REMINDER: US EASTERN TIME (NEW YORK) IS NOW 5 HOURS BEHIND GMT

Financial markets will closely the follow the micro developments of the US presidential elections, theoretically due to be decided in the early morning hours of Wednesday. But the closely contended race between President Bush and Senator Kerry may not be decided by the end of the week or even this month. Election observers agree that the presence of hundreds of lawyers, advocacy groups and staunch willingness by both political parties to challenge the result of a potential defeat would delay the final outcome for weeks, if not months.

Market Uncertainty, Bin Laden and Jobs

Surging election uncertainty and protracted delays shall only translate to capital rushing to US treasuries and gold at the expense of the US stocks and the dollar. The course of oil prices remains uncertain, especially after China’s decision to raise rates appeared to have placed a cap on prices. The weekly inventory data have shown unexpected build ups over the last 2 weeks. Further accumulation should be negative for oil, positive for the dollar but not especially so for the USDJPY rate. The $430 target on oil and $84.50 floor on the US dollar index shall be key gauges of deteriorating confidence in the markets. The 3.98% yield mark on the 10-year treasury and the 8-year low of 1.1850 in USDCHF are also crucial risk benchmarks. See more on futures speculators below.

Friday’s broadcasting of Osama Bin Laden’s address on Arabic TV station al-Jazeera accusing President George W Bush of deceiving the American people in the years following the September 2001 attacks has been widely interpreted as a positive for president Bush’ s reelection bid since it reminds the public of Al Qaeda’s presence, thereby inducing voters to opt for Bush’s war-against terror. A minority of observers see the tape as beneficial for Kerry on the basis of the Administration’s failure to catch Bin Laden.
Aside the election effect, markets will see an array of economic data, namely manufacturing PMI surveys from the US, Western Europe, Canada and Japan. More importantly is Friday’s release of US October jobs report once again expected to show a figure of about 160-175K.

Swiss, Euro, Aussie Hit Record Highs vs Greenback

Last week, futures traders pushed up the Aussie, Euro and Swiss futures to record high net long positions against the US dollar, reflecting the emerging riskiness of holding US currency ahead of the escalating election uncertainty. Swiss net longs leapt 132% to a record 27,331 contracts. Speculators also drove the euro and Aussie contracts to record net longs, pushing them up 25% to 45, 531 contracts and up 27% to 28,530 contracts respectively. Yen net longs shot up 226% to 27,636 contracts, the highest level since February, when the yen stood at 4-year highs against the dollar. GBP net longs rose jumped 660% to 9,525 contracts, attaining their highest level since mid August. CAD net longs were the only major currency futures contracts falling against the US dollar, retreating 10% to 36,223 contracts.

USDJPY aims at 105

Aside from the ensuing loss of confidence in the US dollar, the Japanese yen has gained an extra dosage of strength after Friday’s outlook from the Bank of Japan projecting the a positive inflation rate in early Q2, ending 9 years of deflation . This sets the market for an eventual removal of the Bank’s quantitative monetary easing policy, thus reinforcing upward pressure in the yen. Unexpectedly strong data on Japan’s unemployment rate, and a flat October CPI were also yen positive. Due to these improved fundamentals, we see the Japanese currency as least negatively affected against the dollar in the event of a Bush victory.

USDJPY tests 105.75—the 61.8% retracement of the rise from the 79.79 low of April 1995 to the 147.62 high of August 1998. A breach below 105.75 paves the way for 105.20. Upside potential seen initially limited at 107, while any intervention or jawboning is seen extending upside towards 107.50, followed by 108.20.

Euro goes to the polls

The euro currency will be exceedingly affected by the US presidential elections, including the preliminary poll results starting on Tuesday evening and into the early Wednesday morning hours. But the currency could come under some pressure on Monday’s personal spending data from the US expected to show a 0.6% rise in September following a flat reading in September. Nonetheless, another soft reading in the annual core PCE rate of no more than 1.6% should be dollar negative as it confirms increasingly fading inflation pressures.

Surveying from its $1.2770s, EURUSD sees resistance at $1.28, followed by 1.2845 and $1.2870. Support starts at 1.2670, followed by $1.2640, which would be a neck line base of the head-and-shoulder formation. Subsequent floor stands at $1.26.

