Speculation that a Fed cut is not a done deal may put a floor under the USD ahead of tomorrow's FOMC rate announcement

SEK moving stronger on 25 bp Riksbank hike and strong Retail Sales.

MAJOR HEADLINES – PREVIOUS SESSION
Overnight developments:

• Article by noted Fed watcher Greg IP of the Wall Street Journal speculates that a 25 bp cut by the Fed tomorrow is not a sure thing 
• UBS announced much worse than expected results in its latest earnings report 
• New Zealand Building Permits dropped -8.3% in September from August levels
• Japan Jobless rose to 4.0% vs. 3.8% expected in Sep. Overall Household Spending rose 3.2% YoY vs. 1.4% expected
• Japan Small Business Confidence Index was out at 47.8 vs. 49.1 expected

THEMES TO WATCH – UPCOMING SESSION

Key event risks today:

• Sweden Riksbank Rate Announcement (0830 GMT)
• Sweden Sep Retail Sales (0830 GMT)
• US Aug S&P/CS Home Price Index (1300 GMT)
• US Oct Consumer Confidence (1400 GMT)

Market Comments

The USD found a few buyers overnight after seeing fresh lows yesterday, as noted Fed watcher Greg Ip's WSJ article overnight speculated that the expected 25 bp rate cut is not a done deal. This could actually be a plausible scenario considering the massive speculatory explosion the Fed set off when it cut rates 50 bp on September 18. At that time, the Fed was fretting about the trajectory of growth and was moving inflation worries to the background. Since then, equities (an expression of future earnngs potential) have touched new highs, the USD has crumbled over 3%, and oil has rocketed 20% higher - with the last week seeing especially sharp gains. So the Fed could plausibly weight these latter developments heavily enough to vote for a pause. The trick here is that the Fed won't want to create an equally violent reaction to the action sparked by the Sep 18 decision if it disappoints market expectations. So perhaps the highest odds scenario is that the Fed does cut, but injects firm, hawkish language that gives the Fed maximum flexibility going forward. A no-go would obviously see a sharp, strong USD, while the "we cut, but...." scenario could still mean reasonable USD support for the short term as the market tries to recalibrate as it would have to consider increased uncertainy in the future rate trajectory. In any case, it would appear that the USD sellers could see headwinds for now on either of these two scenarios. The last scenario is that risk appetite is so gluttonous at present that the excess liquidity simply trumps all and the recent themes continue unabated - just as the market has miraculously shrugged off the implications of 90-dollar+ oil. This last scenario we give lower odds, but can't rule out completely.

The stronger than expected UK Lending data gave little hope for the GBP bears, as GBP gained sharply against its European peers and the bearish GBP scenario appears delayed for now once again.

Yesterday, we mistakenly wrote that Norges Bank is expected to raise rates on Wednesday - in fact, they are expected to keep rates steady at the 5.00% level after having raised them to that level in late September - apologies for any confusion this may have caused. A rate hike this time around to 5.25% from Norges Bank has in fact only very slim odds.  As we discussed, EURNOK could be very vulnerable to sharp upside on any risk reduction and any sharp sell-off in oil prices. The last 10-dollar rise in oil, for example, has actually seen EURNOK rise from the 7.65 area to 7.72

The Swedish Riksbank hike news is breaking as this is being written and EURSEK is seeing the expected volatility - the strong Retail Sales numbers support the bearish case for EURSEK. Consider again that Swedish short rates are now in parity with Euro rates. 9.1750 look like the key trigger area for a downside view.

Charts: EURAUD and GBPUSD

EURAUD is approaching interesting key long term levels around 1.5500 that have offered support for the last several years. A "business as usual" market with strong equities, and especially strong metals prices from Chinese demand could see the pair probing the 1.5000 area eventually. If the EM bubble shows signs of popping, on the other hand, we could see a sharp move higher. Note the volatility in this pair on the credit crunch in August - after trading  below 1.5500 in July, 1.7400 was briefly touched in August.

GBPUSD - touched 25+-year highs again this morning. Is this a double-top scenario or a sign that we're headed to a new wave of GBPUSD strength? Again, considering our "US situation is a harbinger of the eventual UK situation", it's tough to argue for dramatic new highs here. Let's see how things look on the other side of the Fed announcement.

Note: the support/resistance levels used in the matrix’s of this document are levels derived from yesterday high, low and close. Reference in the text to other support/resistance levels will occur.