• USD: Higher, stocks erase early losses on banking woes, factory orders rise
  • JPY:Higher, supported by rising risk aversion as equity markets decline
  • EUR:Lower, bank stress tests reveal the EU may face additional bank losses, deficits rising
  • GBP: Mixed, UK construction spending falls, bank troubles re-emerge, more bailout money for RBS & Lloyds
  • CAD and AUD: AUD lower & CAD higher, RBA hikes rates, dovish statement, CAD supported by gold rally

Overview

European bank troubles sparked a sharp sell of in global equity markets, a spike in risk aversion and a rally in the USD. UBS posted a larger than expected Q3 loss, RBS and Lloyd’s will receive additional bailout funds from the UK government and the EU commission warns that EU banks face additional banks looses. The GBP was pressured by a WSJ report which says economists expect the BOE to expand its asset purchases by 25 bln at Thursday BOE policy meeting. The other major feature of Tuesday’s trade was the RBA decision to hike rates 25 bps to 3.5%. The rate hike was widely expected and the AUD traded lower pressured by falling equity markets and doubt about whether the RBA will hike rates again in December. The RBA policy statement showed little urgency for the need to hike rates again in December. US economic data was positive as factory orders rise. The rise in factory orders helped to erase sharp early losses for the US equity market and the USD gave back some of its overseas gains versus the high yields currencies. JPM cut its GDP forecast to 3.1% from 3.5% after today’s
release factory orders release.

The Fed will complete a two-day policy meeting Wednesday and is expected to hold monetary policy unchanged. In light of the improving outlook for the US economy the Fed may drop its language that interest rates will remain low for an extended period. The ECB and BOE meet on Thursday and ECB is expected to leave monetary policy unchanged. There is a great uncertainty over whether the BOE will elect to expand its asset purchase program as UK GDP posted a negative result. US October unemployment will be released Friday. US unemployment is expected to rise to a new 26 year high but nonfarm payroll job losses will likely be less than 200k. The trade will be closely monitoring central bank policy decisions and how they may impact global liquidity and the economic recovery. The US unemployment report will be key to investor risk sentiment and speculation about whether the US recovery is sustainable. FX price direction remains closely correlated to equities and risk sentiment.
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Today’s US data: 

September factory orders rose 0.9%, a 1% rise was expected..

Upcoming US data: 

The FOMC begins a two day policy meeting on November 3rd. On November 4th October ADP employment and non-manufacturing ISM Index will be released. The GDP report is expected at -188k compared to -254k last month and non-manufacturing ISM is expected at 51.8 compared to 50.9 last month. On November 5th initial jobless claims for week ending 10/31 will released expected at 521k compared to 530k last week. Q3 productivity and unit labor costs will also be released on November 5th. Q3 productivity is expected at 5.5%  compared to 6.6% last month and unit labor costs are expected at -4.5% compared to -5.9% last month. On November 6th.. October nonfarm payroll and unemployment will be released. The nonfarm payroll is expected at -175k compared to -263k last week and the unemployment rate is expected to rise 0.1% to 9.9%.