.2% expected and -0.7% prior
• JP Q3 GDP out at +1.2% q/q vs. +0.7% expected and +0.7% prior
• UK Nov. Rightmove House Prices out at -1.6% m/m, +1.6% y/y vs. +2.8%/+0.2% prior

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THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• Denmark Wholesale Prices (0830)
• EU ECB’s Weber to speak (0850)
• Norway Trade Balance (0900)
• EU Euro-zone CPI (1000)
• EU ECB’s Tumpell-Gugerell to speak (1030)
• CA Manufacturing Sales (1330)
• US Advance Retail Sales (1330)
• US Empire State Manufacturing (1330)
• US Business Inventories (1500)
• EU ECB’s Liikanen to speak (1500)
• US Fed’s Bernanke to speak (1715)
• UK BOE’s sentence to speak (1800)
• US Fed’s Fisher to speak (1815)

Market Comments:

As we have seen recently, any rebound in the dollar proves to be short-lived and viewed as an opportunity to short the dollar at better levels. This latest case was no exception and Friday we saw a reversal in the dollar’s trend that had been in place for just two days. The US data releases on Friday were a general disappointment with firstly the US trade deficit ballooning to its worst level in a decade, followed by the lowest reading in three months for the University of Michigan confidence index. While one might have expected the weak data to confirm a risk-off environment, instead markets appeared to view the data as confirmation that low US rates would definitely be around for a further extended period, proving a boon to risk and hence pressuring the greenback.

The APEC meeting at the weekend held little for currency markets to latch on to. Apart from the pledge to keep current stimulus in place and acknowledgement that the global recovery is both fragileand sluggish (in line with the G-20 statement), there was apparently very little discussion on currencies (especially the Yuan) despite market rumours late Friday. Indeed, the only currency commentary came from IMF’s Strauss-Kahn who continued the fund’s apparent pressure on Chinese authorities by commenting that the Yuan needs to appreciate. The fund also added that China needs to cool loan growth (latest data suggests that is already being put into practice) but predicted that the Chinese economy would grow 8.5% in 2009 and 9% in 2010.

Further signs of the global economic recovery were evident in this morning’s release of Japanese GDP data for Q3. Growth surprised to the upside with a q/q performance of +1.2% versus +0.7% expected, marking the second consecutive quarter of growth after plumbing the depths of -3.2% q/q in Q1 2009. Compared to Q2’s turnaround being largely supported by external demand, this quarter’s growth was more balanced with domestic demand contributing a larger proportion (no doubt as a result of tax breaks on eco-friendly cars and consumer electronics) while capital expenditure no longer acted as a drag on growth (rising 1.6% in this quarter, its first positive contribution in six quarters, ). As ever, official comments urged caution about getting too carried away with the data, with Deputy PM Kan reiterating that downside risks to the economy still exist and must be monitored. Reaction to the data was noticeably muted (as is the case with most Japanese data) with the Nikkei barely registering gains and the JPY static.

The other data release this morning featured UK house prices from Rightmove. While November saw the biggest annual rise since May 2008 (+1.6%), compared to the previous month prices were some 1.6% lower. However, Rightmove noted that this was due to seasonal factors with the year-end/Christmas slowdown and the company expects further prices falls over the next three months before a customary spring pickup. An initial uptick in GBP but then a smart reversal to leave GBP back where it started.

On the data front later today we have Norway trade data, Euro-zone CPI and a number of speeches from central bankers at the ECB and BOE in Europe. Economic releases really heat up into the US session with Canada manufacturing sales, US retail sales, empire manufacturing and business inventories on tap. Fed chief Bernanke speaks late in the session on the economic outlook.

The Dollar enjoying a respite; could be more Prolonged - Forex Market Update

Rumour mill talking of possible Yuan revaluation this weekend ahead of Obama's visit

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MAJOR HEADLINES – PREVIOUS SESSION

• US Weekly MBA Mortgage Applications out at +3.2% vs. +8.2% prior
• CA Sep. New Housing Price Index out at +0.5% m/m vs. +0.2% expected and +0.1% prior
• US Weekly Initial Jobless Claims out at 502k vs. 510k expected and revised 514k prior
• US Weekly Continuing Claims out at 5,631k vs. 5,700k expected and revised 5,770k prior
• US Oct. Budget Statement out at -$176.4b vs. -$165.0b expected and -$155.5b prior
• NZ REINZ House Sales out at +36.3% y/y vs. +43.7% prior
• NZ Oct REINZ Housing Price Index out at +1.3% m/m vs. +1.9% prior
• NZ Oct. Non-resident Bond Holdings out at 71.2% vs. 72.1% prior
• JP Sep. Final Industrial Production out at -18.4% y/y vs. -18.9% prior
• JP Sep. Final Capacity Utilization out at +1.6% m/m vs. +2.3% prior
• SI Sep. Retail Sales out at -11.8% y/y vs. -5.0% expected and revised -4.7% prior

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THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• GE Q3 GDP (0700)
• Swiss Producer/Import Prices (0815)
• HK Q3 GDP (0830)
• Sweden Industry Capacity (0830)
• EU Q3 Euro-zone GDP (1000)
• EU ECB’s Weber to speak (1315)
• CA Int’l Merchandise Trade (1330)
• CA New Vehicle Sales (1330)
• US Trade Balance (1330)
• US Import Price Index (1330)
• US Univ. of Michigan Confidence (1500)

Market Comments:

The dollar had a good day at the office yesterday as some significant technical levels held and the markets ran out of momentum. Among the various indicators for a dollar retracement were EURUSD’s inability to hold the 1.50 mark, struggling momentum on the S&P above 1,100, oil’s rally stalling at $80.0 and gold facing a similar fate above 1,120.

There was no specific news to trigger the correction but news that Germany’s WestLB was to receive an additional cash injection of EUR3 bln from the German government set the EUR off below key 1.4920 support. In addition, US Treasury Secretary Timothy Geithner was on the wires from Singapore suggesting that the US would need to borrow “substantially less” as banks recover and will be able to repay the money borrowed from the public sector during the crisis. He also repeated the usual mantra on a strong dollar policy but, given this stance has been repeated multiple times in recent months, its effect was more marginal.

On the data front, the weekly jobless claims were better than expected, with its lowest reading since January (502k jobs lost) and extended the current phase of modest declines. Continuing claims also declined but it is reckoned this is mostly due to unemployed dropping off both regular and extended programmes. However this was largely overlooked as the dollar’s rebound overshadowed.

Of the record bond auctions this week, last night’s 30-year auction proved to be the most disappointing with the worst bid/cover ratio since May for this tenor and a yield that was a few basis points above expectations. Bonds dipped initially, with data adding to the pressure, but recovered into the close for yields to finish 2-4bp lower on the day. USDJPY reacted accordingly, with a spring higher followed by a retreat.

Ahead of President Obama’s visit to China next week it is only natural that the Yuan debate hots up, with various headlines/rumours hitting the markets on China revaluation in recent days. Indeed, the rumour mill was in full force during the Asian session with talk of a China Yuan revaluation as soon as this weekend. This scribe is skeptical about such a development so soon, but nevertheless it was enough to pull the China “B” share index up 9% at one stage, although the “A” share market remained in the red.. Currency markets showed a more muted reaction and we were range-bound for most of the session.

There have been a few comments emerging from the APEC meeting in Singapore, though nothing mind-boggling and market-moving. Japanese FinMin Fujii acknowledged economic conditions were very unstable and agreed with the general consensus to continue stimulus measures to support economies. APEC ministers also agreed to undertake monetary policies “consistent with price stability in the context of market-oriented exchange rates that reflect underlying economic fundamentals”. Hey China, did you agree to that? World bank President Zoellick also hit the wires adding fuel to the comments that a more flexible Yuan would be “useful”. On this note, the Thai FinMin added that China had stressed to need to avoid protectionism but had given no indication if or when a Yuan revaluation might take place.

A relatively slow data calendar into the weekend and, with markets on the threshold of determining whether this current correction is going to remain a deeper, “healthy” one or the of a more prolonged trend. Asia seemed to think the former but lacked conviction to sell the greenback again. Over to you, Europe. The data calendar remains relatively empty, with German/Euro-zone GDP and Swiss PPI awaiting the European session. The US session features Canada trade data and new vehicle sales together with the US trade balance, import prices and Michigan confidence.

Nice weekend.

Risk bubble back into inflation mode - as market declares "Long live Liquidity!"

Sparse economic calendar this week, particularly for the US.

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MAJOR HEADLINES – PREVIOUS SESSION

• Germany Sep. Trade Balance out at 10.6B vs. 11.3B expected
• Germany Sep. Industrial Production fell -12.9% YoY vs. -14.4% expected
• Canada Oct. Housing Starts rose to 157.3k vs. 158.5k expected and 149.3k in Sep.

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THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• Japan Sep. Current Account Total (2350)
• UK BRC Oct. Retail Sales Monitor (0001)
• UK Oct. RICS House Price Balance (0001)
• Australia Oct. NAB Business Conditions/Confidence (0030)
• Japan Oct. Machine Tool Orders (0600)

Market Comments:

The logic of liquidity
The perverse bubble-inflating logic of the market continues as a new week begins. Last Friday's ugly US (un)employment report only served to embolden the risk bulls, who see the Fed on hold indefinitely and only helping to feed the liquidity and USD carry trade inflating risk bubble. After Friday's data, US 2-year rates, at a pathetic 85 basis points, have now fallen within a couple of basis points of their lows since this spring when the equity market was bottoming.  Shortly put: Down with Logic, Long Live Liquidity! The worst thing for risk investors in this bizarre environment would be real signs of an economic recovery in the US, one that would put the real threat of a more hawkish Bernanke on the radar screen. As long as this eventuality fails to materialize, it appears this bubble will only pop under its own weight, or due to some black-swanish exogenous shock.

