Stocks and bonds rallied today at pres Bush’s nomination of Ben Bernanke-- his top economic adviser-- to replace replace Alan Greenspan as Federal Reserve Chairman. But the dollar did not perform as well as stocks and bonds markets. The currency as initially hurt by three blasts in 2 Hotels in Baghdad--where reporters and contractors were staying—killing at least 6 people.

But the dollar’s moves in the aftermath of the Bernanke nomination were too minor to attribute to the Fed’s nomination. At the outset, the dollar reaction should be positive due to Bernanke's experience at the Fed as well as his intellectual capacity. His adherence to inflation targeting, however, has mixed prospects for the currency. At the outset, pursuing explicit inflation targeting policy could deprive the Federal Reserve of its multi pronged policy of using an array of inflation-related figures at the prices and wages level. If a Bernanke-led Fed adopts a more clear-cut inflation target, then it could run the risk of overfocusing on inflation at the possible expense of overlooking the Fed’s objectives of maximum employment and stable prices”. In the event that core inflation continues to threaten the 2.0% figure, then we can expect a positive dollar reaction on the grounds of further Fed tightening. But in the event of the disinflationary or deflationary conditions such as in 2003 when Bernanke suggested the need for the Fed to throw money from Helicopters, the downward impact on the dollar is obvious.

Treasury yields retreated with the 10yr yield off nearly 4 bps to 4.45%. The 3 major equity indices rallied by 1.6%.

Markets turn to tomorrow’s release of the September consumer confidence report and Germany’s IFO survey, which will be assessed as a potentially contrasting release for the dollar and the euro. While the monthly average of the IFO’s Climate component’s stood stands at 2 points above the 7 year average of 94.1, the US consumer confidence has to recover from September’s 2-year low.

USDJPY turns

The dollar’s decline proved to be the product of earlier yuan related remarks from Beijing and Tokyo, the blasts in Iraq where many foreign reporters and contractors stay and the decline in oil prices below the $60 level. PBOC advisor Yu who said earlier he expected further changes in the currency regime, supporting the overall rhetoric from the Bank’s chief Rhongjo who echoed these remarks. The statements from MoF’s Watanbae pressuring china for further currency action helped briefly weigh on the dollar on the rationale that another dollar/yuan revaluation would boost the Japanese currency against the dollar as it allows Japan’s trading partners to lift up their own currencies. We stick with our forecast for a 1.7-2.1% revaluation in the yuan versus the dollar in the second half of the currency quarter. Last week, yen shorts posted their 6th consecutive weekly gain reaching 66,641 contracts, the highest since May 1999. Any more of these aforementioned remarks on the yuan could help cap the dollar

Short-term support seen tested at 114.90—50% retracement of the 113.74-115.96 rally. A breach below 114.60 sees key support at 114.20. Upside capped at 115.55-60, followed by 115.85-90.

Euro unable to break trend line

EURUSD pushed higher but failed to hold to most of its gains after pulling back nearly half a cent off its 1.2020 high. The latter is the trend line resistance extending from the 1.2587 September high. We see interim resistance at $1.2040—the 50% retracement of the 1.1876-1.2204 rise. Nest target at 1.2060. Tomorrow’s release of the Oct IFO survey from Germany and the Oct consumer confidence from the US should underpin activity. Fed Chairman Greenspan’s speech on Thursday will be scrutinized for any more remarks on growth concerns. But the week’s key release will be the advanced US Q3 GDP release on Friday, expected to produce a rate of as much as 3.7%.

Also tomorrow is the meeting between the European Trade Union Confederation and the European Central Bank’s Exec Board should also be important as the former threatened that his 60 million strong organization would give a "very hostile reaction" if basic rights such as collective bargaining and the right to strike were damaged. This could be a short-term positive for the euro as it may encourage a rate hike by the ECB.

Euro futures dropped 83% to 855 contracts last week after a 352% increase in the prior week. Despite the declines in bullishness, euro remained in positive territory for the second straight week following three consecutive weeks of net selling
A renewed break below the $1.1930 support, sees foundation at $1.19 and 1.1860.

