Forex - Dollar Benefits From Lower Equities Amid Speculation China Stimulus May End

Forex News and Events:

China’s impressive GDP figures overnight ignited speculation that we may be close to a point where stimulus is soon removed from the system, sending Asian equities lower and the USD back from the brink of its lowest levels since the beginning of August last year. The 4 trillion Yuan stimulus package has certainly been a key factor in helping China emerge resilient from the financial crisis, and in turn, helping to drive the recovery of many of its trading partners. Despite Chinese cabinet ministers being quick to reassure markets that stimulus would remain in place for now, risk appetite has certainly weakened this morning and sent the USD higher. Meanwhile this morning’s main market-mover has been Sweden’s Riksbank Rate Meeting. As expected the Riksbank kept rates on hold at 0.25%, but reiterated their intentions to keep rates on hold until Q3 2010 and affirmed they would offer another SEK 100bn to banks through 12-month tenders. The central bank they lowered their inflation forecasts for both 2009 and 2010; they now see deflation in running at -0.4% in 2009 (from -0.3% prior estimate), and 2010 inflation reduced to 0.9% (from 1.2% prior). The outcome was perceived as dovish by the markets, and triggered a sharp sell-off in SEK as USDSEK spiked to just below 6.9400, and EURSEK hit a high of 10.3760. The remaining focus has been on GBP this morning as UK’s Paul Tucker stated the BoE could increase QE “if necessary”. The comments were taken to imply he may be on the side of King and Miles who voted for more QE back in August, and given weekend press that indicated MPC member Posen might also be in that camp, we might be looking at 4 votes in favour of more QE in November (out of a possible 9). The UK Retail Sales figures this morning have done little to improve the outlook in the UK, posting a disappointing 0.0% MoM in Sep against expectations for a 0.5% rise. That is now 2 consecutive months of zero prints for UK Retail Sales, certainly not encouraging signs of a recovery in domestic demand. 

Today's Key Issues (time in GMT):

12:30 CAD Retail sales, % m/m Aug exp: 0.4% prev: -0.6%
12:30 USD Initial jobless claims, thous 17-Oct exp: 515 prev 514
12:30 USD Continuing claims, thous 10-Oct exp: 5970 prev: 5992
14:00 USD Leading indicators, % m/m (y/y) Sep exp: 0.8 (2.7) prev: 0.6 (1.9)

The Risk Today:

EurUsd The bulls are still in charge on a medium term EUR USD with the pair finding support yesterday at 1.4905 before marching straight to 1.5000 where we saw the market move from a 1.5000 bid to a 1.4990 in a split second. Half of those sellers were stopped out later on in the evening as the pair made a move higher to 1.5046 but with this morning's move back below 1.4967, stops is probably all they were. If they bulls want a chance of taking the pair to new highs then 1.4905 needs to stay in tact and a move above 1.5050 will confirm continuation of the uptrend. There is a good chance of intraday shorting before that at 1.5040 and long interest for the day around 1.4910.

GbpUsd After yesterday's BoE Minutes, GBPUSD rallied through 1.6570 resistance to twice touch 1.6637 before paring back below 1.6525 this morning. If we rally back above 1.6637, the next target comes in at 1.6740. The 1.6320 support level remains strong downside support, but a break below through 1.6221 will bring fresh selling down to 1.6127 and 1.6038 thereafter.

UsdJpy USD JPY continues in its uptrend and in hindsight may prove to be a leading indicator on USD weakness or strength having posted a bottom on the 7th and 8th of October. We will have to wait and see if this is in fact a bottom in the US dollar before making any conclusions but it is fair to say that the typical USD JPY relationship has changed as the USD is just as much a carry currency these days as the JPY. Anyway, 90.20 is looking like the level for intraday long entry and sellers expected at 92.50.

UsdChf After reaching our downside target at 1.0037 yesterday the pair has bounced strongly with the stronger USD. The support turned resistance at 1.0123 has held yet again today (high so far), expect fresh selling at 1.0186, as only a clear move above that 1.0250 resistance can be viewed as bullish for the pair.

Resistance and Support: