The dollar pared back some of its gains on last Friday. Recall that the dollar strengthened significantly across the board on the strong US consumer sentiment and the bright side of US September retail sales report.

US Empire manufacturing survey rose unexpectedly from 13.8 to 22.9 in October, beating the forecast of 11.0. In spite of the strong figure, the dollar was able to sustain its gains, since last Friday's rally is overdone and investors are cautious about buying the dollar before key US inflation data.

This week's economic calendar is pretty heavy with a lot data from all over the world. The Fed's favorite inflation measures, US PPI and CPI, will be released on Tuesday and Wednesday respectively. US September building permits and housing starts, which are expected to reflect US housing markets slow-down, are both due on Wednesday. Also markets are paying attention to a bunch of Fed officials' speeches this week for more clues on the Fed's next move.

EURUSD will face interim resistance at 1.2535, followed by 1.2570 and 1.26. Additional ceilings will emerge at 1.2630, backed by 1.2660 and 1.27. Support starts at 1.25, backed by 1.2490, 1.2460 and 1.2430. Subsequent floors are eyed at 1.24.


CAD Soft on Weak Manufacturing Data

Canada manufacturing shipments posted a surprisingly 0.3% decline in August, well below the previous months' reading of 0.8% and the consensus for a 0.5% increase. After the release of the weak figure, the Canadian dollar gained initially but dipped soon.

USDCAD will face resistance at 1.1390, followed by 1.14 and 1.1440. Additional ceilings will emerge at 1.1480, backed by 1.15 and 1.1550. Support starts at 1.1350, backed by 1.1320, 1.13 and 1.1280. Subsequent floors are eyed at 1.1250, backed by 1.12.


Yen Gains as Russia Central Bank Increases Reserve Holdings

The yen rose after Russia's Central Bank said it had started adding the Japanese yen to its foreign exchange reserves. As Russia's reserves are the world's third largest reserves, this means a lot yen buying. The dollar dropped to a one-week low against the yen and the euro fell to a two-week low versus the yen after Russia's announcement.

The market will look to Bank of Japan September meeting minutes due this Wednesday to feel when BoJ is going to raise its ultra low interest rates from 0.25%.

USDJPY encounters interim resistance at 119.40, backed by 119.80 and 120. Subsequent ceilings will emerge at 120.50, followed by 121. On the downside, support begins at 119, followed by 118.70 and 118.40. Additional floors are eyed at 118, backed by 117.50 and 117.

At 6:00 AM ECB President Trichet Speaks (exp n/a, prev n/a) At 8:30 AM US October Empire Manufacturing Survey (exp 11.0, prev 13.8) Canada August Manufacturing Shipments m/m (exp 0.5%, prev 0.8%) At 12:00 PM Fed Chairman Bernanke Speaks At 1:30 PM Fed’s Poole Speaks At 3:40 PM Fed’s Yellen Speaks At 7:50 PM Japan August Tertiary Index (exp 0.8%, prev -0.2%)

The market maintains its dollar positive tone heading into the week, supported by the shift in sentiment in Fed policy outlook. Recent data has reinforced the notion of a soft landing in the US economy and that perhaps the weakness in the housing market may be isolated. Expectations for when the FOMC may move to an easing stance have shifted from Q1 2007 to later in the year as a result of a more hawkish tone used by Fed speakers.

In the Monday session, several key FOMC members are scheduled to speak including Fed Chairman Bernanke, Fed Board members Poole and Yellen. San Francisco President Janet Yellen has placed much emphasis on the upward risks of inflation and will likely maintain her stance when she speaks Monday afternoon. However, St Louis Fed President William Poole triggered a small bout of dollar selling when he said that while he remains an inflation hawk, he currently envisions greater risk stemming from growth and would advocate policy easing if the data warrants. Chairman Bernanke’s comments will likely echo a similar tone as his previous speeches; highlight the need to remain wary against inflation, essentially leaving the door open for further tightening if deemed necessary.

The key US highlights of the week will factor into market expectations of Fed moves, with the release of September producer price index and consumer price index, due out on Tuesday and Wednesday, respectively. The September PPI is forecasted to drop to 1.7% from 3.7% a year earlier, while the monthly reading is seen dropping by 0.6% compared with a 0.1% gain previously. The core figures are expected to edge up on an annual basis to 1.0%, from 0.9% and the monthly core PPI is forecasted to reverse the 0.4% decline, up 0.2%. Meanwhile, September core CPI will likely have edged up to 2.9% from 2.8% in the previous year and unchanged at 0.2% on a monthly basis. The headline figure however, is seen dropping off sharply at 2.2% from 3.8% a year earlier and post a 0.3% decline compared with 0.2% in the prior month.