Sterling’s fate dubious

Considering sterling’s weakening fundamentals recently showing consumer confidence at 18-month lows, and monthly housing prices (Nationwide) dropping for the first time in 3 years, the currency’s only hope is a continued uncertainty in the US elections and (or) and a Kerry victory. If a final uncontested election decision is reached by Wednesday morning, then expect a pounding on the currency, which would drag it below $1.8150. Meanwhile, sterling’s fundamental weakness is being increasingly highlighted relative to the euro, against which it hit 9-month lows.

A breach above $1.8365—61.8% retracement of the $1.8769-1.7706 drop, finds key resistance at $1.8445-50. Subsequent pressure stands at $1.85-- trend line resistance extending from the 1.9140 high thru the 1.8769 high. This is followed by 1.8570. Support starts at 1.8150, followed by 1.8113—the 61.8% retracement of the said move.

Aussie reattempts to breach 75-cents

The Aussie regains its footing after three negative days showing soft Aussie CPI and a Chinese rate hike that may cool demand for Australia’s commodities. Australia’s Q3 CPI rose by a benign 2.3% y/y, matching the Q2 rise and undershooting expectations of a 2.8% rise. The figure was well within the Reserve Bank of Australia’s annual inflation target of 2.0%-3.0%. The RBA may have to maintain rates unchanged in the effect that oil shows no fresh record high this year. But the Aussie could well shatter the 75-cent figure amid the rising uncertainty plaguing the US elections.

Resistance starts at 74.80, before we see interim pressure at 75 cents. Key target stands at 75.33—the 61.8% retracement of the 80.02-67.73 decline. Subsequent resistance follows at 75.60 and 76. Support starts at 73.80-90 cents—near the 50%. Subsequent support stands at 73.45-50 followed by 73 cents.

loonie’s eyes further heights

Propped by improved economic fundamentals and further interest rate upside, as well as a potential impasse in the US elections, the Canadian dollar carries the potential for durable gains into the 1.21 figure. Potential negatives include a knee-jerk reaction from a Bush victory and a US payrolls figure above 200K.

Support starts at 1.2150 followed by 1.2115-20 (May 19992 high). Key foundation stands at 1.2080. Upside starts at 1.2275, followed by 1.2320.

A weaker than expected Q3 GDP report coupled with lingering uncertainty ahead of the final weekend before the highly contested US presidential elections. After some hesitancy in the first hew hours of US trading resulting from the data reports, traders sent the dollar broadly lower to 84.80 (dollar index) lifting gold to a $428.90 high on a combination of markets’ unwillingness to stay long the dollar ahead of an uncertain pre-election weekend. A new video tape broadcasted on Arabic TV station al-Jazeera showed Al Qaeda leader Osama Bin Laden accusing President George W Bush of deceiving the American people in the years following the September 2001 attacks. Bin Laden said the security of the US people laid in their own hands and not in those of any leaders.

The advanced report of US Q3 GDP showed a 3.7% rise from 3.3% in Q2, undershooting consensus estimates of a 4.3% increase. The largest movers of the report occurred in a 4.6% rise in consumer spending, 11.7% rise in business spending and a 9.3% rise in defense spending. The swelling trade deficit, falling non-defense spending and low inventory accumulation were the primary negatives in the report. For more details on the GDP report and the dollar, please see articles and ideas.

On the bright side, the Chicago Purchasing Managers Index shot up to a 10-year high of 68.5 in October from September’s 61.9. The employment index rose 54.1 from 53.9,while the new orders index jumped to 79.4. The production index hit 79.7, its highest figure in 54 years. The report could lead to optimism ahead of next week’s release of the ISM national survey.

Meanwhile, the University of Michigan consumer sentiment survey edged up to 91.7 in October, up from a midmonth estimate of 87.5, but falling short of 94.2 consensus forecasts.

Yen hits fresh 6-month as BoJ talks inflation

The US dollar closed under the 106 yen level for the first time since April 12, as traders rushed into the Japanese currency on a combination of fresh data and comments from official. The Bank of Japan projected that inflation would grow 0.1% in fiscal 2005 (starting next April), raising chances of an eventual removal of the Bank’s current quantitative monetary easing policy designed to fight deflation.

The yen was also boosted by a round of data on showing Japan’s unemployment rate falling to 4.6% in September from 4.8%. Japan’s September Core CPI came in flat in October, besting forecasts for a 0.1% drop.

