AUD finally knocked off its perch by low inflation data and dovish words from Treasury's Swan.


MAJOR HEADLINES – PREVIOUS SESSION

  • US Weekly ABC Consumer Confidence fell to -51 vs. -49 expected and -50 the previous week

  • Japan Sep. Retail Trade rose 0.9% MoM vs. 0.2% expected

  • Australia Q3 Consumer Prices rose 1.0% QoQ vs. 0.9% expected

  • New Zealand Oct. NBNZ Business Confidence fell to 48.2 vs. 49.1 in Sep.

  • Japan Oct. Small Business Confidence fell to 43.4 vs. 43.5 expected

  • Germany Sep. Import Price Index out at -0.9% MoM and -11.0% YoY vs. -0.7%/-10.7% expected

  • Sweden Oct. Consumer Confidence rose to 7.5 vs. 6.0 expected and 5.6 in Sep.

  • Sweden Oct. Manufacturing Confidence

  • Sweden Sep. Retail Sales rose 0.2% vs. 0.5% MoM expected

  • US Weekly Mortgage Applications fell -12.3% vs. -13.7% the previous week

  • US Sep. Durable Goods Orders out at 1.0% MoM and 0.9% MoM ex Transportation, vs. 1.0%/0.7% expected, respectively

  • Norway Norges Bank raised the deposit rate 25 bps to 1.50% as expected


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • US Sep. New Home Sales (1400)

  • US Weekly DOE Crude Oil Inventories (1430)

  • New Zealand RBNZ Cash Rate (2000)

  • New Zealand Sep. Trade Balance (2145)

  • Japan Sep. Industrial Production (2350)

  • Japan Sep. Corporate Service Prices (2350)

  • Australia Sep. HIA New Home Sales (0000)

Market Comments:

The USD and JPY rallies accelerated overnight on further risk aversion and as the Australia CPI data was basically inline (but also the lowest in a decade), triggering a stop order dam-break in AUDUSD and AUDJPY. The latter is now down over 3.5% from its high last Friday. Australia's Treasurer Swan was also out with rather dovish comments on the Australia economy, saying that unemployment is still expected to rise, that the economy is operating below capacity, and that the business investment outlook still looks weak, even if things are better than some months ago.

Krona losing steam

Another big mover in today's trade was the Swedish Krona, with the rampant risk aversion rubbing it the wrong way and the weakish Retail Sales not aiding the krona's cause either, even if confidence numbers improved from last month. EURSEK is approaching the big line or resistance just above 1o.40 again. Anything at those levels or higher looks like a cheap level to buy the Swedish currency on a valuation basis for the long run, but one wonders whether the krona wouldn't weaken here further if risk aversion deepens in the coming weeks, valuation arguments aside. 10.40/5 is an important line in the sand to watch in any case.

Volatility expansion

The expansion in volatility in FX is serious business technically and is beginning to drive a convincing wedge into the bearish USD and JPY trends. We may have throwbacks, retracements, double tops, etc., in which we see renewed attempts to get back on track with the old weak USD and JPY trends, but the action over the last few days suggests trend exhaustion is here and we should finally be positioning for a larger USD and JPY rally in the weeks ahead. This is somewhat of a dangerous proposition if we are to consider the old argument that equities are strongest in the Thanksgiving (late November) to the end-of-year period. One key indicator we will have to watch in the weeks ahead is the strength of Retail Sales in the days after Thanksgiving, considered an important predictor of retail demand for the entire Christmas season. With the current state of confidence as measured by present situations components of various confidence indices, pressure on employment and anemic wage growth for those who actually still have jobs, it is hard to prophecy a Christmas miracle for US end consumer demand.

Today's US Data

The US durable goods orders numbers for September were inline with expectations and are really too volatile to draw much of a conclusion from in the first place on a month-to-month perspective. For year-on-year perspective, consider that actual durable goods shipments ex-defense are off -18.1% and ex-defense new orders are off -18.0%. That is still a lot of slack. In other US data, the Weekly ABC Consumer Confidence out late yesterday ticked down yet again. The weekly mortgage applications number has ticked down very steeply the last couple of weeks as it is already too late to start the home buying process for those who want to squeeze in a home purchase before the Dec. 1 tax credit expiration. Nonetheless, the Sep. New Home Sales data out shortly will likely show a very strong reading - before a likely decline starting with Nov. or Dec. data.

Norges Bank

Just as we are going to press, Norges Bank is out announcing the expected hike to 1.50% as expected For guidance, the Executive Board of the Norges Bank said that the "key policy rate should be in the interval 1.25 - 2.25% in the period to the publication of the next Monetary Policy Report on 25 March 2010 unless the Norwegian economy is exposed to new major shocks." It appears the market has greeted this as very hawkish news considering the very strong kneejerk move in NOK just now after the recent squeeze in EURNOK and USDNOK heading into today's meeting. Sell the rumor, buy the fact, it seems. Still, NOK will have a challenge rallying beyond the shortest term if risk aversion remains the order of the day. (Last second comment: Norges Bank says that rate hikes will be scaled down or cancelled if - this is the important mention of the NOK strength that makes a rally scenario for the NOK a tough one to buy into....)

Looking ahead

In today's US session, watch the results of the 5-year auction, which is likely to go off strongly. The market may be unwilling to press its case for a stronger USD today on anticipation of tomorrow's US GDP number.

Another interesting session may await for Asia with New Zealand's RBNZ on tap. The market is not looking for a move after PM Key said that the RBNZ shouldn't move this year. Any accompanying statement will be key for the kiwi's direction as the interest rate expectations have ticked solidly higher in the weeks leading up to tonight's announcement. According to the Credit Suisse index of year forward expectations for the RBNZ, the market is looking for over 200 bps of tightening now - topping even Norges Bank at the moment.

Chart: NZDJPY

The NZDJPY pair advanced several percent on strong risk appetite and the latest interest rate scare before this week's start. But the latest, very steep sell-off suggests that the tide may be turning here. A significant breach of the 66.00 area in the coming weeks would help confirm that the high is in for the pair. The correlation of NZDJPY with the S&P500 in Q3 was 0.91 - very high - so any downside view will need a weak stock market, and steady to lower interest rates as well.

NZDJPY