The market psychology here reminds this analyst of another frustrated analyst's morning daily report read several years ago, when the market's moves were especially defiant of economic common sense. The title of the report was "FX Trading in Bizarro World". For those unfamiliar with the term Bizarro World, it was a parallel, alternate universe created by the Superman comic book writers that allowed them to indulge in the creation of upside down logic and alternate realities on the planet Htrae (a cube shaped planet and Earth, spelled backwards). According to Wikipedia, Bizarro World is "used to describe anything that uses twisted logic or that is the opposite of something else." Right now, folks, we are living and breathing and trading currencies on the planet Htrae.

Bloomberg points out that the big three Wall Street banks (Goldman, JPMorgan, MorganStanley) are set to distribute almost $30 billion in bonuses this year, a new record, even beating the banner year of 2007, as the Fed's liquidity spree has reinvigorated asset markets. One can only wonder if this development will escape popular outrage in the US, where the underemployment gauge (the so-called U6) jumped to a new record high of 17.5% in October. Many would-be workers in the US must feel that they are living in Bizzaro world as well.

Lines in the sand redrawn?
The moves on Friday and into today cross some important lines in the sand and look to have delivered the deathblow for the hopes of a USD turnaround to the strong side for the shortest term. We mentioned EURUSD retracement levels that were still intact on Friday, but these were blown through this morning. Weekly AUDUSD momentum also was an area we focused on recently, but last week's strong close will need to see a strong reversal and lower close this week for that view to stay on track. One indicator that doesn't sit well with today's moves, however, is the level in the emerging market equities, which lag this latest dollar move to the downside. Over the past few months, these markets have followed one another in lock step, as EM is the favorite destination of USD funding, so this divergence is noteworthy. The market may have a hard time keeping weak USD momentum going if we see more strength in EM equities.

In other developments, the JPY crosses have started the weak with a fairly strong move to the upside, a move that doesn't look justified by the move in interest rates

Looking ahead: key data this week
This week is about as about as sparsely populated with interesting economic data as last week's was packed with key event risks. Here we include highlights only.

• Tuesday: Norway Oct. CPI, UK Sep. Trade Balance, Germany Nov. ZEW
• Wednesday: China Oct. Retail Sales, Inflation, and Industrial Production data, UK Quarterly Inflation Report
• Thursday: New Zealand Sep. Retail Sales, Australia Oct. Employment, US Weekly Initial Jobless Claims
• Friday: Germany Q3 GDP, US Sep. Trade Balance, Canada International Merchandise Trade, US Nov. Preliminary University of Michigan Confidence

Of all these data points, the three most important for apparent likelihood of causing significant moves in the country's currency we would list the UK Quarterly Inflation report on Wednesday, Australia's Employment Report, and the Norway CPI data up tomorrow.

Chart: EURGBP
EURGBP trying to make a new foray to the downside today, but will likely need a good look at Wednesday's Quarterly Inflation Report before any decisive move can be made. NOte the approaching 200-day moving average to the downside.

G-20 seeks to keep stimulus measures in place, notes recovery fragile; FX hardly mentioned - Forex Market Update

IMF report dictates direction – USD still over-valued, EUR above equilibrium and Yuan significantly under-valued

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MAJOR HEADLINES – PREVIOUS SESSION

• CA Oct Unemployment out at 8.6% vs. 8.5% expected and 8.4% prior
• US Oct Non-farm Payrolls out at -190k vs. -175k expected and revised -219k prior
• US Oct Unemployment Rate out at 10.2% vs. 9.9% expected and 9.8% prior
• US Oct. Avg. Hourly Earnings out at 0.3% m/m, 2.4% y/y  vs. +0.1%/2.2% expected and +0.1%/2.5% prior
• US Oct. Avg. Weekly Hours out at 33.0 vs. 33.1 expected and 33.0 prior
• US Sep. Wholesale Inventories out at -0.9% vs. -1.0% expected and -1.3% prior
• US Sep. Consumer Credit out at -$14.8b vs. -$10.0b expected and -$9.9b prior
• NZ Oct. QV House prices out at +0.2% y/y vs. -1.1% prior
• AU ANZ Oct Job Advertisements out at -1.7% m/m vs. +4.4% prior
• AU Sep. Home Loans out at 5.1% vs. 3.0% expected and revised 4.0% prior
• AU Sep. Investment lending out at -0.1% vs. revised +8.3% prior

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THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• GE Trade Data (0700)
• EU Sentix Investor Confidence (0930)
• GE Industrial Production (1100)
• CA Housing Starts (1315)
• US Employment Trend Index (1500)

Market Comments:

The major focus into the end of last week was the US non-farm payroll and unemployment data. The data on the headline was worse than expected with the number of non-farm jobs lost coming in at 190k versus an expected 175k but was still better than previous month, even after a strong positive revision to that month’s data of +44k. It was the unemployment headlines that stole the headlines though, if not the market reaction, with the rate ballooning to 10.2%, far worse that the 9.9% expected and in double digits for the first time since mid-1983. It was also noted with disappointment that the average weekly hours remained at an all-time low of 33.0 hours/week.

