G10 FX moves relatively subdued considering global equity panic. Commodity currencies continue to feel the heat with BoC on tap today.

JPY surprisingly quiet overnight - is it a sign of weakness, or just a little calm before the storm?

MAJOR HEADLINES – PREVIOUS SESSION
Overnight developments:

• Asian equity markets continued to nosedive, with the Hang Seng closing down -8%.
• Bank of Japan kept ratees unchanged at 0.50% as expected.

THEMES TO WATCH – UPCOMING SESSION
Key event risks today (all times GMT):

• Switzerland Nov. Adjusted Retail Sales (0815)
• UK CBI Industrial Trends (1100)
• US Secretary of Treasury Paulson to speak (1300)
• Canada Nov. Retail Sales (1330)
• Canada BoC Rate Decision (1400)
• UK BOE's King to speak (2010) 
• US Weekly Consumer Confidence (2200)
• Australia Q4 Consumer Prices (0030)

Market Comments

Global equity markets slid into outright panic mode overnight, with Asian declines even outpacing the previous day's sharp drop. The malaise spread to commodities as well, where growth fears sent some base metals futures limit down in Shanghai. This development is beginning to pressure the commoditiy currencies, particularly AUD and NZD. The Australian stock market was off 7.0% overnight, and is now down some 24% from last October's highs. We look with heavy anticipation to the US equity session today, as traders were forced to the sidelines yesterday due to the US holiday, though the major equity futures were trading. It would seem that a continued bloodbath in equities could be in the making, as commentators begin to draw parallels with the 1987 crash. If the old adage proves true that stock markets predict recessions, then we can expect a full blown recession in the US in coming quarters.

While JPY and CHF have not responded particularly to the moves overnight, we would still prefer to be long these currencies in this environment, and short the commodity currencies (the "other dollars" - AUD, NZD, CAD). The USD Is generally stronger, but we'd like to see where it is once the equity panic subsides to make a firmer call on a long term trend change. In any case, the USDJPY sell-off may still be on as a test of the huge 100 level may lie ahead.

The strong consensus is looking for for a cut from Canada at today's Bank of Canada meeting, which would take the rate to 4.00%, actually below the current US Fed Funds rate at 4.25% , even if it won't remain that way for long, as the market has almost fully priced in a 75 bp easing for the February Fed Funds future. The 1.0340 old low area is providing some resistance to the move higher so far, but if oil remains under pressure and the Canada retail sales report is weak, the pair may squirt quickly higher towards 1.0500 in the short term and even more further out. Interestingly, 1.0340 is also right at the 200-day moving average, which the pair last crossed in April of last year. The highest beta plays are likely to be the commodity currencies vs. the JPY.

Be careful out there - this market is scary stuff.

Chart: EURAUD

EURAUD: We choose to look at EURAUD to see how AUD is performing away from the USD and JPY. We can see that this pair has been in a range for some time, as AUD has been punished by the equity sell-off and fears of a global growth slowdown, while EUR has been pressured by a shift in the rate view and anticipation of its "recoupling" with the global economy in the event of a slowdown. But in these market conditions, we would expected declines in AUD to outpace those for the EUR, so we would look for a break of the range to the upside, with a move to 1.7500 possible in coming weeks. Short AUD/CHF is a possible alternative to this trade, though it will likely be a higher volatility trade in this environment.