An unexpected uptick in inflation will result in Fed officials maintaining their hawkish rhetoric, thereby further supporting the dollar against the majors. Additionally, with the US equity rally hitting record levels, foreign capital inflows have garnered renewed demand for dollars. Tuesday’s August net foreign security purchases (TICS) data is seen reflecting the surge in capital inflows, with an expected jump to $56.0 bln from a month earlier at $32.9 bln. Traders will keep a close eye on the TICS data as well as its current trend to gauge dollar direction.

The dollar strengthened after the release of US September retail sales report. The greenback initially slipped close to session low at 1.2570 versus the euro, but it quickly rallied to 1.2512. US retail sales fell surprisingly in September as gasoline sales posted a record drop. Core retail sales, excluding auto sales, dropped 0.5%, below the forecast for a 0.2% rise. However, the sharp decline in overall retail sales was mainly due to a 9.3% drop in gasoline sales. Monthly average gas prices declined from around $3 in August to $2.5 in September. Excluding gasoline sales, retail sales rose 0.6%.

The University of Michigan consumer sentiment released later rose from 85.6 to 92.3 in October, well above the forecast for 86.0. The dollar extended its gains as the strong consumer sentiment reinforced the view that US economy is steady and the Fed may not need to cut rates as speculated before. The euro dipped below 1.25 versus the dollar for the first time in three months.

The Fed Beige Book released yesterday showed the growth in economy is generally moderate or mixed but wage pressure is seen. Chicago Fed President Moskow said further interest rate rises may be needed to curb inflation pressures.

EURUSD will face interim resistance at 1.2530, followed by 1.2570 and 1.26. Additional ceilings will emerge at 1.2630, backed by 1.2660 and 1.27. Support starts at 1.25, backed by 1.2480, 1.2460 and 1.2430. Subsequent floors are eyed at 1.24.


Yen Weakened vs Dollar

The yen edged up slightly after Bank of Japan Governor Toshihiko Fukui said after the policy meeting that another rate hike this year could not be ruled out. But he reiterated that rate increases would be gradual. Bank of Japan left interest rates unchanged at 0.25% on its policy meeting as expected.

Gains in the yen may be limited as carry trading is still favored by investors given the huge interest rate differential.

USDJPY encounters interim resistance at 119.85, backed by 120 and 120.50. Subsequent ceilings will emerge at 120.70, followed by 121. On the downside, support begins at 119.30, followed by 119 and 118.70. Additional floors are eyed at 118.40, backed by 118 and 117.50.

At 2:00 AM Bank of Japan Monthly Report At 8:30 AM US September retail sales ex-autos (exp 0.0%, prev 0.2%) US September retail sales (exp 0.2%, prev 0.2%) At 9:45 AM US October University of Michigan Consumer Sentiment (exp 86.0, prev 85.4)

The primary factor driving foreign exchange movements continues to be sentiment over the outlook for global interest rates. The dollar has been supported throughout the week amid market reassessment of when the FOMC may shift to an easing stance, with the timing of any such move likely to be pushed back toward the latter part of 2007. Lingering caution against inflationary pressure has kept the dollar bears in check, while the bulls have remained reluctant given uncertainty over the extent of the US economic slowdown as well as any secondary effects from the declining housing market.

Markets await a clearer picture on the state of the US economy to more accurately gauge the timing and direction of any Fed rate moves. Although comments from FOMC officials have maintained a more hawkish tone in recent days, some have placed more emphasis on the slowing economy over inflation.

Earlier in the session, St Louis Fed President Poole said that risks to inflation have receded in the last 8-10 weeks while dangers to growth and jobs have augmented. He also said that it still was no guarantee the worst was over in the housing market, countering previous suggestions from former Fed Chairman Greenspan. Poole’s concerns lay with further slowdown in economic activity, saying there was a strong likelihood that US productivity growth and GDP potential will be revised lower. He added that it was necessary to maintain an open mind that inflation might fall faster than expected. The most important comment though, was Poole’s acknowledgement of policy easing. He said if all economic news were to break to the downside, he would advocate rate cuts. It is worth noting that Poole will be a voting member at the upcoming FOMC policy meeting in October.

The immediate market response to Poole’s comments and acknowledgement of possible rate cuts was a dip lower in the dollar, relinquishing some of its gains versus the majors. However, the selling was tempered when Chicago Fed President Moskow maintained his hawkish tone saying further rate hikes may still be necessary to ease inflation. He deems high inflation risks to be greater than the risks to low growth. Nevertheless, Fed decisions will hinge on incoming economic data – with his expectations that growth will likely run somewhat below 3% over the coming year or so.

Friday’s retail sales report will be essential given markets’ need to discern any spillover effects the slowdown in the housing market has had on other aspects of the economy. A particularly upbeat report will reinforce the notion that the worst in the housing market may be behind us and that the Fed can possibly engineer a soft landing in the US economy. However, on the other side of that coin, a disappointing retail sales report will confirm suspicions that the economic slowdown has filtered through other parts of the economy and raise fears that if the Fed does not preempt further declines in the economy through monetary easing, the US slowdown runs the risk of spiraling into recession.