USDJPY drops for the 10th straight day, testing the key 105.75—the 61.8% retracement of the rise from the 79.79 low of April 1995 to the 147.62 high of August 1998. A breach below 105.75 paves the way for 105.20. Upside potential seen initially limited at 107, while any intervention or jawboning is seen extending upside towards 107.50, followed by 108.20.

Euro makes late push to 1.2790s on GDP, Bin Laden Tape

The euro leapt towards the 1.2790s amid soaring election uncertainty and increased contention in US presidential election. The Osama Bin laden tape came in as a stark reminder to the presence of event risk against the US. Bin Laden claimed responsibility of the Sep 11 attacks and addressed the American people that their security was in their own hands and not in any of the presidential candidates. The tape did not call the Muslim world for any attacks on the US but called the Bush administration deceptive the American people.

Breaching above the $1.2775 figure, subsequent resistance stands at $1.28,followed by 1.2845 and $1.2870. Support starts at 1.2670. Next target seen at $1.2640, which would be a neck line base of the head-and-shoulder formation.

Canada’s GDP extends loonie’s run

In addition to the disappointing US GDP figures and the ensuing election uncertainty damaging the US dollar, Canada’s GDP rose by a stronger than expected 0.5% in August following a 0.1% rise, conveying a broad-based strength. CAD could stage fresh gains dragging USD below 1.2100 in the event that fresh escalation in oil prices coupled with an impasse in the US election crown US uncertainty.

Support starts at 1.2150 followed by 1.2115-20 (May 19992 high). Key foundation stands at 1.2080. Upside starts at 1.2275, followed by 1.2320.

At 8:30 US Q3 Employment Cost Index (exp 1.0%, prev 0.9%) At 8:30 Canada August GDP (exp 0.3%, prev 0.1%) US Q3 GDP –advanced (exp 4.3%, prev 3.3%) US Q3 Price Deflator –advanced (exp 1.6%, prev 3.2%) At 10:00 AM US Chicago PMI (exp 59, prev 61.3) At 2:00 PM US Fed Vice Chair Ferguson Speaks.

The dollar was mixed overnight, dropping to another 6-month low against the yen beneath 106, while edging up against the sterling and euro. The coming session will see a data deluge, including US Q3 ECI, Canada Q3 GDP, US Q3 GDP, and the Chicago PMI. Economists are expecting robust growth from the US in Q3, posting 4.3% GDP, up by 1% from the previous quarter’s figure of 3.3%. However, Chicago PMI is seen declining to 59.0, down from 61.3.

Yen Edges to Fresh High

Japan’s unemployment rate slipped to 4.6% in September, beating forecasts of unemployment to remain unchanged from August at 4.8%. Japan’s September Core CPI was slightly better than expected, coming in flat from the previous month, versus forecasts for a 0.1% drop. The October PMI slipped to 52.9, down from September at 53.6. However, on a brighter note, the prices component rose to 50.9, from 48.9 – marking a new survey high.

As expected, the Bank of Japan, by unanimous decision, left monetary policy unchanged, keeping its current account deposits target at 30-35 trillion yen. The Bank also reiterated its mantra of providing funds regardless of the target if risks to the stability of the financial system emerge. The BoJ released forecasts for the next fiscal year, expecting CPI to rise 0.1% in FY 05/06. The Bank expects GDP for the next fiscal year between 2.2% to 2.6%. Lastly, the BoJ expects Japan’s economy to move to sustainable growth path.

BoJ Governor Fukui said that the Bank will continuing communicating with the market and will not surprise with policy change. He said the end of deflation was nearing, but difficult to specify when. Fukui does not deem a 0.1% rise in CPI as a rising trend, and said there was latitude in conducting policy even if time comes for policy change. Commenting on yen strength, Fukui said that recent forex moves were stable and does not see moves as a risk to Japan’s economy.

The yen climbed to another 6-month high overnight at 105.82. Resistance is seen at 106.30, followed by 106.70 and 107. Additional ceilings are seen at 107.40, backed by 107.80 and 108. Losses will target support at 105.70, followed by 105.20 and 105. A move lower will encounter additional floors at 104.65, followed by 104.30 and 104.

