Things went from bad to worse for the US dollar when currency was dumped across the board emerging economic doubts, escalating election uncertainty and rising oil prices. The dollar hit fresh 8-month lows against the euro at $1.26, fresh 3-month lows against the yen and sterling at 108.13 yen and $1.8188 respectively, fresh 11 1/2 year lows against the Canadian dollar at 1.2415, and 9-mnth lows against the Swiss franc at 1.2167.

Oil hits $55, Gold at 7-month high, Treasuries Up

Interestingly there were no major data behind the latest dollar attack, which ensued in early European trade. But The situation wasn’t helped when oil futures surged near recent record highs at$55 per barrel following the release of US inventory data. These showed 1.9 mln barrel drop to total 119 mln barrels for the week ending Oct 15, while the American Petroleum Institute showed a drop of 1.2 mln barrels to total 116.8 mln.

In a clear showing of economic preoccupation, the rise in oil drove bond prices higher while pushing down the 10-year yield back under 4.0%. This shows that bond traders are concerned about the negative impact of oil on consumer demand and the overall economy, rather than on inflationary impact. A safe conclusion suggests further economic slowing is being discounted by the bond market. With such reasoning, one more 25-bp rate hike by the Fed would make little difference for the US dollar.

Meanwhile, as the dollar index breached blow the key $87 support to an 8-month low of $86.36, gold prices gained nearly $6 to hit an 8 ½ month high at $425.15 per ounce. Although pres Bush leads most opinion polls by a margin of 5-7%, traders are bracing for a close election decision as well as allowing for the possibility of delayed results. Such mounting uncertainty would only be negative for the US dollar.

Euro breaks through $1.26

The euro took off in early European trade, well before the release of the US oil inventory report. As we have often stated the rallying euro is a reflection of deteriorating dollar weakness rather than any signs of Eurozone strength. The US currency never recovered from the domestic wound of disappointing September payrolls. Then came last week’s trade report showing the second highest monthly deficit, before the release of the net flow data, showing foreign flows falling in 6 out of the last 8 months and hitting the lowest level in 10 months. Last but not least, lingering questions about whether the Federal Reserve will raise interest rates again this year turns the question mark on the dollar turns into an exclamation mark.

Breaching above the $1.2590-95 resistance, EURUSD will face interim resistance at $1.2630 before 1.2650. With the Relative Strength Index at about 65%, this makes for more upside before we get to the 70-75% oversold territory. Thus, we see the Feb 24 high of 1.2710 as the subsequent target. Support moves up to 1.2550, followed by 1.25. Follow-up support stands at $1.2480, the 61.8% retracememt of 1.1926-1.1759 move. A breach below 1.2450 sees support at $1.2380 and $1.2340—the 50% retracement of the 1.1926-1.1759 move.

USDJPY struggles despite oil

The dollar’s rebound to the 108.30s proved short-lived following the report showing falling oil inventories. Yen bulls should be warned that a continued oil rebound could push up the dollar/yen pair towards the 109 level, especially if Japanese officials make interventionist remarks seeking to temper the yen’s appreciation.

Traders turn to this release of the Japanese trade figures expected to show the surplus nearly doubling to 1.43 bln yen.

We still see support at 108.20, a break below which is seen holding at 107.75—the 61.8% of the 108.36-111.88 rally. Upside capped at 109.20—50% retracement of the said move as well as the 200 day MA. Next resistance stands at the 100-day MA of 109.75.

Cable hits 2-month high despite unanimous BoE

One way to measure the extent of the dollar gloom is to see how sterling is rallying to 2-month highs at $1.8188 despite the slump in the British currency against the euro to 9-month lows. Cable hit its 200-day moving average for the first time since August 24 despite the Bank of England minutes showing that all MPC members voted against raising rates and possibly for keeping them steady into the rest of the year.

The MPC noted rising oil prices as a substantial source of risk to its outlook and expected Q3 GDP growth to be weaker than expected. Nonetheless, members did echo Mervyn King’s remark last week, noting the inflationary impact of weak sterling and higher oil.

Sterling chattered the $1.8110 resistance—38% retracement of the $1.8770-1.77 drop. A renewed breach of $1.8150 sees key pressure at 1.82 and 1.8238—the 50% retracement of the said move. Support starts at 1.81, followed by 1.8060. Key foundation held at $1.7970, followed by $1.7850 the trend line support from the $1.5608 low thru the 1.7926 low.

