By GCI Forex Research
Fundamental Outlook at 0800 GMT (EDT + 0400)
USD
The dollar briefly strengthened sharply during the Asia session on wire headlines citing US Treasury Secretary Geithner as telling the Wall Street Journal that there is no need for the dollar to sink further against the euro and the yen. However, given the lack of a supporting quote, the market came to doubt the accuracy of the remark, and the dollar gave back most of its gains against the yen. EURUSD traded 1.3872-1.3983, USDJPY 80.99-81.83. Asian equities closed slightly weaker, despite a strong finish in New York that took the S&P 500 over +1% higher. Gold continued to lose ground, and it is changing hands for $1341.98/oz at the time of writing. During the US session, the dollar hit a sizable weak patch, which was variously attributed to German Chancellor Merkel’s comments or the appearance of an early draft of a G20 statement. The draft suggested the group may take a clear stand against what has been called a global “currency war” as the G20 economies vow to “refrain from competitive undervaluation” of their currencies. But the move may have been due more to market talk of a US think-tank saying that the Fed will, at its Nov. 3 meeting, launch $500 bn worth of QE over three to six months. QE2 expectations remain firmly in place as the latest Fed Beige Book said economic activity continued at a modest pace, though the tone was slightly more positive than previously, and investors paid no heed to Philadelphia Fed President Plosser being somewhat disinclined to pursue further easing. Richmond Fed President Lacker, an FOMC voter in 2012, said the dollar seems to be responding to shifting expectations about policy in different countries. Initial jobless claims are due and the Fed’s Hoenig and Bullard are likely to sound more hesitant on QE2 prospects.
EUR
German Chancellor Merkel said fiscal problems persist in the Eurozone but that rescue mechanisms cannot run beyond 2013. Merkel added that the euro is still being shielded by the various rescue packages. While near-term dollar weakness is the overwhelming factor supporting EURUSD, Merkel’s comments underscore our concern for the medium-term prospects for the euro.
PMIs are in focus for the Eurozone today as they are expected to ease slightly in October but the recent euro strength will likely not deter growth prospects in the near term.
GBP
The minutes from the October 7 MPC meeting revealed a three-way split in the policy vote. As expected, MPC policymaker Sentance voted for a policy rate hike and at the other end of the spectrum MPC policymaker Posen voted to begin another round of quantitative easing. Sterling fell slightly on the split vote and the size of the asset purchases Posen had in mind was a factor as he voted for £50bn more, a substantial sum that would have increased the BoE’s stock of Gilts by 25%. The minutes also noted most MPC members stood ready to alter policy in either direction although some felt that the chances of more stimulus being needed had increased. November’s Inflation Report was explicitly mentioned as providing the next opportunity to review the economic outlook thoroughly.
The Comprehensive Spending Review (CSR) provided few surprises, as the budget deficit forecasts were held unchanged. The lack of surprises and continued dollar weakness overcame any hangover from the latest BoE MPC minutes and cable remained supported. But while the CSR was as expected, it still means the UK faces a significant period of austerity, which keeps us cautious on sterling in the medium-term.
M4 money supply made another all-time low, coming in well below expectations at +0.9% y/y. BoE Governor King said M4, pay, and demand growth are likely the best guides to the inflation path and this print could be concerning.
JPY
Finance Minister Noda repeated that excessive FX moves are undesirable and that Japan will take decisive action on FX, including intervention when needed. Noda went on to say that the yen’s appreciation against other Asian currencies puts Japan’s trade at a disadvantage.
CAD
The BoC MPR provided more details on the forecast changes mentioned in the earlier policy statement. But the report did mention that the inflation forecast assumes a “gradual” rise in rates and in the ensuing press conference Governor Carney sounded less dovish on the domestic economy than the policy statement reflected, which helped support the Canadian dollar during the session.
TECHNICAL OUTLOOK
EURJPY break of 111.77 exposes 110.66
EURUSD BULLISH Break of 1.3775 reaction low exposes 1.3637/1.3559 support zone.
USDJPY BEARISH Next support at 79.75 ahead of 77.91. Upside potential capped at 83.03.
GBPUSD BULLISH Look for a break below 1.5606; till then pullback is seen as a correction. Resistance at 1.5942 ahead of 1.6107.
USDCHF BEARISH Rise through 0.9729 exposes 0.9918 breakout low. Next big support below 0.9463 at 0.9225.
AUDUSD BULLISH Upside gains held at 1.0004; move above the level would expose 1.0166. Support defined at 0.9662 ahead of 0.9542 reaction low.
USDCAD BEARISH Tough resistance in 1.0380/1.0407 area. Initial support at 1.0162 ahead of 0.9981.
EURCHF BULLISH While 1.3494 continues to cap recoveries, support lies at 1.3265 ahead of 1.3072.
EURGBP BULLISH Momentum is positive; expect gains to target 0.8840 with scope for 0.8894 and 0.9039 next. Near-term support holds at 0.8689.
EURJPY BULLISH Move below 111.77 exposes 110.66 ahead of 107.73. Upside capped at 115.68.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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