Dollar remains firm across the board in mid morning European trade following the late Friday session rally which was reported to be related to Homeland Investment Act flows. But the dollar is a little off against the yen following remarks from a Peoples’ Bank of China official saying further changes in the nation’s currency regime were lie ahead and that China was not afraid of a stronger yuan. Separately, Japanese Finance Ministry’s Watanabe said the trial period of China’s currency adjustment had reached its last stage, urging Beijing to deliver further revaluation to its currency.

The week’s key US data reports will be Tuesday’s release of the September consumer confidence report, Thursday’s new home sales and durable goods orders for September and Friday’s advanced Q3 GDP release. Germany’s Oct IFO, Japan’s Sep trade and Aussie Sep CPI on Tuesday and Friday’s Oct CPI from the Eurozone should be of importance.

Dollar still dominates among speculators

The dollar garnered fresh interest among futures traders as the Fed’s inflationary rhetoric extended dollar longs in the expectation of accumulated yield. The only exceptions were the Canadian dollar and the Swiss franc

Euro futures dropped 83% to 855 contracts after a 352% increase in the prior week. Despite the declines in bullishness, euro remained in positive territory for the second straight week following three consecutive weeks of net selling. Yen shorts posted their 6th consecutive weekly gain reaching 66,641 contracts, the highest since May 1999. Sterling shorts posted their third straight week against the dollar, falling 10% to 21,050 contracts. This was the highest nest short week for cable since mid July. Aussie futures fell 35% to 11,062 contracts, the lowest in 7 weeks

The loonie continues to be the only currency outperforming the dollar in the futures market as it remains in net long territory since June. Since then, the re has been only 6 declines in the loonies net long position. Swiss shorts stabilized by 25% to 30,982 contracts after 4 consecutive weekly increases. The ensuing hawkishness from the Swiss National Bank and its concern with the inflationary effects of a weal franc have contributed to the currency’s ascent. This may also suggest that the currency is nearing its days of being sold as a funding currency for carry trade plays.

USDJPY steadies despite Yuan comments

USDJY had an early dip to the 115.50s on a combination of comments favoring further yuan revaluation by PBOC advisor Yu who said he expected further changes in the currency regime, supporting the overall rhetoric from the Bank’s chief Rhongjo who echoed these remarks. The statements from MoF’s Watanbae pressuring china for further currency action helped briefly weigh on the dollar on the rationale that another dollar/yuan revaluation would boost the Japanese currency against the dollar as it allows Japan’s trading partners to lift up their own currencies. We stick with our forecast for a 1.7-2.1% revaluation in the yuan versus the dollar in the second half of the currency quarter.

USDJPY faces interim resistance at 115.80, followed by 116.00. Any renewed sell-off seen stabizling at 115.40. Key foundation stands at 115.10.

Euro struggles below $1.20

Euro struggles to regain the $1.20 figure and is now testing the 1.1920s follwing Friday’s 1-cent drop in late trade. Demands of a 4% rise by German metal unions in the upcoming wage talks should prompt further hawkishness by the ECB. Currently, EURIBOR markets are pricing about a 40% chance of a 25-bp rate hike before year-end, but the constant anti-inflation talk by Fed speakers has overwhelmed dollar bears. Tomorrow’s release of the Oct IFO survey from Germany and the Oct consumer confidence from the US should underpin activity. Fed Chairman Greenspan’s speech on Thursday will be scrutinized for any more remarks on growth concerns. But the week’s key release will be the advanced US Q3 GDP release on Friday, expected to produce a rate of as much as 3.7%.

Tuesday’s meeting between the European Trade Union Confederation and the European Central Bank’s Exec Board should also be important as the former threatened that his 60 million strong organization would give a "very hostile reaction" if basic rights such as collective bargaining and the right to strike were damaged. This could be a short-term positive for the euro as it may encourage a rate hike by the ECB.

EURUSD’s tests the $1.1930 support, which could pave the way for 1.19 and 1.1860. Upside seen limited at $1.1970 followed by $1.2030.

Cable eyes $1.7640s

A 0.1% drop in UK housing prices as measured by the Hometrack did not impact the pair which had a solid 4-cent rally last week to the $1.78 figure on a less dovish than expected MPC minutes. The 0.4% slowdown in Q3 GDP is not bearing any pressure on the pair. Traders turn to Wednesday’s CBI industrial trend survey. Support tests1.7670--38% retracement of the 1.7430-1.7798 rally. Subsequent support stands at $1.7610—50% retracement of the said move. Upside capped at 1.7670, followed by 1.77.