The market’s reaction initially conformed to conventional thinking with the USD edging higher and Wall St looking for a shaky open. However, the strong upward revisions resulted in bears being a touch more hesitant and Wall St finished the day in the black for a 3.2% gain on the week. The employment situation in Canada was not inspiring either, with their unemployment rate jumping to 8.6% from 8.4% and this weighed on the CAD, causing a 100-point spike against the dollar, also not helped by a further slide in oil prices. Gold touched a fresh all-time high just above 1,100 and this helped the commodity currencies to hold steady.  USDJPY slid below the 90.0 mark as US yields edged lower following the disappointing headlines for the US data.

The G-20 meeting at the weekend contained little for the markets to latch onto other than a pledge to keep stimulus measures in place, acknowledging that the global economic recovery is still in a fragile state with high unemployment a particular worry. A detailed timetable was presented for work on global imbalances but debate only went as far as saying “flexible exchange rates” (ie China) would be helpful. British PM Brown attempted to drum up support for his financial transaction tax but found few followers. US treasury secretary Geithner stated in an interview that such a tax was “not something we are prepared to support” and, as PM Brown himself said that unless all financial centres supported the plan, it was a non-starter.

With markets receiving little input from the G-20, it was left to an IMF report to provide the sentiment at the Asian open. The report noted that the USD is being used for “carry trade” funding and, despite its slide of late which brought it closer to medium-term equilibrium, may still be overvalued. It added the EUR was on the strong side of its equilibrium while the Yuan was “significantly undervalued” from a medium-term perspective.

This gave risk bulls/USD bears the green light and we saw gradual USD weakness during the session. The USD down-move was given additional impetus when Fonterra, the New Zealand cooperative of dairy farmers, revised its payout for 2010 higher to NZ$6.10/kilo from NZ$5.10 previously amid firmer milk powder prices. This helped the NZD score further gains, building on the USD negative environment and we hit a 1-1/2 week high.

The start of the week is quite barren on the data front with the European session confined to German trade data and industrial production. Watch out for further developments in the Kraft/Cadbury takeover talks. Weekend press suggests this could revert into a more hostile environment and GBP is getting an additional lift from this talk. The deadline for the deal to be struck is supposed to be around 5pm London time. The North American session is quiet on the data front with only Canadian housing starts on the agenda.

The non-farm payroll event rolls into town – unemployment at 10%? - Forex Market Update

On the other hand, RBA upgrades its forecast for Australian economy – AUD looking firmer

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MAJOR HEADLINES – PREVIOUS SESSION

• CA Sep. Building Permits out at +1.6% m/m, as expected, vs. revised +7.4% prior
• US Q3 Non-farm Productivity out at 9.5% vs. 6.5% expected and revised 6.9% prior
• US Q3 Unit Labour Costs out at -5.2% vs. -4.2% expected and revised -6.1% prior
• US Weekly Initial Jobless Claims out at 512k vs. 522k expected and revised 532k prior
• US Weekly Continuing Claims out at 5745k vs. 5750k expected and revised 5817k prior
• UK Oct NIESR GDP Estimate out at -0.4% vs. unchanged from prior revised number
• CA Oct. Ivey PMI out at 61.2 vs. 58.0 expected and 61.7 prior
• AU AiG Performance of Construction Index out at 50.9 vs. 50.8 prior
• JP Sep. Leading Index out at 86.4 vs. 83.2 prior
• JP Sep. Coincident Index out at 92.5 vs. 91.2 prior
• Swiss Oct. Unemployment out at 4.0%, as expected, vs. 3.9% prior

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THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• UK PPI Input/Output (0930)
• GE Factory Orders (1100)
• CA Unemployment (1200)
• US Non-farm payrolls (1330)
• US Unemployment Rate (1330)
• US Wholesale Inventories (1500)
• EU ECB’s Gonzalez to speak (1630)
• EU ECB’s Nowotny to speak (1700)
• US Consumer Credit (2000)
• G-20 Meeting (n/a)

Market Comments:

The second phase of central bank meetings occurred overnight and there was a hint that both the BOE and ECB were adopting a slightly more optimistic approach on their respective economies, though this did not stop the BOE from announcing a £25 bln increase to its quantitative easing programme. The total for its Asset Purchase facility was upped to £200 bln but the pace of disbursement on the remainder was extended to 3 months rather than one. Noted for its extremely cautious view on the state of the economy, the MPC this time suggested that a pickup in activity may soon be evident (albeit at a snail’s pace). With the increase in the QE measures at the lower end of market expectations, and the day’s economic data coming in better than expected, GBP survived an early sell-off and came back strongly, touching a 2-week high.

The ECB meeting by contrast was as steady as they come although Gov. Trichet was a tad more hawkish in his press conference than the market had expected. He said that interest rates were “appropriate” but it was comments that “not all liquidity would be needed in future” that got the EUR going, pushing it up to a one-week high.

