Recent moves likely to climax between now and Monday with end of month trade behind us at week-end.


MAJOR HEADLINES – PREVIOUS SESSION

  • New Zealand RBNZ left its Cash Rate unchanged at 2.50% as expected

  • New Zealand Sep. Trade Balance out at -424M vs. -681M expected and -719M in Aug.

  • Japan Sep. Industrial Production rose 1.4% MoM and fell -18.9% YoY vs. +1.0%/-19.3% expected, respectively

  • Australia Sep. HIA New Home Sales fell -4.5% MoM

  • Germany Oct. Unemployment Change out at -26k vs. +15k expected and -15k in Sep.

  • Norway Sep. Retail Sales fell -1.1% MoM vs. +0.4% expected

  • Norway Oct. Unemployment Rate fell to 2.6% from 2.7% in Sep.

  • UK Sep. Mortgage Approvals rose to 56.2k vs. 53.6k expected and 53.0k in Aug.

  • EuroZone Oct. Consumer Confidence out at -18 as expected and vs. -19 in Sep.

  • Canada Sep. Industrial Product Price fell -0.5% vs. -0.2% expected

  • Canada Sep. Raw Materials Price Index fell -1.1% vs. -0.5% expected

  • US Q3 GDP first estimate out at 3.5% vs. 3.2% expected

  • US Q3 Personal Consumption out at 3.4% vs. 3.1% expected

  • US Q3 GDP Price Index out at 0.8% vs. 1.1% expected

  • US Weekly Initial Jobless Claims out at 530k vs. 525k expected and 531k the previous week

  • US Weekly Continuing Claims out at 5797k vs. 5905k expected and 5945k the previous week


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • US Treasury Secretary Geithner to Testify (1330)

  • New Zealand Sep. Building Permits (2145)

  • Japan Oct. Nomura/JMMA Manufacturing (2315)

  • Japan Sep. Jobless Rate (2330)

  • Japan Sep. Household Spending (2330)

  • Japan Oct. Tokyo and Sep. National CPI (2330)

  • UK Oct. GfK Consumer Confidence (0001)

  • US Treasury Secretary Geithner to Speak (0040)

  • Bank of Japan Target Rate (no time given)

  •  Japan Sep. Housing Starts (0500)

Market Comments:

Ahead of this week, we talked up the potential for an interesting week, with the risk that the approaching end of the month could provide an excuse for a considerable consolidation in previous trends. Our expectations for "interesting" were certainly fulfilled and then some with the tremendous volatility this week. But now we wonder if the market has absorbed the lion's share of the needed consolidation: after all, what we have seen this week seems to be more of a typical shock to imbalanced speculative market positioning rather than any new fundamental development driving markets.

What does this mean for the old trends? While recent moves in USD, GBP, and JPY strength have inflicted critical damage to their previous downtrends, as we stated recently, one trend doesn't usually just yield immediately to another. Instead, we may switch to a more back and forth regime as some percentage look to hop back on the old trends, while new participants recognize the signs of a regime change and begin making significant bets on a follow on to recent moves (stronger USD, etc..) to emerge further down the road. So between now and Monday, we are likely to hammer out a top in the recent consolidation move (if it isn't already behind us) of USD, JPY and GBP strength. This is especially the case with the looming FOMC meeting approaching next Wednesday.

Fed ending its debt monetization

While this week was a key test for US interest rates considering the record issuance of Treasuries, we will enter a new phase in the treasury market starting on Friday as the US Fed is completing its $300 billion government treasury purchase program today as promised earlier. This knowledge hasn't seen the market shying away from snapping up treasuries at this week's auctions, but it is worth noting, nonetheless. The Fed only has about $2 billion left in its arsenal to spend in on treasuries today.

Mixed Signals from the ECB

The ECB's Noyer made a few good points about the strength of the Euro today in comments about currencies around the world: "The Euro is not particularly strong relative to the yen, the Swiss franc, the Canadian or Australian dollars or several other currencies. The question of the relationship with the dollar is not specific to the EuroZone." This is very true, though it is also true that the Euro is unfairly strong vs. the US relative due to USD-pegging reserve accumulators, mostly in Asia. The SNB has to be steaming a bit at the mention of the Swiss franc, though EURCHF hardly moved around Noyer's comments. Noyer also mentioned the standard ECB line that it is too early to reduce liquidity and that he sees no reason to raise interest rates at the moment. Later, the ECB's Weber was a certainly more on the hawkish side with his comments today, saying that the withdrawal of stimulus should start as soon as possible, that banks must prepare for the slow withdrawal of ECB liquidity. This suggests that the ECB will likely begin to exit its liquidity operations next year, though it can't "precommit".

US Growth

US stimulus-led growth managed to come in at a 3.5% annualized pace in Q3, according to the first estimate. This is somewhat stronger than expected, and was aided by a very low GDP price index number of 0.8% annualized. There is little to take away from such a figure, considering that the third quarter ended a month ago and the key questions about the economy are whether any gains are self-sustaining. With the better than expected figure, the usual knee-jerk rally in risk is seeing the USD sharply weaker, and JPY even more so (see today's USDJPY chart.)

Why is GBP so strong?

The GBP rally really seems to be getting stretched here as the previous big bets on its further weakness have been brutally squeezed of late. While a consolidation was certainly justified (most notably in the likes of GBPNZD, GBPAUD, etc....), there is little on our radar screen in terms of real developments/indicators to justify the extension of this move in the short term, even if we feel the pound is still far to weak vs. the EUR and other currencies in the long run. A cross like GBPUSD might be an interesting way to play the idea that GBP is getting a bit overdone here. 1.6530 is a line in the sand in GBPUSD (0.618 Fibo for latest downwave).

Chart: USDJPY

JPY remains the highest beta currency as JPY crosses are reversing higher just as quickly as the sold off in recent days as the US GDP triggered a move higher in bond yields. Note that USDJPY found support right on the 21-day moving average, which has been an important MA on several occasions over the recent cycle. For resistance, we'll watch the 91.54 retracement level (0.618 Fibo of recent sell-off) and the 92.00-area daily Ichimoku cloud resistance (not shown here.). JPY will need new local lows in bond yields to work back below 90.00 in USDJPY.

USDJPY