Pivotal day ahead - Fed guidance is the key for USD direction. US Q3 GDP also on tap

Dovish BoJ pushing JPY weaker again. CAD fails to respond to huge sell-off in crude oil

MAJOR HEADLINES – PREVIOUS SESSION

Overnight developments:

• US Weekly ABC Consumer Confidence out at -15 vs. -17 previously
• Australia Building Approvals in September rose 6.8% v. 1.0% expected
• Japan Labor Cash Earnings fell -0.5% vs. +0.2% expected YoY in Sep. Overtime earnings rose 1.4%
• New Zealand NBNC Business Confidence was -12.9 in Oct vs. -26.5 in Sep
• BoJ Target remains steady at 0.50%
• Japan Housing Starts fell -44% YoY in Sep vs. -31.2% expected and Construction Orders fell -16.3% vs. -15.0% expected.
• UK Nationwide House Prices rose 1.1% vs. 0.2% expected
• Germany Retail Sales rose 2.3% vs. 0.8% expected MoM, but fell -2.2% YoY vs. -0.6% expected
• France Producer Prices rose 2.7% YoY vs. 2.5% expected

THEMES TO WATCH – UPCOMING SESSION

Key event risks today:

• Norway Retail Sales (0900 GMT)
• UK GfK Consumer Confidence (1030 GMT)
• Switzerland KOF Swiss Leading Indicator (1030 GMT)
• US Q3 GDP Preliminary and related releases (1230 GMT)
• Norway Norges Bank Rate Announcement (1300 GMT)
• US Chicago PMI (1345 GMT)
• US Construction Spending (1400 GMT)
• US Weekly Crude Oil and product inventories (1430 GMT)
• FOMC Rate Decision (1815 GMT)
• Australia Retail Sales (0030 GMT)
• Australia Trade Balance (0030 GMT)

Market Comments

Considering the speculative frenzy that the Sep 18th 50-bp cut by the Fed unleashed, today's announcment, and especially the accompanying statement, seem to be easily as important as the September announcement. The meeting will help the markets to discern whether the last 6 weeks' moves across markets will be given the green light for even more to come, or whether the Fed will attempt to throw up an obstruction in the form of a hawkish statement, or even more dramatic, a "no cut" rather than the 25 bp cut that is 90%+ priced in.

As we outlined yesterday, there is a credible chance that the Fed will not move on rates this time around, considering the inflationary threat that a struggling dollar and oil at 90 USD/bbl represent, not to mention the further contraction in many risk spreads from the levels at the last meeting, when the August credit crunch was so fresh in everyone's minds. If the Fed cuts 25 bps with no real effort to counter the markets assumption that further Fed easing lies immediately ahead could trigger yet another sharp move down for the USD. We give 25%+ odds of no cut, 50%+ odds of a cut with new rhetoric in the monetary policy statement that will dramatically decrease the market's certainty of future Fed cuts, and a less than 25% odds of a cut with little additional worry about inflation and market developments expressed. The first two scenarios would likely put a short term floor under the USD and could even trigger a sharp rally in the USD within the overall bearish USD trend.

The FOMC announcement comes on the same day that we see the Q3 GDP numbers from the US - a reading at or above the expected 3.1% level may make it tough for the Fed to be too dovish - though keep an eye on the Personal Consumption reading - which was only +1.4% last time around, but is expected at a robust 3.4% for Q3.

The UK Nationwide House Price release this morning showed house prices rising at 1.1% on a month-on-month basis, the strongest reading for some time for this survey. This obviously tore the rug out from under the bearish GBP view (to which we adhere) for at least the shortest term for data watchers. But, as an FT article out yesterday described, measuring house prices is not an easy thing to do, and the major UK surveys use a variety of methods. From looking at these surveys, it would appear that the RICS price survey is the leading indicator, and it has been turning down since almost a year ago, with the survey turning firmly into negative territory in August, with a terrible -14.6% reading (meaning 14.6% more of those surveyed saw falling prices vs. rising prices). This survey has consistently lead the Nationwide survey by many months without exception since the early 1990's, so we wouldn't pin much significance on the Nationwide data, as the plummeting RICS data means that the Natinowide reading will more than likely turn down very soon in coming months.

SNB's Roth was out yesterday once again expressing little sympathy with the market's pricing of CHF. He clearly stated that any feed through of a weak CHF on import prices has clear implications. CHF strengthened quickly in response and EURCHF may have performed a key reversal - see chart below.

AUD looks interesting here and has begun to lag other currencies just a bit as gold and other metals have failed to etch new highs in sympathy with the weak USD. Copper is trading close to 6-week lows, in fact. Further weakness in metal prices and any sell-off in equities, if it materializes, could be a double whammy for AUD and trigger a sell-off in the likes of risk appetite crosses like AUDCHF. Australia also releases its latest Retail Sales data tonight.

Speaking of gold, it's very interesting to see gold off 14 dollars/oz. from recent highs while the USD made new lows this morning. These two instruments have normally been very tightly correlated - which is the leading indicator?

The Bank of Japan was dovish overnight, and gave little reason for the market to want to buy JPY in this environment, with Fukui even saying that the downside risks for Japan are growing and the forecast for YoY Core CPI at year end at 0%. Again, however, we stress that the JPY is more of a risk appetite play and that it could find strength on any dramatic hawkish developments from the Fed and any related sell-off in EM equities and further weakness on the opposite development. USDJPY is banging at key resistance as this is going to publication - see chart below.

Very strong retail sales from Norway as this is being written - does this raise the risk of a Norges Bank move today after all? What about the 4-dollar drop in crude yesterday? EURNOK looks ready to move in any case, with 7.7400 and 7.6800 the trigger areas in the sessions ahead. Watch for future guidance on rate policy. EURSEK failed to follow through lower despite hawkish guidance - but is still stuck in a range defined by 9.1700 and 9.2300. The reaction is a significant disappointment for SEK bulls.

Charts: USDJPY and EURCHF

USDJPY looks interesting as it pushed above 115.00 today. This has been a key flatline resistance area, as well as representing the first Fibo retracement (0.382) at 115.03. A bit higher, the 55-day SMA looms at 115.46 - a strong close above there, and it looks like the pair could be consigned to the wider range again back toward 118.00. Bears would need to see an immediate strong rejection of this move in the sessions ahead to gain hope of the recent downtrend retrenching.