USDCAD Trades Narrowly Ahead of GDP

Traders will look ahead to Canada’s August GDP, expected to edge up to 0.3%, versus the previous reading of 0.1%. USDCAD traded within a tight range overnight ahead of the growth data, due out later in the session at 8:30 AM EST.

Resistance in the pair starts at 1.2240, followed by 1.23 and 1.2350. Subsequent ceilings will emerge at 1.2375, followed by 1.24 and 1.2450. Losses will find interim support at 1.22, followed by 1.2160 and 1.2130. Further Canadian strength will target 1.21, backed by 1.2050 and 1.2020.

Sterling Struggles

The sterling continued to struggle, slumping to a fresh 9-month low against the euro at 0.6974 and dipping beneath the 1.83-level versus the dollar. Earlier in the session, UK’s September consumer credit slipped to 1.609 bln sterling, down from 1.866 bln sterling a month earlier. September mortgage lending fell to 7.748 bln sterling, down from August at 8.376 bln sterling, posting its lowest level since April 2003.

Cable trades just beneath the 1.83-level, with support starting at1.8260, followed by 1.8230 and 1.82. Subsequent floors are seen at 1.8170, backed by 1.8140 and 1.81. Gains will target resistance at 1.8350, backed by 1.84 and 1.8460. Additional ceilings are seen at 185 and 1.8540.

Euro Slumps

The Eurozone October business sentiment improved to –2, from –3 in September, while the consumer sentiment worsened to –14 from –13. The economic sentiment rose to 101.3, up from a revised September figure of 101.0

The euro hangs out above the 1.27-level. Support is seen at 1.27, followed by 1.2670 and 1.2630. Subsequent floors are eyed at 1.26, followed by 1.2575 and 1.2540. Resistance is seen at 1.2770, followed by 1.28 and 1.2840-50. A breach higher will target 1.2880, followed by 1.29 and 1.2925.

Swiss Weighed By KoF

The Swiss franc slid versus the euro, and to a lesser extent, the dollar. The catalyst was a weaker than expected KOF business index, which fell to 0.79-pts, much worse than a forecasted 0.93-reading. The Swiss fell to session lows versus the dollar following the release at 1.2020.

Resistance for the pair is seen at 1.2080 and 1.2150. Subsequent ceilings are seen at 1.2230, followed by 1.23 and 1.2350. Support begins at 1.20, followed by 1.1950 and 1.19. Subsequent floors are seen at 1.1840, followed by 1.18 and 1.1730.

AUDUSD

AUDUSD trades in a narrow range, confined beneath 0.75. Support begins at 0.7450, followed by 0.7420 and 0.74. Additional floors will emerge at 0.7370, backed by 0.7340 and 0.73. A move above 0.75 will target 0.7530, followed by 0.7560 and 0.76. Subsequent ceilings are seen at 0.7645, backed by 0.7690 and 0.7750.

China’s decision to raise interest rates for the first time in 9 years sent oil prices tumbling by nearly $2 below $52 per barrel, while weighed on the US dollar after initially propping the currency. The 27-bp rate hike to 5.58% in China’s 1-year lending rate is a symbolic step in an economy growing over 9.0% per year. Given China’s paramount role in driving up world demand for metals and fuel, the price of these commodities tumbled on market expectations of an incipient slowdown in China. But the US dollar ended mostly lower, particularly against the yen as the sharp oil drop is seen favoring the fuel-dependent Japanese economy. Gold prices pushed up by about $3 to $424 per ounce but ended off their session $426 high. Once markets realized the move mainly consisted of an embryonic tightening that remains far from reigning in China’s expansion, the yen was propped back on the rationale that Japan’s exports to China shall remain undaunted. For more details on today’s China rate hike, please see our article on Articles & Ideas.

Due to China’s strong demand for commodities, a Chinese slowdown would pressure the commodity currencies of Canada and Australia. But with China's gross domestic product slowing only modestly to 9.1% in Q3 from 9.6% in Q2, we think the Aussie and the Canadian dollar have yet to sustain further gains since there are no incipient signs of any soft landing in China. In the event that China reiterates its intentions (as it did last May) to temper its demand for commodities, we would have to cool our outlook for gold, euro, yen, Aussie and CAD, while issuing a more supportive US dollar forecast.

Separately, US weekly jobless claims rose by 20K to 350K after the prior’s week’s tumble. Yet the 4-week average fell 5.5K to 343.3.