Loonie breaks above US 0.80

The loonie soared to fresh 11 1/2 year high on the back of renewed bounce in oil prices and emerging USD gloom. These factors outpaced the 0.3% rise in Canada’s leading measure of economic activity rose, which was the slowest pace in over a year reflecting slowing housing market activity and the cooling in the US leading indicator.

USDCAD support seen at 1.2465-70, followed by 1.2430 and 1.24. Upside starts at 1.2525 session low and could extend to as far as $1.2570, followed by $1.2620 in the event of further US weakness and a decline in oil.

At 8:30 AM Canada September Leading Indicators Index (exp 0.4%, prev 0.5%)

The dollar came under renewed selling pressure overnight, dropping to a fresh multi-year low against the Canadian dollar, and fresh multi-month lows against the yen and Swiss franc. The outlook for the greenback remains grim as sentiment for the currency continues to turn bearish. Although oil prices retreated off record highs yesterday, there’s no indication of further declines to come.

Cable Revisits 1.81

As expected, the minutes from the MPC’s last meeting revealed a unanimous decision to leave rates unchanged at 4.75%, with them also showing no discussion of raising rates. The minutes said the November inflation report would allow MPC to weigh the uncertainties to outlook. The MPC said that while the rise in oil prices in unlikely to persist in full, it poses substantial risk to the outlook. It said that signs of Q3 GDP growth were weaker than expected. Also, the MPC remains puzzled by the tight labor market and modest pay growth quandary. Lastly, the fall in sterling, UK market rates and rise in equities may boost both inflation and economic activity.

After briefly climbing above the 1.81-level, cable quickly retreated and hovers near 1.8080. Resistance is seen at 1.81, followed by 1.8130 and 1.8170. Subsequent ceilings are seen at 1.82, followed by 1.8250 and 1.8280. Losses will find support at 1.8065, followed by 1.8040 and 1.80. A move lower will target 1.7980, backed by 1.7930 and 1.79.

Yen Advances

With oil prices letting up overnight, the yen reaped the benefits, rising to 3-month high against the dollar around 108.30. Nevertheless, investors remained on the sell side of Japanese equities, sending the Nikkei average lower by 1.65% to beneath the 11,000-level at 10,882.18.

Separately, BoJ Governor Fukui reiterated that Japan’s economy would likely continue to see more balanced growth in the coming year and that the Bank would keep its quantitative easing policy for the time being. He also said that long-term yields should stabilize if the Bank’s easing policy permeates through the market. Lastly, he added that the Bank would continue to keep a watchful eye on the impact of rising oil prices on both Japan’s and the global economy.

Support for dollar/yen is seen at 108.30, followed by 108 and 107.75. Subsequent floors are eyed at 107.40, backed by 107 and 106.80. Gains will target resistance at 109, followed by 109.40 and 110. Subsequent ceilings are seen at 110.30, followed by 110.60 and 111.

Euro Climbs Shy of 1.26

The euro bounced higher in London trading, climbing just shy of 1.26. The pair trades near 1.2585, with resistance seen at 1.26, followed by 1.2640 and 1.2680. Subsequent ceilings are seen at 1.27, backed by 1.2730 and 1.2760. Support begins at 1.2560, followed by 1.2535 and 1.25. Further losses will find additional floors 1.2460, followed by 1.2430 and 1.24.

Dollar/Cad Trades Multi-Year Lows

Dollar/Cad remained mired beneath the 1.25-level and just above multi-year lows. Support is seen at 1.2475, followed by 1.2430 and 1.24. Subsequent floors are eyed at 1.2350 and 1.23. Resistance is seen at 1.25, backed by 1.2540 and 1.26. Further gains will target 1.2660, followed by 1.2680 and 1.27.

AUDUSD

AUDUSD hovers near 0.7345, with resistance seen at 0.7370, followed by 0.74 and 0.7450. Subsequent ceilings will emerge at 0.75, followed by 0.7530 and 0.7580. Support starts at 0.73, backed by 0.7250 and 0.7230. A move lower will target 0.72, followed by 0.7140 and 0.71.

