By GCI Forex Research
Fundamental Outlook at 0800 GMT (EDT + 0400)
USD
Further dollar strength came through during the Asia session, as the market continued to digest Fed Chairman Bernanke’s speech from Friday. EURUSD traded 1.3863-1.4006 and USDJPY traded 80.89-81.68. Bernanke provided no new insights into the current state of the FOMC’s thinking, although he did see a case for “further action” and noted that measures of underlying inflation are “trending downwards”. But the absence of detail on the likely size and timing of any future asset purchases proved to be a significant source of support for the dollar, and US 10y yields ultimately closed 8bp higher. Our US economics team still expects a new round of US Treasury purchases will be announced on Nov. 3, composed of $200 bn of purchases per quarter, with a maximum five-quarter program size of $980 bn. Chicago Fed President Evans, who is due to become an FOMC voter in January, said that the US economy is in a “bona fide liquidity trap” and that much more policy accommodation is appropriate “today”. Evans noted that, given the circumstances, “targeting a higher price-level path in an effective, disciplined and limited fashion” could be justified. The US Treasury decided to delay the release of the latest currency report until after the upcoming G20 meetings. Retail sales rose +0.6% in September (cons. +0.4%) while the August and July readings were revised up significantly. The Univ. of Michigan consumer sentiment index slipped to 67.9 (cons. 68.9), while core CPI was flat m/m in September (cons. +0.1% m/m). Industrial production is due and our US economists expect it turned slightly negative in September..
EUR
ECB President Trichet said that a majority of the ECB Governing Council is still in favour of keeping the sovereign bond purchasing program in place. Referring to the ECB’s mandate for price stability he said that raising the inflation target would be “disastrous”, and that he was also “completely against” the idea of raising inflation expectations. Again, he called on Eurozone governments to vigorously implement fiscal reforms.
EU Economic and Monetary Affairs Commissioner Rehn said that the CNY is “very undervalued” and called on China to allow it to strengthen “broadly”. Earlier, US Treasury Secretary Geithner said that China’s actions to accelerate the yuan’s rise had been recognised, but that it was important for this course to be sustained. The IMF announced that a conference of central bankers hosted by the PBoC will take place in Shanghai on Monday to continue with “the ongoing international examination of the policy challenges posed by the global financial crisis”.
Eurogroup Chairman Juncker said it would be premature to discuss an extension to Greece’s EU/IMF bailout plan, and that Greece has no alternative but to implement the terms of the original plan.
JPY
Economics Minister Kaieda said that Japan will study how to increase the quantity of international trade that is invoiced in yen, so as to help better immunize Japanese exporters from currency fluctuations.
GBP
Referring to the BoE’s asset purchase facility, MPC Member Fisher said it is not clear whether the next policy step will be “to sell the assets back or to buy more”. Also, he dismissed the idea of re-investing Gilt coupon payments received to date as “an unnecessary complication at this stage”. He reiterated comments made by Governor King in June that, when the bank eventually decides to tighten policy, it will most likely raise rates first and begin Gilt sales some time later.
Fischer’s remarks echo those of MPC Member Miles who last week was also unsure whether the next policy step would be to tighten or to ease further. So far, only MPC Member Posen has publicly called for further Gilt purchases now. Our UK economist expects the minutes of the Oct. 7 policy meeting, due for release on Wednesday, will show that Posen voted in favour of such action. We remain cautious on sterling as fiscal austerity will likely hold back economic growth and keep monetary policy accommodative.
AUD
Australian Treasurer Swan warned against trying to prevent the AUD making further gains against the US dollar. He said attempting to “artificially depress the value of the currency would be counterproductive” as to do so would risk pushing inflation and interest rates higher.
TECHNICAL OUTLOOK
AUDUSD clears 1.000 psychological resistance.
EURUSD BULLISH Pullback from 1.4159 targets 1.3775, reaction low. However, broader trend is bullish, next resistance at 1.4373 Fibonacci level.
USDJPY BEARISH Sell continues to rally towards 79.75, scope for 77.91 next. Resistance at 81.85 ahead of 83.03.
GBPUSD BULLISH Rise through 1.6018 favors extension of the uptrend towards 1.6201 ahead of 1.6379. Support at 1.5888 ahead of 1.5670.
USDCHF BEARISH Outlook is bearish; break below 0.9500 exposes 0.9225. Resistance at 0.9729 ahead of 0.9918 breakout low.
AUDUSD BULLISH After breaching 1.000 marginally, pullback eyes 0.9709 support. Expect gains to extend towards 1.0166.
USDCAD BEARISH Next support below 0.9981/31 defined at 0.9820. Recovery clears 1.0184 initial resistance thus exposing 1.0273.
EURCHF BULLISH Stalled in front of 1.3494; break of the level would expose 1.3665. Initial support lies at 1.3265 ahead of 1.3072.
EURGBP BULLISH Currently holds resistance at 0.8840 ahead of 0.8894 and 0.9039. Support holds at 0.8689 ahead of 0.8563.
EURJPY BULLISH As long as support at 111.77 holds, expect recovery towards 115.68 ahead of 116.68 Fibonacci resistance.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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