Across the Atlantic, US productivity spiked 9.5% in Q3, no doubt reflecting the impact of stimulus measures and hefty job cuts by companies. The jobless claims showed a slight improvement with 512k jobs lost vs. 532k last week and, when compared with the slightly worse ADP report yesterday, may cloud the release of tonight’s non-farm payroll data. Equities liked the data, rebounding strongly, but the correlation between strong equities/weak dollar appeared to disengage with the greenback closing marginally higher on the Index. No doubt the uncertainty surrounding tonight’s jobs report was a factor influencing currency markets.

The major mover during the Asian session was the AUD (though only a 30 pip-or so rally) following the release of the RBA’s quarterly monetary policy report. An upgrade to near-term growth forecasts for 2009 to 1.75% from 0.5% and for 2010 to 3.25% from 2.25% proved the catalyst while revisions to headline CPI through December 2010 to 2.25% (though still within the target band of 2-3%) also helped. Overall an upbeat assessment with less spare capacity than originally thought, but nevertheless any increases in interest rates are likely to be gradual. The report acknowledged that consumption growth was showing signs of slowing as stimulus fades but forecast that spending would remain resilient.

The other headline in Asia concerned Fannie Mae, though Asian markets failed to show any reaction to the news. The mortgage lender has requested an additional $15 bln in additional funding by year-end after posting another net quarterly loss of $18.9 bln in Q3. The lender has already received some $44.9 bln in federal government assistance under a senior preferred-stock purchase agreement. Should the market decide to take notice then it should be another knock back for risk appetite.

An article in the China Daily suggested that the huge surge in deposits at China’s biggest bank could signal that the huge rallies in the country’s equity and property markets this year are sustainable and not just fueled by massive cash injections from the central bank. The report notes that deposits at the country’s four largest listed banks grew by Yuan 4.3 tln ($629.7 bln) during the first half of 2009, more than the Yuan 3 tln increase in loans from the same banks.

Looking ahead to tonight’s non-farm payroll numbers, the market is looking for a loss of 175k jobs in the payroll report and an increase in employment up to 9.9%. A print with a 10% handle would likely cause a dent to risk appetite (even though eventually the market sees it as inevitable) and the risk of a surprise would likely lie to this side. We note that Wednesday’s weak reading in the employment sub-component of the non-manufacturing ISM data is a definite negative for tonight though the ADP report could suggest a possible shrinking in the magnitude of payroll losses. All in all, a bit of a lottery.

 Apart from the US employment data, other data points on the horizon include Swiss unemployment, UK PPI and German factory orders during the European session while the US session can look forward to Canada unemployment and US wholesale inventories. G-20 meeting in Scotland this weekend but nothing concrete or defining for currency markets is expected though individual finance minister may pass asides about the strength of their currencies versus the greenback.

Have a great weekend.

Gold Shines and takes some of the Sparkle off the Dollar Overnight - Forex Market Update

Weak Australian retail sales data reinforces a more cautious approach to rates

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MAJOR HEADLINES – PREVIOUS SESSION

• US Sep. Factory Orders out at +0.9% vs. +0.8% expected and -0.8% prior
• US Weekly ABC Consumer Confidence out at -49 vs. -50 expected and -51 prior
• US Oct. Total Vehicle Sales out at 10.45 mln vs. 9.80 mln expected and 9.20 mln prior
• AU Oct. AiG Performance of Service Index out at 54.8 vs. 49.3 prior
• JP Oct. Monetary Base out at +4.4% y/y vs. +4.5% prior
• UK Oct. Nationwide Consumer Confidence out at 72 vs. 73 expected and revised 72 prior
• AU Sep. Retail Sales out at -0.2% m/m vs. +0.5% expected and revised +0.7% prior
• AU Q3 Retail Sales ex-Inflation out at -0.4% q/q vs. -0.5% expected and +1.9% prior
• AU Sep. Building Approvals out at +2.7% m/m, +11.7% y/y vs. 2.3%/8.2% expected and revised -0.9%/0.4% prior resp.
• HK Oct. PMI out at 54.6 vs. 51.8 prior

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THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• GE PMI Services (0855)
• EU PMI Services (0900)
• UK PMI Services (0930)
• EU Euro-zone PPI (1000)
• US Weekly MBA Mortgage Applications (1200)
• US Challenger Job Cuts (1230)
• US ADP Employment Change (1315)
• US ISM Non-manufacturing (1500)
• CA BOC’s Murray to speak (1550)

Market Comments:

The gold bars took on an extra sparkle overnight as the commodity powered some 3% higher amid a (somewhat delayed) reaction to news that the Indian central bank had purchased 200 metric tons of gold from the IMF as part of the latter’s plans to boost funding for various programmes. Valued at $6.7 bln, the deal was the largest purchase by a central bank in 30 years. Certainly the move caught some surprise given that the headline first hit the wires late in the NY session on Monday. Nevertheless, the surge galvanized currency markets into action and worked to stall the dollar’s rally in its tracks and brought most currencies back to near starting levels.

GBP was a notable beneficiary  from the dollar’s retracement after experiencing early weakness on the back of negative news headlines surrounding RBS and Lloyds, together with a weaker than expected construction PMI reading. However, a continued recovery in the housing market (Halifax house prices up 1.2% m/m vs. +0.6% expected) assisted the rebound, which managed it past opening levels. Nevertheless, tomorrow’s BOE meeting and the question of the extent of QE adjustment remains a cloud over the pound.