At 4:30 AM BoE MPC Minutes (exp n/a, prev 9-0) UK PSNCR Public Finances (exp 8.0 bln sterling, prev 3.3 bln sterling)

The dollar remained stuck near its lows against the majors, trading just above 3-month lows versus the yen around 108.50 and near the 1.25-mark against the euro. Despite yesterday’s gains in consumer inflation data, the greenback slumped across the board, shrugging off the prospects of further rate hikes before the end of the year.

Yen Buoyed on Decline in Oil

With oil prices letting up overnight, the yen reaped the benefits, rising to 3-month high against the dollar around 108.30. Nevertheless, investors remained on the sell side of Japanese equities, sending the Nikkei average lower by 1.65% to beneath the 11,000-level at 10,882.18.

Separately, BoJ Governor Fukui reiterated that Japan’s economy would likely continue to see more balanced growth in the coming year and that the Bank would keep its quantitative easing policy for the time being. He also said that long-term yields should stabilize if the Bank’s easing policy permeates through the market. Lastly, he added that the Bank would continue to keep a watchful eye on the impact of rising oil prices on both Japan’s and the global economy.

Support for dollar/yen is seen at 108.30, followed by 108 and 107.75. Subsequent floors are eyed at 107.40, backed by 107 and 106.80. Gains will target resistance at 109, followed by 109.40 and 110. Subsequent ceilings are seen at 110.30, followed by 110.60 and 111.

Cable Steady Ahead BoE Minutes

Markets look ahead to the minutes from last month’s MPC meeting, due out at 4:30 AM EST. Last month’s decision to leave rates unchanged is seen by many as a unanimous one. However, it will be interesting to see how BoE board members will address recent soft UK economic data.

Cable held steady above the 1.80-mark in Tokyo trading. A move higher will target 1.8040, followed by 1.8065 and 1.81. Subsequent resistance is seen at 1.8130, followed by 1.8170 and 1.82. Losses will target 1.7980, backed by 1.7930 and 1.79. Further floors will emerge at 1.7860, followed by 1.7820 and 1.78

Euro Hovers Above 1.25

The euro held steady above the 1.25-level, with resistance seen at 1.2535, followed by 1.2560 and 1.26. Subsequent ceilings are eyed at 1.2640, followed by 1.2680 and 1.27. Losses will find support at 1.25, backed by 1.2460 and 1.2430. A move will finds additional floors at 1.24, followed by 1.2360 and 1.2330.

The dollar came under renewed pressure against the major currencies as falling oil boosted the fuel-dependent yen. The Japanese currency hit a 3-month high against the dollar at 108.24 while interrupting a 4-day winning streak in the euro. US inflation edged up 0.2% last month from 0.1%, while the core rate pushed up 0.3% from 0.1%. The rapid 2.0% rise in the core rate was attributed to rising lodging prices away from home, reflecting accelerating hotel and motel prices. This is the first time in 2 years the core rate reaches the Fed’s implicit target of 2.0%, thus, solidifying expectations of another 25-bp rate hike by year-end.

Oil prices fell for the second straight day, dragging November crude futures to $53.25 per barrel from Monday’s record high of $55.33. There were no real factors weighing on oil prices apart from the absence of fresh supply worries and expectations of an increase in US inventories due for release on Wednesday.

Loonie mute to BoC rate hike

The Bank of Canada’s decision to raise its overnight rate by 25-bps to 2.50% did not generate any gains for the loonie as falling oil prices weighed on the currency. The loonie’s 10% rise of the past 5 months had mainly emerged on the due to improve growth, rising rate expectations and higher oil prices boosting the nation’s export receipts. The Bank said the “Canadian economy is operating near its production capacity and continues to adjust to global economic developments”. It expects core inflation to edge back below the 2.0% target by 2005, but sees total inflation “to move well above core inflation in the first half of 2005 and fall slightly below core inflation in 2006”. The BoC sees growth at slightly less than 3.0% in 2005 and a little over 3.0% in 2006. Such language makes a one more rate hike before year-end a possibility.

Markets await Wednesday’s release of Canada’s leading indicators’ index expected up 0.4% in Sep from 0.5%.

USDCAD recovered nearly half a cent off its 1.2525 session low now facing resistance at $1.2570, followed by $1.2620. Support starts at $1.2520 figure, backed by.2465-70 and 1.2430 and 1.24.

