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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



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


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.

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