Once again it was the AUD that provided the excitement in the Asian morning session today. Retail sales for September were much weaker than anticipated, falling 0.2% m/m on a seasonally-adjusted basis against a consensus of +0.5%, while August’s numbers were also revised lower. The more dovish sentiment that had prevailed post-RBA yesterday looked to be firmly cemented in place after the data and expectations of a December rate hike were moved further to the background. The flip side to the retail sales data looked to be in the building approvals numbers as the headline numbers came in above forecast on both a monthly and annual basis. However, drilling down into the data and the “core” private housing approvals barely registered positive growth. The AUD was quickly 50 points lower and short-term interest rate yields edged off 5bp while futures reduced implied odds of a December rate hike to less than 50-50. However, the AUD held at support levels, and appetite for the currency still looked strong in Asia.

Australian Treasurer Swan also worked to place a dampener on sentiment when he commented that Australia’s economic recovery remains fragile, with some considerable challenges still ahead for the economy. He added that he expected to “rise substantially” and noted that the big decline in hours worked is dampening incomes.

A more cautious approach to the state of a domestic economy was also voiced by the Bank of Japan Governor Shirakawa. He stressed that the BOJ’s decision late last week to end its commercial paper and corporate bond purchases in December did not mean that there was a change in its monetary policy stance and the BOJ will maintain very accommodative monetary conditions. He noted that corporate activity was still low compared to pre-Lehman levels and the economy would take time to return to solid growth.

Looking ahead to today’s session, the late announcement following the second day of the FOMC meeting will be a major focus, and could dampen activity. Prior to that we have the prelude to Friday’s employment report, in the release of the ADP employment change and non-manufacturing ISM numbers. In Europe, it is the service sector PMI releases across various economies that dominate.

The dollar’s respite proves only temporary; A USD negative start to the week so far….

China’s reserve diversification hits the headlines again and dictates FX sentiment

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MAJOR HEADLINES – PREVIOUS SESSION

• US Sep. Existing Home Sales out at 5.57m vs. 5.35m expected and revised 5.09m prior
• US Sep. Existing Home Sales out at +9.4% m/m vs. +4.9% expected and revised -2.9% prior
• AU Q3 PPI out at +0.1% q/q, +0.2% y/y vs. +0.3%/+0.5% expected and -0.8%/+2.1% prior resp.
• SI Sep. Industrial Production out at -7.7% y/y vs. +1.0% expected and revised +11.8% prior

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THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• GE GfK Consumer Confidence (0700)
• Sweden Trade Balance (0830)
• UK BOE Report on Asset Purchase Facility (0930)
• US Chicago Fed Nat'l. Activity Index (1230)
• CA BOC’s Carney to speak (1255)
• USD Dallas Fed Manufacturing Activity (1430)

Market Comments:

GBP was whacked mightily on Friday after all the hopes that the UK might finally show the first positive growth since Q1 2008 in Q 3 were dashed. GDP came in at -0.4% q/q versus an expected +0.2% and forced a sharp liquidation of GBP longs that had been riding the wave of GBP’s appreciation. The fact that the economy could not even manage positive growth despite unprecedented stimulus from UK authorities, and a weak pound that should have helped manufacturers price goods more competitively, was an extremely disappointing factor and will likely keep GBP capped near-term as talk of additional QE measures is reignited. PM Brown commented that it would be “suicidal” to abandon the measures in place to stimulate the economy in the wake of the data, which confirmed the UK was in the throes of the worst recession on record since data was collected in 1955.

Elsewhere, US data was better than forecast, with existing home sales surging 9.4% m/m in September though it was noted that this is likely heavily influenced by first-time buyers rushing to take advantage of the tax credit scheme that is due to expire on December 1. Despite the data, and more Q3 earnings that beat forecasts, Wall St finished the week on a soft note and we expected Asia to carry on this tone at the start of a new week. Weekend headlines also reminded us of the spectre of the commercial real estate sector with Capmark Financial filing for bankruptcy protection, while a possible resurgence in the H1N1 virus as the West enters into winter also grabbed the attention.

Indeed, this weaker risk appetite theme seemed to dominate the start of the week, with early activity benefitting the USD to the detriment of GBP, EUR and AUD. However, some mid-morning comments/reports from China changed the mood. First off, we had headlines detailing a report that recommended China raise the proportion of Euro and Yen in its reserves while reducing the proportion held in USD. This was immediately followed by comments from Chinese Vice Premier Li Keqiang who said the China economic recovery is now solid and the market associated both sets of headlines with the Vice premier. However, it transpired the reserves report came from PBOC researcher Zhou Hai, who subsequently clarified that the views were “purely personal” and not a reflection of policy. Nevertheless, the damage had been done and the USD was immediately on the back foot and USDJPY pummeled, though the EURUSD rally stalled shortly after printing a new 14-month high.