Euro ready for more gains

The euro’s drop against the yen did not stop the EURUSD rate from clawing ground above $1.25, readying it for further upside this week. The 0.6% drop in Eurozone industrial output from a revised 0.2% rise m/m and up 1.5% down from a revised 2.2%. The single currency remains energized at the expense of the dollar’s increasingly shaky external position following yesterday’s evidence of further foreign disinterest in US assets.
Interim resistance comes up at $1.2520, followed by the March 01 high of $1.2539. Subsequent resistance stands at $1.2590-95. Downside crops up to $1.2460, backed by $1.2380 and $1.2340—the 50% retracement of the 1.1926-1.1759 move. Key foundation is solidified at the 200-day MA of $1.2248. Subsequent targets seen at $1.2215—the 38% retracement of the said move.

USDJPY hits fresh 3-month low

The retreat in oil prices is boosting the yen across the board as speculators argue that the economic strains from oil would be lessened. As the yen rallies, Japan bulls should pay attention to comments from Japanese authorities seeking to temper the currency’s appreciation. One of such ways would be to reiterate their forecast for negative inflation into year-end.

Breaking below the key support of 108.73 (double bottom with Aug 31 low), USDJPY faces the next support at 108.20. Subsequent foundation seen held at 107.75—the 61.8% of the 108.36-111.88 rally. Upside capped at 109.20—50% retracement of the said move as well as the 200 day MA. Next resistance stands at the 100-day MA of 109.75.

Cable stabilizes after RICS damage

Sterling stabilized after Monday’s broad damage, which resulted from the tumble in the Royal Institute of Chartered Surveyors’ house price index to–30 from–12. Sterling’s increased volatility is repealing traders who seek to position for the medium term. Traders await tomorrow’s release of the BoC minutes from this month’s MPC meeting. The currency could come under renewed pressure in the event that MPC members make a strong case for leaving rates steady, and possibly into the rest of the year.

Sterling’s potential above $1.80 seems limited at $1.8030, followed by $1.8070 and 1.8110—the 38% retracement of the $1.8770-1.77 drop. Key resistance at $1.8150. Support starts at $1.7950, followed by $1.7850 the trend line support from the $1.5608 low thru the 1.7926 low. Accumulated losses seen emerging at $1.78—the 38% retracement of the rise from the $1.5608 low thru the $1.9140 high.

At 8:30 AM US September CPI m/m (exp 0.2%, prev 0.1%) US September CPI y/y (exp 2.5%, prev 2.7%) US September Core CPI m/m (exp 0.2%, prev 0.1%) US September Core CPI y/y (exp 1.8%, prev 1.7%) US September Housing Starts (exp 1.95 mln, prev 2.0 mln) At 9:00 AM BoC monetary policy decision (exp 2.50%, prev 2.25%)

The dollar posted sharp declines across the board in London trading, selling-off against the euro to 1.2518 and 108.64 versus the yen. With dollar sentiment turning sour in recent sessions, the currency’s direction will continue to be dictated by economic data. Yesterday saw the dollar slump on a drop in US foreign net inflows to a fresh 10-month low at $59 bln. Traders will scrutinize the US September CPI and housing starts data, slated for release at 8:30 AM EST

Markets are looking for September CPI to edge up slightly to 0.2% m/m, up from 0.1%, while slipping annually to 2.5%, down from 2.7%. The main focus will be the core CPI figure, which excludes food and energy costs, is seen rising 0.2% m/m and 1.8% y/y. Larger than expected gains in consumer prices bodes well for the prospects of further Fed rate hikes for the remainder of the year, and thus would be beneficial for the dollar.

Dollar/Cad Confined Ahead of BoC

In addition to the US data, markets will also look closely at the Bank of Canada’s monetary policy decision, due out at 9:00 AM EST. The BoC is widely expected to lift its benchmark-lending rate by 25-basis points to 2.50%, adding onto further onto last month’s 25-bp hike. The Bank was apparent in communicating the need for additional hikes since inflation was not an immediate concern, but growth hovering above trend. Although the hike is largely anticipated, the Loonie may receive a shot in the arm following a raise in rates as a knee-jerk reaction.

USDCAD trades near 1.2570, with support seen at 1.2540, followed by 1.25 and 1.2480. Subsequent floors are seen at 1.2430 and 1.24. Resistance is seen at 1.26, followed by 1.2660 and 1.2680. Additional gains will target 1.27, backed by 1.2740 and 1.2770.

