By GCI Forex Research
Fundamental Outlook at 0800 GMT (EDT + 0400)
USD
The outcome of the G20 meeting seemed to boost the risk appetite, but it was not until a strong Australian PPI reading was reported that the US dollar began to weaken significantly. EURUSD traded in a range of 1.3917-1.4044, and USDJPY traded 80.90-82.20. Asian equities were slightly firmer and US stocks closed fractionally ahead on Friday, inspired by the latest Q3 earnings and the prospect of further Fed easing drawing ever nearer. The G20 failed to agree on specific limits for current account imbalances. On the subject of FX intervention, G20 countries pledged “to refrain from competitive devaluation”. Nevertheless, delegates agreed to remain vigilant to “disorderly movements in exchange rates”, with the aim of reducing the risk of “excessive volatility in capital flows facing some emerging countries”. This does not suggest a willingness to engage in coordinated intervention, but is rather an acknowledgement that policy decisions in advanced economies “including those with reserve currencies” can create problems for emerging markets. Treasury Secretary Geithner said that the US, Europe and Japan recognized the importance of preserving FX stability, and he reaffirmed that the policy of the US is to support a strong dollar. Philadelphia Fed President Plosser said he is not convinced that more asset purchases will help the economy at this juncture, and said Fed policymakers hold differing views on the relative merits of “shock and awe” versus incremental asset buying. Director of Research Waller at the St. Louis Fed said the probability of further easing being announced on Nov 3 is “probably pretty high”, adding that a case could be made for an initial easing of $500 bn followed by subsequent steps of $250 bn.
EUR
The German Economy Minister Bruederle said intensive G20 discussions took place on US liquidity policy, by which he presumably means the policy of quantitative easing. He said he does not support an increase in US liquidity as it indirectly influences the exchange rate.
Referring to the debate over G20 current account imbalances, ECB President Trichet implied that a focus on Germany’s large trade surplus alone would be misguided, and that the current account of the EU as a whole should instead be considered. Trichet added that, according to some G20 participants, the monetary policy of advanced economies could create problems for EM.
JPY
After the G20 meeting, Finance Minister Noda said that he had gained an understanding from his G20 counterparts on Japan’s policy of FX intervention, and that Japan would continue to take decisive steps on FX as needed. Noda added that he does not expect the debate over current account imbalances to be settled at the upcoming G20 Summit on Nov. 11-12.
Against expectations, the adjusted trade balance for September was broadly stable despite the stronger yen, coming in at ?587.6 bn (cons. ?495.5 bn, prev. ?570.2 bn).
AUD
The AUD got a significant boost from a much stronger than expected Q3 PPI rising +2.2% y/y (cons. +1.4%, prev. +1.0%). This suggests upstream price pressures are intensifying, which should keep the RBA hawkish, although Wednesday’s Q3 CPI will still be key to the November policy decision.
RBA Governor Stevens spoke but offered few clues on the likely path of the policy rate. He showed his determination to maintain the RBA’s 2-3% target range for the cash rate and said higher inflation will not be tolerated. He said mining investment is now at its strongest since the 1960s, and would very likely increase further.
CAD
Canadian CPI was slightly stronger than expected on a monthly basis at +0.2% m/m (cons. +0.1%), but the headline annualised rate was in line at +1.9% y/y, and probably not strong enough to force the BoC back onto a more hawkish track. Core inflation actually dipped to +1.5% y/y (cons. +1.6%). Retail sales meanwhile were much stronger in August, growing +0.5% (cons. -0.1%, prev. +0.1%).
CAD
Ahead, Canada CPI readings for September will be released as will retail sales for August.
TECHNICAL OUTLOOK
EURCHF 1.3924 resistance.
EURUSD BULLISH Remains constructive above 1.3637/1.3559 support zone, trigger to bear trend. Resistance at 1.4159 ahead of 1.4373.
USDJPY BEARISH Outlook is bearish, expect extension of downleg towards 79.75 ahead of 77.91.
GBPUSD BULLISH Holds above 1.5606 keeping our focus on the upside. Resistance at 1.5942 ahead of 1.6107.
USDCHF BEARISH Recovery has scope for 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 Remains heavy below 1.0380/1.0407 area. Initial support at 1.0162 ahead of 0.9981.
EURCHF BULLISH Violation of 1.3665 triggers acceleration of gains towards 1.3924. Near-term support at 1.3456 ahead of 1.3265.
EURGBP BULLISH Move above 0.8908 exposes 0.9039 next. Near-term support defined at 0.8773.
EURJPY BULLISH Focus is back on the upside; expect gains to target 115.68 and 116.68 next.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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