The dollar mounted a sharp rally in late European trading, gaining over a full cent against the euro and the pound while pushing more than half a yen against the Japanese currency. The vacuum in US data allowed for a mixed release of Canadian which had a relatively muted reaction in the markets until the dollar bounce ensued in late Europe trade.

The dollar rally was attributed to ongoing USD-bound flows resulting from the Homeland Investment Act--part of the American Jobs Creation Act passed last October aimed at reducing the corporate tax on foreign subsidiary income from up to 35% to 5.25%. Repatriation amounts have been estimated to range between $200 bln to $500 bln, about 30% of which would involve currency conversion into dollars. The Q2 current account figures released last month may have been propped by HIA repatriation.

The Washington-based American Shareholders Association said Bureau of National Affairs told Market news International that $214 billion in repatriated profits had been announced by S&P; 500 companies by mid-September, up from the $191 billion estimate made in mid-August by the International Strategy and Investment (ISI) Group. Since the tax breaks are due to expire in Dec 30 of this year, further repatriation could be expected in the coming months by companies seeking to take advantage of the tax savings. The ASABN said it expects about $70 billion of additional flows before year-end.

It is interesting to note that the dollar could be propped during the current quarterly earnings season where individual reports shed more detailed light at the earnings of the multinationals.

Euro slide spells ominous technicals

The euro’s 1-cent drop in late trade was attributed by HIA related flows after the pair failed to breach above the $1.2060s. Demands of a 4% rise by German metal unions in the upcoming wage talks should prompt further hawkishness by the ECB. Currently, EURIBOR markets are pricing about a 40% chance of a 25-bp rate hike before year-end, but the constant anti-inflation talk by Fed speakers has overwhelmed dollar bears. Monday’s release of the Oct IFO survey from Germany and the Oct consumer confidence from the US should underpin activity. Fed Chairman Greenspan’s speech on Thursday will be scrutinized for any more remarks on growth concerns. But the week’s key release will be the advanced US Q3 GDP release on Friday, expected to produce a rate of as much as 3.7%.

EURUSD’s full cent break below $1.1950 is testing the $1.1930 support, which could pave the way for 1.19 and 1.1860. Upside seen limited at $1.1970 followed by $1.2030.

Cable breaks below 38% retracement

Sterling’s rally following the 0.4% slowdown in Q3 GDP report proved short-lived in light of the dollar’s nearly 1.5 cent rally. The pair dived below the 1.7670 support-38% retracement of the 1.7430-1.7798 rally. Further losses seen prolonged towards key foundation of $1.7610—50% retracement of the said move. Upside capped at 1.7670, followed by 1.77.

Loony drops vs dollar shrugging core sales

In combination of the decline in headline retail sales and oil declines, loony posed a 1.25 cent drop past the 1.1850s. Canada’s retail sales dipped 0.3% largely due to a 2.1% drop in auto sales without which the core figure rose 0.2%. This week’s 4% decline in oil prices to 2-week lows has also weighed on CAD. Further upside seen capped at 1.1870, followed by 1.1905—the 38% retracement of the 1.1585-1.2217.

8:30 am Canada Aug Retail Sales Aug Retail Sales (exp -0.5%, prev 1.5%) Aug Retail Sales ex autos (exp 0.6%, prev 0.7%) 11:45 am St Louis Fed’s Poole Speaks
The dollar is up across the usual flurry of Fed inflation talk is seen cementing the pricing of at least 75-bps of Fed tightening in the next 3 months, which may not add new luster to the US currency. Hawkish remarks from the Bank of Japan and the European Central Bank are also becoming part of the uniform rhetoric.