Tomorrow’s Data

Traders await tomorrow’s release of the advanced (first release) Q3 GDP and ECI reports, with the latter expected to grow 4.3% from 3.3% and the latter up 1.0% from 0.9%. Personal consumption is expected to be a considerable booster of GDP. Although the report will be incomplete, markets will use it as a key reference for determining the first part of H2 growth.

The October Chicago PMI is due at 10.00 am, expected to slip to 59 from 61.3. But note that Chicago PMI officials have announced they would release the figures 3 minutes before 10.00 am to their paying clients before releasing to the public. This may lead to some faster than normal movements in currency and bond markets 3 minutes before the official release. Also on tap is the final University of Michigan sentiment survey expected at 88.0 from 87.5.

Yen gets last word after Chinese hike

The Japanese yen came under initial pressure against the dollar once the post-rate hike drop in commodities boosted the US currency by virtue of its negative correlation. But the yen had the last word when the oil drop grew more pronounced, thereby providing relief for yen bulls on the argument that Japan’s economy is mostly dependent on oil. Japanese officials again jawboned the market by attempting to talk down the yen , but theior efforts were dissipated by the ensuing volatility in commodities.
USDJPY drops for the 9th straight day, testing below the 106 level. Support seen 105.75—the 61.8% retracement of the rise from the 79.79 low of April 1995 to the 147.62 high of August 1998. A breach below 105.75 paves the way for 105.20. Upside potential seen initially limited at 107, while any intervention or jawboning is seen extending upside towards 107.50, followed by 108.20.

Euro ends higher after initial retreat

The euro also had the word against the US dollar amid realization that today’s Chinese rate hike was more of a symbolic gesture towards a soft landing, rather than a drastic step to slow the economy. The rebound in gold prices despite the drop in oil was also weighed on dollar, suggesting that traders were more worried with the uncertainty surrounding the mounting presidential election in Florida. News of missing 58K votes in Florida are raising fears of another voting fiasco in the Sunshine State.

Once eleection uncenrtainty is removed , a Bush victory is expected would trigger the knee-jerk rise in the US dollar for no more than a week, after which markets return to economic basics, i.e. worrying over the swelling twin deficits and the potential halt in monetary policy tightening. A Kerry victory would remove the incumbent and therefore weigh on the dollar. Kerry’s protectionist proclivities would also have negative implications for the US currency. The only currency exception from a Kerry victory would be the unlikely appointment of former Treasury Secretary to the Administration.

Euro traders shall await the array of US data, especially the GDP figure, which should boost the dollar in the event of an above 4.5% figure.

Regaining the $.127 figure, EURUSD looks to have formed a temporary flag before renewed gains. Upside seen initially capped at $1.2775. Subsequent pressure stands at $1.28,followed by 1.2845 and $1.2870. Support starts at 1.2670. Next target seen at $1.2640, which would be a neck line base of the head-and-shoulder formation.

Sterling remains doubtful

UK consumer confidence remains near its 18-month lows, after the GfK edged up by 1 point to -6 in October from. Meanwhile, Nationwide’s housing price index fell by a bigger than expected 0.4% last month undershooting expectations of a 0.2% rise. This was the index’ first monthly drop since October 2001.

Meanwhile, sterling’s fundamental weakness has been increasingly highlighted relative to the euro, against which it hit 9-month lows.

Cable’s initial support stands at $1.8238, the 50% retracement of the 1.8769-1.7706 move. Key support stands at the 200 day MA of $1.8190 followed by $1.8150 and 1.8120. Upside capped at $1.8330, followed by $1.8365 foundation—61.8% retracement of the said move. Subsequent target comes up at 1.8445-50. Key pressure point stands at $1.85-- trend line resistance extending from the 1.9140 high thru the 1.8769 high. Subsequent target stands at 1.8570.

Loonie still on offensive, awaits GDP

The Canadian dollar’s status had initially wobbled following the breaking news of the China rate hike, before traders argued that the move had yet to impact China’s demand for commodities. Traders await Canada’s August GDP report expected up 0.3% from 0.1%, which should sustain the loonie’s current bull run.

Support starts at 1.22, followed by 1.2150 and 1.2115-20 (May 19992 high). Key foundation stands at 1.2080. Upside starts at 1.2250, followed by 1.2270 and 1.2320.