 EUR bulls had also been given further ammunition to test for new highs after ECB’s Noyer, speaking at a forum in Singapore, made no comment of the level of the EURUSD. Coming on the back of EU Alumunia’s comment Friday that EUR strength is not a big risk, and EUR’s time below 1.50 was already limited.

With the RBNZ meeting later in the week now in immediate focus, weekend comments from NZ PM John Key may take on more significance. He was upbeat on the economy, saying growing demand for NZ’s commodities should help it avoid a double-dip recession and expects GDP to improve over Q3 and be “much stronger” in Q4. However, he added that NZ was unlikely to face any upwards pressure on interest rates until mid-2010 at the earliest. With the market already pricing in rate hikes by Q1 2010 and expecting the RBNZ to shift to a more neutral bias at Thursday’s meeting, we may see some activity in NZ markets early tomorrow when they return after a long weekend.

The reaction to the news in Asia may have been exaggerated due to liquidity issues as Hong Kong centre was also absent, and may explain why the move stalled after a while. There is little on the data front today to excite, with German consumer confidence and Swedish trade data to consider. The BOE’s report of its Asset Purchase Facility may grab more attention, especially following Friday’s GDP data and its implications for QE. The US session sees Chicago Fed activity for September closely followed by the Dallas Fed release for October.

Risk swings turn theDollar this way and that...

Asia closing the week with a slightly better bid dollar

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MAJOR HEADLINES – PREVIOUS SESSION

• CA Aug. Retail Sales out at +0.8% m/m vs. +0.4% expected and revised -0.5% prior
• US Weekly Initial Jobless Claims out at 531k vs. 515k expected and revised 520k prior
• US Weekly Continuing Claims out at 5923k vs. 5970k expected and revised 6021k prior
• US Sep. Leading Indicators out at +1.0% vs. +0.8% expected and revised +0.4% prior
• US Aug. House Price Index out at -0.3% m/m vs. +0.3% expected and +0.3% prior
• AU Q3 Import Price Index out at -3.0% q/q vs. -2.8% expected and -6.4% prior
• AU Q3 Export Price Index out at -9.6% q/q vs. -4.7% expected and -20.6% prior
• SI Sep. CPI out at -0.4% y/y vs. -0.2% expected and -0.3% prior

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THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• GE PMI Manufacturing/Services (0730)
• GE IFO Surveys (0800)
• EU PMI Manufacturing/Services/Composite (0800)
• UK Q3 GDP (0830)
• UK Index of Services (0830)
• UK BBA Loans for House Purchase (0830)
• EU Industrial new Orders (0900)
• EU ECB’s Nowotny to speak (1030)
• US Fed’s Bernanke to speak (1230)
• US Existing Home Sales (1400)
• US Fed’s Kohn to speak (1530)

Market Comments:

It was a familiar story overnight with what looked to be a “risk off” and dollar-positive day in Asia soon running out of steam in the European/US session. Risk bears were caught offside and the ensuing snapback rally brought us back to Asian opening levels. Again Q3 earnings generally beat market expectations as Asia took over the baton with risk appetite firmly back in place.

GBP had a slight scare after the retails sales data came in well below forecast (flat for the second straight month versus +0.5% expected), even though the data series is regarded as erratic and irrelevant. BOE Deputy Governor Paul Tucker reminded us that an increase in quantitative easing beyond the £200 bln proposed under the current scheme “would be possible and it would happen” if it was deemed necessary. However, thought the economy now appeared to be on a path to recovery, though it would be hard to tell whether we face anaemic or above-trend growth. The early pressure that GBP felt was soon reversed as the dollar retreated though.

Of the Fed speakers overnight, Rosengren grabbed the headlines with a comments that the US risks dipping back into recession after expanding in H2 2009. When asked about the dollar he replied that “the movement we have seen is a pretty natural movement that reflects people’s comfort level with a recovery in US and other economies. We care about the dollar to the extent that it impacts inflation and unemployment.” No obvious impact on the dollar at the time.

Activity in Asia was limited to relatively tight ranges. The “risk-on” feel, with equity markets starting off strongly, pulled EURUSD through the supposed barrier at 1.5050 but managed only another 9 ticks before reversing quickly. Profit-taking and an FT article suggesting the Fed may be considering a slight adjustment to the language of its statement that rates would be held low for an “extended period”. The piece muses that the Fed will want to avoid a situation where it is forced to move quickly from forecasting an “extended period” of low rates to raising them, a move that would disrupt markets and certainly undermine its credibility. The dollar was comforted by the possible development and the USD index was marginally in positive territory by lunch.

Q3 GDP data is the major event for the UK today with the market looking for growth of +0.2% q/q, the first positive growth since Q1 2008. However, yesterday’s weak retail sales data and news that industrial production surprisingly fell in September may suggest that a weaker result may not be too much of a surprise. If we stay in negative growth for another quarter, then watch out below GBP!

Elsewhere we get to see German PMIs and IFO surveys, Euro-zone PMIs and industrial new orders for August. The US sees existing home sales (note other housing data has been a tad softer of late) while Fed speakers Bernanke and Kohn wrap up the week.

Have a great weekend.