The dollar declined slightly after US trade deficit unexpectedly widened in August. Trade deficit climbed from 68 billion to 69.86 billion in August, refreshing the historical record for a second consecutive month.

The high oil prices in August contribute to the increase in trade gap. The deficit may narrow in September and October since oil prices dropped.

Besides, US weekly jobless claims due today rose from 302k to 308k, still beating the forecast for 312k.

The Fed Beige Book released today showed consumer spending increased, and residential real estate is widely cooling down. The growth in economy is generally moderate or mixed but job growth is steady to stronger. It also said job market wage pressure is seen.

The market will focus on US retail sales and consumer sentiment due tomorrow. The University of Michigan consumer sentiment is expected rise to 86.0 from 85.4 in October.

EURUSD will face interim resistance at 1.2565, followed by 1.2580 and 1.26. Additional ceilings will emerge at 1.2630, backed by 1.2660 and 1.27. Support starts at 1.2530, backed by 1.25, 1.2470 and 1.2450. Subsequent floors are eyed at 1.24.


Yen Awaits BoJ meeting

Bank of Japan Governor Toshihiko Fukui said today rate increases would be gradual. It is widely expected that the Bank of Japan will leave interest rates unchanged at 0.25% on its policy meeting. The decision is schedule to release at 12AM EST.

The yen still face the downside risk under North Korea threat. The dollar/yen is likely to test the important psychological level at 120.

USDJPY encounters interim resistance at 119.75, backed by 120 and 120.50. Subsequent ceilings will emerge at 120.70, followed by 121. On the downside, support begins at 119.30, followed by 119 and 118.70. Additional floors are eyed at 118.40, backed by 118 and 117.50.


AUS Firm after Strong Job Report

The Australian dollar is steady above 0.75 versus the dollar today after a rally on surprisingly strong job report released yesterday.

AUSUSD will face interim resistance at 0.7510, followed by 0.7550and 0.7570. Additional ceilings will emerge at 0.76, backed by 0.7650 and 0.77. Support starts at 0.75, backed by 0.7470, 0.7450 and 0.7420. Subsequent floors are eyed at 0.74.

At 8:30 AM US Weekly Jobless Claims (exp 312k, prev 302k) August Trade Balance $-66.5 bln, prev $-68.0 bln At 10:00 AM US Fed Beige Book (exp n/a, prev n/a)

The greenback edged up further across the board in the Asian session, maintaining its buoyant tone versus the yen near its 10-month highs around 119.70 and firmer against the euro toward the 1.25-level. Helping the dollar sustain its recent gains was the release of the FOMC’s September monetary policy minutes, which reinforced comments from Fed officials emphasizing the continued need for caution against inflationary pressure.

Markets are now reassessing the possibility of a Fed rate cut in early 2007 given the FOMC’s primary focus to contain inflation. This supports the tone delivered in speeches from Fed officials tempering market expectations for an imminent ease in policy. Furthermore, recall that former Fed Chairman Greenspan expressed confidence that the worst in the housing market is already behind us fuelling anticipation that current Fed Chairman Bernanke can successfully engineer a soft landing.

The Fed has acknowledged the declines in the housing market, but it remains to be seen whether there have been further spillover effects onto other aspects of the economy. Potentially key will be Friday’s retail sales report, with forecasts calling for an unchanged reading for September at 0.2%, while the excluding autos report is seen at 0.0%, down from 0.2%. An upbeat showing in retail sales would support a soft landing scenario and bolster the greenback further against the majors.

In the session ahead, traders will focus attention on the August trade deficit, which is forecasted to decline slightly to $66.5 bln from July at $68.0 bln. Also, due out are weekly jobless claims, seen edging up to 312k from 302k and the Fed’s Beige Book at slated for release at 10:00 am.

Yen Trades near Lows

The yen maintained its softer tone against the dollar, steady near its lows of the year around 119.75. Earlier in the session, Japan’s August unadjusted current surplus was up 22.2% to 1.4769 trillion yen. The unadjusted trade surplus rose 36% to 312.4 bln yen. All eyes will turn to tomorrow’s BoJ monetary policy announcement and subsequent monthly report. The Bank is unlikely to lift its benchmark lending rate tomorrow, but may signal the possibility to do so. Bank of Japan Governor Fukui spoke to the Budget Committee earlier, stressing the BoJ’s desire to adjust rates carefully and gradually while examining economic growth.

Aussie Firms on Jobs

The Australian dollar edged up against its US namesake in early Thursday trading, driven by an upbeat labor report. Jobs growth in September sharply exceeded forecasts for a 5k gain, instead shooting up to 31.4k from August at 23.4k. The unemployment rate also unexpectedly drifted lower to 4.8%, versus expectations to remain steady at 4.9%. The upbeat report propped the Aussie higher to 0.7465 in the Asian session.