Euro Bolstered

The euro propped back above the 1.25-level amid a broad-based dollar decline. Earlier in the session, Eurozone August industrial output dropped to –0.6%, down from a revised 0.2% m/m and up 1.5% down from a revised 2.2%.

EURUSD hovers just above the 1.25-mark, with interim resistance seen at 1.2535, followed by 1.2560 and 1.26. Subsequent ceilings are seen at 1.2640, followed by 1.2680 and 1.27. Losses will target support at 1.25, followed by 1.2460 and 1.2430. Additional losses will target 1.24, followed by 1.2360 and 1.2330.

Yen Shrugs Off Record Oil

Despite oil hovering near record levels around $54 per barrel, the yen maintained its strength against the dollar breaking beneath 109 to fall to 108.60. Earlier in the session, Japanese government officials reiterated the economic repercussions from current oil levels. Japan Economics Minister Heizo Takenaka said a prolonged rise in oil price remains the biggest for the economy.

Support begins 108.60, backed by 108.30 and 108. Further losses will target 107.75, followed by 107.40 and 107. Interim resistance begins at 109, followed by 109.40 and 110. A move higher will target 110.30, backed by 110.60 and 111.

Cable Edges Back to 1.80

Cable edged back up toward the 1.80-level. A move higher will target 1.8040, followed by 1.8065 and 1.81. Subsequent resistance is seen at 1.8130, followed by 1.8170 and 1.82. Losses will target 1.7980, backed by 1.7930 and 1.79. Further floors will emerge at 1.7860, followed by 1.7820 and 1.78

AUDUSD Mired in Narrow Range

The Aussie traded within a narrow range overnight, with support seen at 0.7250, followed by 0.7230 and 0.72. Subsequent floors are seen at 0.7140, backed by 0.71 and 0.7060. Gains will target interim resistance at 0.73, followed by 0.7340 and 0.74. Subsequent ceilings are eyed at 0.7450 and 0.75.

No Key Data

The dollar edged up slightly against the majors in Tokyo trading, recovering to 1.2455 versus the euro and 1.7940 against the sterling. Dragging the greenback lower overnight was a drop to 10-month lows in net US foreign inflows, triggering a sharp sell-off in the currency. US net foreign inflows fell to $59 bln, attributable to a 35% drop treasury purchases and a dip to negative territory of equity purchases at $2.1 bln.

USDJPY Shrugs Off Record Oil

Despite oil hovering near record levels around $54 per barrel, the yen maintained its strength against the dollar around 109.40. Earlier in the session, Japanese government officials reiterated the economic repercussions from current oil levels. Japan Economics Minister Heizo Takenaka said a prolonged rise in oil price remains the biggest for the economy.

Support begins at 109.30 and 109. Additional floors are eyed at 108.70, backed by 108.30 and 108. Interim resistance starts at 110, followed by 110.30 and 110.60. Subsequent ceilings will emerge at 111, followed by 111.50 and 112.

Cable Steady Above 1.79

Support is seen at 1.79, followed by 1.7865, followed by 1.7820 and 1.78. Subsequent floors are seen at 1.7760, followed by 1.7740 and 1.77. Gains will target interim resistance at 1.7930, followed by 1.7950 and 1.80. A move higher will target 1.8040, followed by 1.8065 and 1.81.

Euro Backs Away from 1.25

The euro drifted away from its highs around the 1.25-handle, slipping toward 1.2455. Support starts at 1.2430, backed by 1.24 and 1.2360. Subsequent floors are eyed at 1.2330, followed by 1.23 and 1.2280. Resistance is eyed at 1.25, backed by 1.2535 and 1.2560. Additional resistance 1.26, followed by 1.2640 and 1.2680.

USDCAD Steady ahead of BoC

The main focus for USDCAD is Tuesday’s decision from the Bank of Canada, where the majority of analysts expect a 25-bp rate hike to 2.50%. Despite improved fundamentals in Canada and the rising price of commodities, we expect the Bank to stand pat out of concern of slowing growth in the US and the 10% appreciation in the currency over the past 5 months. Yet we think the CAD would remain relatively steady even if the Bank does not cut because traders would argue that a rate hike is inevitable.

Upside seen initially capped at $1.2570, followed by $1.2620. Support starts at $1.2520 figure, backed by.2465-70 and 1.2430 and 1.24.