At 8:30 AM US Weekly Jobless Claims (exp 335k, prev 329k)

The dollar was mixed overnight, with currency moves dictated by the yen, which rose to a 6-month high vs the greenback beneath 106. Strength in the yen extended over the euro and sterling, which dropped against the dollar as a result. Yesterday’s pullback in oil prices provided fresh impetus for traders to send the oil-dependent currency to a multi-month high against the dollar and multi-week highs versus the euro and sterling.

Yen Rises to 6-mo High

The yen extended gains to its highest level in 6-months earlier in the session, briefly dipping below the 106-level. Bank of Japan Governor Toshihiko Fukui said that eventually the Bank would have to end its current easing policy, since eventually it must return to a normal policy framework using interest rates. Nevertheless, he added that the BoJ would continue implementing its quantitative easing stance despite economic recovery in Japan based on the Bank’s commitment to CPI.

The Japan’s industrial production tumbled 0.7% m/m in September, instead of the 0.4% rise forecasted by economists. Retail sales, however, were stronger than expected, rising 1.0% m/m, besting estimates for a drop of 0.1%. The bulk of Japan’s economic data is scheduled for release tomorrow, including CPI, unemployment, all-household spending, and the Bank of Japan’s monetary policy decision.

After dipping to its lowest level in 6-months beneath the 106-level, dollar/yen crawled back to 106.40. Interim support begins at 106.30, followed by 106 and 105.70. Additional floors will emerge at 105.20, backed by 105 and 104.65. Meanwhile, gains will target interim resistance at 107, followed by 107.40 and 107.80. Subsequent ceilings are seen at 108, followed by 108.30 and 108.70.

Sterling Falls With Housing Prices

UK housing prices fell by more than expected in October, dropping 0.4%, compared with forecasts for a 0.2% rise. It marked the first monthly fall in house prices since October 2001. Separately, the GFK consumer confidence figure for October was inline with forecasts, standing at minus 6, compared with the month before at minus 7.

Cable remains mired beneath the 1.83-level, with support starting at1.8260, followed by 1.8230 and 1.82. Subsequent floors are seen at 1.8170, backed by 1.8140 and 1.81. Gains will target resistance at 1.8350, backed by 1.84 and 1.8460. Additional ceilings are seen at 185 and 1.8540.

Euro Slumps

The euro hangs out above the 1.27-level. Support is seen at 1.27, followed by 1.2670 and 1.2630. Subsequent floors are eyed at 1.26, followed by 1.2575 and 1.2540. Resistance is seen at 1.2750, followed by 1.28 and 1.2840-50. A breach higher will target 1.2880, followed by 1.29 and 1.2925.

AUDUSD

AUDUSD trades in a narrow range, confined beneath 0.75. Support begins at 0.7450, followed by 0.7420 and 0.74. Additional floors will emerge at 0.7370, backed by 0.7340 and 0.73. A move above 0.75 will target 0.7530, followed by 0.7560 and 0.76. Subsequent ceilings are seen at 0.7645, backed by 0.7690 and 0.7750.

USDCHF

Dollar/Swiss climbed up higher overnight, rising just shy of the 1.21-level. Resistance is seen at 1.2080 and 1.2150. Subsequent ceilings are seen at 1.2230, followed by 1.23 and 1.2350. Support begins at 1.20, followed by 1.1950 and 1.19. Subsequent floors are seen at 1.1840, followed by 1.18 and 1.1730.

USDCAD

Dollar/Cad holds steady at 1.2250. Resistance is seen at 1.23, followed by 1.2340 and 1.2375. Subsequent ceilings are eyed at 1.24, backed by 1.2450 and 1.2480. Losses will find support at 1.2240, backed by 1.22 and 1.2160. Additional floors will emerge at 1.2130, followed by 1.21 and 1.2060.

Dollar selling eased as oil prices headed lower on reports by the American Petroleum Institute and the Energy Department reporting sizable accumulation in crude oil supplies. A 0.2% rise in US durable goods orders in September and an unexpected 3.5% rise in new home sales in the same month also helped the dollar gain ground against the European currencies. The rise in durable orders followed a revised 0.6% drop in August. Dollar bears pointed to the fact that figure came in below expectations of a 0.5% rise to the 3.6% drop in transportation goods, without which durables rose 1.7%. Although durable orders are up 12.1% on a year-to-year basis, the trend has weakened markedly over the past 6 months.