Richmond Fed’s Jeffrey Lacker is the latest central bank US central bank official to express his inflation concern, especially after the prices paid component of the Philly Fed’s business survey hit a 25-year high. Neither Lacker nor William Poole—who will speak later this morning is a voting member at this year’s FOMC.Crude oil prices remain at their 2-week low just above $60 per barrel as US oil reserves are being replenished by emergency imports in response to last month’s hurricanes which shut 2/3 of the nation’s oil output. Indications that Hurricane Wilma will miss the oil facilities in the Gulf of Mexico have helped weigh on prices. This week’s 4.4% drop in oil accompanies a 4% drop in gold prices ($20 drop from its $480 high) in the last 7 days but the gold-oil ratio still remains near its 35-year low of 6.8.

Cable extends 2 week highs

Sterling shrugs the Q3 GDP report, continuing its late week bullishness at 2-week highs. UK’s GDP slowed to 0.4% in Q3 after a 0.5% rise in Q2 in line with most economists’ forecasts. Annual growth edged up to 1.6% from a 12- year low of 1.5%. Total output from industrial production fell 0.6% per cent, while the 0.4% increase in manufacturing was more than offset by a 6.8% drop in mining. Chancellor Gordon Brown downgraded this year’s growth from as high as 3.5% to 2.5%. Sustaining sterling however, is yesterday’s faster than expected retail sales growth in the month ending in September, and the lack of dovish discussions in the minutes of this month’s Monetary Policy Committee meeting.
Cable pulls back from its $1.7786 high hit after the GDP figures, eyeing interim support at $1.7720. Subsequent support stands at 1.7680 followed by 1.7655—38% retracement of the bounce from the 1.7481 low. Upside starts at 1.7780, followed by 1.78.

Loony awaits sales

Loonie turns to August’s retail sales which are expected to register a 0.5% decline but a 0.6% increase when excluding auto sales. The currency broke its 3-day gains yesterday after the Bank of Canada lowered its 2006 growth forecast but any declines are limited in light of further rate hikes ahead.
The Bank of Canada raised its 2005 growth forecast 2.8% from July’s forecast of 2.7%, but lowered its 2006 forecast to 2.9% from 3.3%. It said inflation 'probably spiked above 3.0 pct in September' and would likely hold at a 3 pct pace for the rest of 2005 and the first half of 2006 before returning to the 2.0 pct target in the second half. The remarks are in line with markets’ expectations of another rate hike this year, following two easings so far this year.

USDCAD sees interim support at 1.1722, followed by 1.1680. Upside seen capped at preliminary target of 1.1790 followed by 1.1820.

USDJPY scales down gains

USDJY is set to end its 6th week on a high note, a feat not achieved since Spring 2004. But the dollar is retreating amid end of week profit-taking and lack of Friday US data. BoJ policy member Muto echoed the Bank’s message about the an expected rise in consumer prices and the need to withdraw accommodation accordingly. But we do not see any meaningful dollar retreat until Japanese outflows to foreign bonds show begin to taper off or are offset by significant equity inflows from abroad.

Japan’s service industries also helped the yen as the tertiary index, rose 1.7% in August, overshooting expectations of a 0.9% rise following a 0.8% drop.

USDJY’s symmetrical triangle has turned into a downward channel on the hourly charts whose ceiling stands at 115.40. Toppishness seen present at 115.60. Declines see testing 115.10, followed by 114.70.

Euro sets to reduce week’s losses

Euro’s bounce above the $1.20 level may be insufficient in eroding the losses of the week, but its ability to bounce back despite Thursday’s 15-point jump in the Philly Fed survey reflects resilience of the 1.19 support. ECB’s Issing reiterated the central bank’s willingness to act in the face of any accelerating signs of inflation. The Bank has already said it expects 2006 inflation to average above its 2.0% ceiling, but we should get clearer info on the Bank’s view in its upcoming official projections.

EURUSD broke out of what appeared to be a consolidation inside the 1.1950-1.2000 band. But the pair is already more than half a cent off its $1.2070 session high eyeing prelim support at 1.1970. Subsequent support stands at 1.1930. Upside starts at 1.2030, followed by $1.2060.

The dollar ended lower after a mixed set of US data, with a strong but inflationary rebound in the Philly Fed survey, and continued deterioration in the leading indicator of economic indices. The dollar did edge higher against the yen while gaining versus the loonie after oil prices fell to 15-week lows amid receding strength in Hurricane Wilma and a build in weekly gas inventories.