Bulls and Bears Hold the Dollar near threshold levels

Very little on the data front to tip the scales today

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MAJOR HEADLINES – PREVIOUS SESSION

• CA Aug. Wholesale Sales out at -1.4% m/m vs. -0.4% expected and revised +2.6% prior
• CA Sep. Leading Indicators out at +1.1% m/m vs. +0.8% expected and revised +1.2% prior
• US Sep. PPI out at -0.6% m/m vs. flat expected and +1.7% prior
• US Sep. Housing Starts out at 590k vs. 610k expected and revised 587k prior
• US Sep. Building Permits out at 573k vs. 595k expected and revised 580k prior
• CA Bank of Canada leaves rates unchanged
• US Weekly ABC Consumer Confidence out at -50 vs. -48 prior
• NZ Sep. Visitor Arrivals out at 3.8% vs. revised -0.5% prior
•  AU Westpac Aug. Leading index out at 1.1% vs. revised 1.4% prior
• AU Sep. New Vehicle Sales out at +2.9% m/m, -2.0% y/y vs. revised +0.1%/-6.1% prior resp.
• NZ Sep. Credit Card Spending out at -2.3% y/y vs. +0.1% prior

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THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• UK BOE Minutes 0830)
• UK CBI Qtrly Industrial Trends Survey (1000)
• US Weekly MBA Mortgage Applications (1100)
• US Fed’s Lacker to speak (1300)
• US Fed’s Cumming to speak (1300)
• US Fed’s Tarullo to speak (1700)

Market Comments:

While Q3 earnings releases continued to beat forecasts overnight, markets instead decided to focus on the less than stellar US data, resulting in a dollar rebound and a slight retracement on Wall St. US housing starts increased only marginally (590k from revised 587k last, 610k expected) while building permits declined to 573k from 580k (consensus 595k).

The dollar’s recovery ensured that EURUSD left the 1.50 level untouched, a level that French President Sarkozy’s speech writer Guaino described as “disastrous for European industry and the economy”. Fin Min Lagarde also mentioned that she is worried about EUR levels (though not specifically versus the USD).

CAD was the major underperformer after the BOC’s rate announcement. The BOC left rates unchanged but highlighted the negative impact of the CAD’s current strength, saying that, over time, it would “more than fully offset the favourable developments since July”. In addition, the bank reminded that it had extraordinary policy measures as an option (ie QE). The firmer dollar and softer CAD ensured that the parity level that had been in the sights for USDCAD remained a pipe dream, at least in the near-term.

In his speech yesterday, BOE Governor Mervyn King sounded especially dovish on the UK economy, saying that while it is likely to return to positive growth in H2 2009, the recovery will neither be smooth nor painless. As such, the conduct of monetary policy would be particularly difficult and challenging. He noted that UK banks were still overly dependent on the government and the impact of the global financial crisis would likely be felt for a generation. He was a tad more hawkish on the CPI outlook, saying it was likely to remain volatile and could edge higher in coming months due to higher petrol prices, sterling’s weakness and the reversal of a cut in the VAT on Jan 1^st. His comments could be a precursor to the tone of the BOE minutes due to be released later and is likely to keep GBP on the back foot.

There was no such problem for the NZD after RBNZ’s Bollard surprised the market with a comment in a radio interview suggesting that the high level of the NZD was not necessarily an obstacle to raising the cash rate. He later qualified this comment by adding that this was in the context of stronger domestic demand and house prices. Nevertheless, wWith eyes on next Thursday’s policy meeting, and the expectation that the RBNZ would drop its easing/dovish bias, today’s comments seem to affirm that prospect. NZDUSD had a quick 40-50 point run-up post-comments but ran out of steam shortly thereafter in a broadly USD-positive environment. Nevertheless, expect the NZD to maintain support on other crosses near-term.

BOJ Deputy Governor Nishimura was also on the wires, reaffirming the BOJ’s dovish stance by saying it is important to persist with an accommodative policy to help sustain the economy's recovery. Though he expects Japan's economy to pick up further, he notes downside risks are still high adding that developed countries in general could face downwards pressure due to balance sheet adjustments. Otherwise he notes it will take a while for inflation to go to the desired level, with annual CPI falls likely to continue for a considerable time. Financial conditions are said to be widely improving though, with the BOJ to decide on whether to extend its corporate support measures at the next Oct 30th policy meeting or later. Whilst on Japan, car-maker Honda commented on the fall of the dollar, saying that if it falls further then the company would need to secure key export markets other than the US to sustain production at its Japanese factories. Nissan also joined in with comments that it would use US-made cars for exports to “dollar countries” such as in the Middle East. Bear in mind that Japanese corporate had mostly budgeted a USDJPY rate closer to 95.0 than current levels for Q4 and current sentiment suggests such a level is well out of reach.

It's a very quiet session on the data front today, so more Q3 earnings will dominate headlines. Apart from the BOE minutes, the UK will see the quarterly CBI report  with the only other data the weekly US mortgage applications. Fed speakers are out in force with Lacker, Cumming and Tarullo all scheduled.