The Fed's Beige noted that the economy continued to expand in September and early October, while indicating further increase in manufacturing activity since the previous survey was prepared. Business reported a pick up in outlays in most districts, while consumer spending was seen mixed. The survey also noted many reports of energy costs restraining consumer and business spending. This could be a key factor to the Fed’s monetary policy decision- making.

The US Treasury raised $24 billion in its auction of 2-year notes, which drew a 1.93 bid/cover ratio, the lowest in 9 months. Indirect bidders, who principally make up foreign central banks snapped up 40% of the whole issue, compared to 49% in the last auction.

The retreat in oil prices caused by the data showing gains in inventory diminished chances of an oil led slowdown thereby weighing on treasuries. The 10-year note lost ground, pushing up yields to 4.06% bond yield from 3.98% earlier in the session.

Euro drops after oil inventory data

The euro’s declines following the US durable goods orders accelerated after the US Dept of Energy’s oil inventory data showed marked increase on oil, which dragged oil prices below $53 per barrel. European Central Bank board member Axel Weber, joined politicians in exhibiting worry over the impact of the dollar’s fall on Eurozone exports. ECB Governing Council member Constancio weighed on the subject of currencies saying that level of volatility was more important than absolute levels. He deemed the recent changes as acceptable regardless of the current levels. Yesterday, Eurozone politicians stepped into the rhetoric fray, when German Chancellor Schroeder described the currency euro rises as “worrying”, adding that he discussed the subject with French president Jacques Chirac.

Markets should expect Chirac to add to the fray once the euro regains $1.2800-50.
Falling below the euro support of $1.2720, traders see foundation at $1.2670 and $1.2640, which would be a neck line base of the head-and-shoulder formation. Upside seen initially capped at $1.28,followed by 1.2845 and $1.2870.

But USDJPY is hurt by oil

Japan’s high dependence on oil led to considerable yen resilience in the face of the dollar’s overall gains. There were no fresh interventionist remarks from Japan after yesterday’s comments by vice finance minister for international affairs Hiroshi Watanabe who said the dollar fall was not backed by economic fundamentals. Bank of Japan Governor Toshihiko Fukui weighed in matters by affirming the Bank of Japan Bank is committed to its quantitative easing until consumer prices rise above zero % on a an annual level and is certain that deflation wouldn’t return.

Testing the 106.30 support, USDJPY sees support at 105.75—the 61.8% retracement of the rise from the 79.79 low of April 1995 to the 147.62 high of August 1998. A breach below 105.75 paves the way for 105.20. Upside potential seen initially limited at 107, while any intervention or jawboning is seen extending upside towards 107.50, followed by 108.20.

GBP on heels opf euro

Sterling’s declines mirrored those of the euro on the back of the oil declines. Aside from the euro drop, UK fundamentals remain in the back of the mind of traders after the week’s soft data from the CBI’s quarterly industrial trends survey hitting its lowest level in over a year.

Cable face support at $1.8238, the 50% retracement of the 1.8769-1.7706 move. Key support stands at the 200 day MA of $1.8190 followed by $1.8150 and 1.8120. Upside capped at $1.8330, followed by $1.8365 foundation—61.8% retracement of the said move. Subsequent target comes up at 1.8445-50. Key pressure point stands at $1.85-- trend line resistance extending from the 1.9140 high thru the 1.8769 high. Subsequent target stands at 1.8570.

Aussie retreats off 75-cent highs

It was all down for the Aussie after having touched the 75-cent high in mid-day Asian trade and traders unwound some of their USD shorts. Australia’s Q3 CPI rose by a benign 2.3% y/y, matching the Q2 rise and undershooting expectations of a 2.8% rise. The figure remains well within the Reserve Bank of Australia’s annual inflation target of 2.0%-3.0%. The RBA may have to maintain rates unchanged in the effect that oil shows no fresh record high this year.

Support starts at 73.80-90 cents—near the 50% retracement of the 80.02-67.73 decline. Subsequent support stands at 73.45-50 followed by 73 cents. Resistance starts at 74.80, before we see interim, resistance at 75 cents. Key pressure stands 75.33—the said move.