The Federal Reserve Bank of Philadelphia’s business conditions index, jumped to 17.3 in October from 2.2, nearly recapturing the 17.5 figure in August. The report showed broad-based signs of strength, but with soaring inflation. The prices paid index soared to a 25-year high at 67.6 from 52.7 while the new orders index hit a 6-month high at 18.6 from -0.5. The employment index rose to a 10-month high at 17 from 2.7. Interestingly, a long term chart of the Philly Fed survey would show a declining trend with lower highs and lower lows indicating a broadening weakness despite the short-term recoveries.

The leading indicators index fell 0.7% in September following a revised 0.1% decline, showing an unprecedented 8 monthly declines in the past 9 months. The largest negative contributor amid the 10 components of the index was the weekly initial jobless claims, which accounted for a 0.8% decline, followed by consumer expectations, real money supply and manufacturers' new order.

On the jobs front, initial jobless claims fell 35K last week to 355K while the 4-week average dropped to 376K from 396K. Claims for the week ending Oct. 8 were revised slightly upward to 390,000. About 13% of last week’s new claims were estimated to emerge from Hurricanes Katrina and Rita.





USDJPY consolidates

Bank of Japan Governor Fukui issued some balanced remarks today reiterating the Bank’s willingness to maintain the currency quantitative easing monetary policy until consumer prices enter positive territory. But Fukui also reiterated the possibility of inflation becoming positive by end of the year. The Bank of Japan's regional branch managers affirmed the latest 4 monthly upgrades by the Policy Board on the economy when six out of nine managers upgraded their individual economic assessments from the previous meeting in July.

The hourly chart of USDJPY shows the pair confined in a symmetrical triangle whose ceiling stands at 115.55-60 and support 115.45-50, suggesting narrow consolidation and indecision by traders. The lack of data tomorrow is unlikely to trigger any significant moves. Resistance starts at 115.75-80, followed by 116, with downside stabilizing at 115.20, backed by 114.90.

Cable boosted by sales, turns to GDP

After being fuelled from positive MPC minutes, sterling stole more gains from the data. Retail sales rose 0.7% last month, more than twice expectations following a flat reading the prior month, fuelling positive sentiment ahead of Friday’s release of Q3 GDP. Nonetheless, the three-monthly growth in retail sales stood at the lowest level since May, while the annual growth of the 3-month average was the weakest in 9 years.

Overall the report could suggest a bottom in sales weakness and could help sustain sterling especially following encouraging remarks from the Bank of England’s MPC. The minutes of the October meeting revealing the Committee had discussed rate hikes in the event of a continued increase in energy prices. This would disrupt sterling bears who have priced in at least 2 more rate cuts.

Tomorrow’s Q3 GDP release is expected to show a 1.6% rise y/y from 1.5% and a 0.4% q/q from 0.5%.

Cable is set to enter its second weekly gain for the first time in a month as it hovers around the $1.77 figure. Breaking the 1.7685 trend line resistance, cable sees pressure at the Oct 16 high of $1.7728, a break of which sees $1.7750. An upside surprise in Q3 GDP i.e. above 1.6% could see GBP testing 1.78. Support starts at $1.7630, followed by $1.76.

Euro redresses after Philly

The single currency bounced back after an initial decline following a stronger thane expected Philly Fed survey as currency markets may be growing increasingly apprehensive with sparing signs of inflation accompanying the US data.

Focus is shifting to the emerging tensions between the European trade unions and the ECB regarding the subject of pay hikes and interest rates. European Trade Union Confederation’s Hoffman said today that it is “absolutely inappropriate” for the central bank to urge wage restraint and a rate hike in response to higher wage settlements would be “stupid”. European Trade Union Confederation head John Monks threatened that his 60 million strong organization would give a "very hostile reaction" if basic rights such as collective bargaining and the right to strike were damaged. Notably, the ETUC will meet the ECB Executive Board next Tuesday. This may be a short-term negative for the euro as it threatens the prospect of potential rate hikes.

The EURUSD 2-hour chart shows a clear consolidation inside the 1.1950-1.2000 band. We see any continued gains capped at 1.2030. A breach below $1.1950 is seen limited at 1.1910. Key foundation stands at $1.1865.

4:30 am UK Sep Retail Sales (exp 0.3%, prev 0.0%) 5:00 am Aug E-12 Trade Balance (exp EUR 2.2 bln, prev EUR 7.2 bln) 8:30 am US Weekly Jobless Claims (exp 365K, prev 389K) 10:00 am Sep Leading Indicators (exp -0.5%, prev -0.2%) Oct Philly Fed Index (exp10.0, prev 2.2) 1:10 pm Atlanta Fed's Guynn Speaks 7:00 pm Richmond Fed’s Lacker Speaks 7:50 pm Japan’s Aug All Industry Index (exp 0.8%, prev -0.8%) 7:50 pm Japan’s Aug Tertiary Index (exp 0.9%, prev -0.8%)

The dollar is trading mixed, awaiting a round of US data, following yesterday’s barrage of hawkish remarks from Federal Reserve officials. A higher than expected Chinese Q3 GDP sustained expectations of a Q4 revaluation but did little to lift the Japanese currency against the dollar.

Going back to data mode, this morning’s main data releases will comprise the Sep leading indicators index—expected to show the 7th monthly decline in the past 9 months and the Oct Philly Fed index—expected to stage an 8-point bounce following the 15-pt drop in September. Aside from watching the New Orders Index which collapsed to -0.5 from 19.8, traders will also scrutinize the prices paid index which doubled to 52.7. This combination of slumping activity and rising inflation has been throughout the manufacturing surveys, but has not been reflected in the Fed’s rhetoric.





Yen unaffected by Chinese GDP

China's much anticipated Q3 GDP 9.4% from a year earlier after a 9.5% in Q2, beating estimates of a 9.2% increase. The economy expanded 9.4% in the first 9 months, and averaged 9.5% for the past two decades. Consumer demand and investment in coal mines and railways were the principal contributors. The growth occurred despite the September slowdown in exports to 25.9%, which was the smallest since January 2004.

The report would have helped the yen as it would mean that the Chinese overheating has not cooled, thereby, justifying a subsequent yuan revaluation against the dollar. We remind you that the revaluation of last July occurred after a faster than expected Q2 GDP release a week earlier. Similalry, just like in October 2004 when China raised interest rates about 2 weeks following a strong Q3 GDP, we may see a subsequent revaluation sometimes in November.

Nonetheless, reports of Japanese life insurers planning to add on to their foreign bonds in the H1 of the fiscal year of 2005, and reports of others reducing the portfolio of their hedged foreign bond portfolio along with the increase of their unhedged bonds. An increase in unhedged Japanese holdings of foreign bonds has more of yen negative impact as it is not offset by yen buying.

USDJPY cools off its 115.97 in NY trade, drifting in the 115.50s. Support stands at 115.30 and 115. Today’s Philly Fed index should be key and a figure weaker than 6 or 5 would make for a disappointment and further intensify the growth issue. Upside resistance starts at the 116 figure, which has served as key support as well as resistance. Subsequent resistance follows at 116.40 and 116.73. The Japanese currency will look for renewed strength on Thursday with release of Industry indices data.

Cable awaits retail sales

After a 2-cent rally following the release of less dovish than expected MPC minutes, sterling turns to September retail sales expected up 0.2% m/m from flat and flat y/y from the previous 0.8%. The report follows an array of weak data, but Tuesday’s high inflation rate is material enough in stabilizing market expectations for a rate cut.

Cable drifts around the $1.7620s, and could be set towards the preliminary support target of $1.7570, followed by $1.7530. Interim resistance stands at 1.7630,followed by the trend line resistance of $1.7675. Subsequent resistance seen standing at the Oct 16 high of $1.7728.

Euro turns to US surveys

The euro seems to have exhausted its ability to react to the Fed’s hawkish anti-inflation rhetoric and shift focus to the LEI and Philly Fed. We see the pair reacting to the former in the event of at least a 0.5% drop, but some forecasts extend as low as 0.8%. The more interesting survey will be the Philly Fed survey since it is relatively shielded from last month’s Hurricanes in the Southeast. Should the survey fail to recover as expected from its15-point decline in September, the euro could obtain a leg up above the $1.20 figure. A breach above the $1.20 figure requires testing the $1.2030 target. Support starts at $1.1950, followed by 1.1925-30.