US ISM Non-manufacturing data on tap today. Is GBPUSD headed for a big sell-off

Yesterday's Bank of Canada cut sees USDCAD pushing higher. GCC summit avoids the USD depegging issue completely for now.

MAJOR HEADLINES – PREVIOUS SESSION
Overnight developments:

• The major GCC summit members announced they will push for a currency union by 2010.
• US Weekly ABC Consumer Confidence declines to -24 from -21 last week
• Australia RBA leaves rates unchanged at 6.75% as expected
• Australia Nov. AiG Performance of Services Index rose to 56.4 from 53.2 in Oct.
• UK Nationwide Consumer Confidence dropped to 86 vs. 94 expected
• Australia GDP was out at 1.0% QoQ as expected, but 4.3% vs. 4.8% expected YoY after a downward revision to the previous quarter's data

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

• UK Nov. HBOS House Prices (0800)
• EU ECB's Trichet to speak (0830)
• EU Nov. EuroZone and member country Services PMI (starting 0845)
• UK Nov. Services PMI (0930)
• EU EuroZone Oct. Retail Sales (1000)
• UK Nov. BRC Shop Price Index (1020)
• US Nov. ADP Employment Change (1315)
• US Oct. Factory Orders (1500)
• US Nov. ISM Non-manufacturing (1500)
• US Weekly Crude Oil and product inventories (1530)
• US Secretary of Treasury Paulson to speak on China (1645)
• NZ RBNZ Official Cash Rate announcement (2000)
• Japan Nov. Machine Tool Orders (0600)

Market Comments

Overnight we saw the carry trades continuing their rebound from yesterday. The remarkable divergence in fixed income markets (which are suggesting near panic) and equity markets (reasonably stable after recent rally) continues for now, but we wonder how long this can last. One would expect that either treasuries need to see a big sell-off, or equities do. In the case of the former, this may be a bit USD positive as the volatility has been much higher in US rates and any rally in yield could therefore outpace rallies seen elsewhere and ease some of the pressure on the USD from a rates perspective. In any case, FX seems not to have the finger on the panic button as the JPY crosses are back higher again overnight. One wonders whether a short term USDJPY call, strike 111.50 might be an interesting contrarian call to tuck into ones portfolio. With the deleveraging into year-end going on out there, a JPY sell-off may not be what the market wants to see and could see a squeeze.

The GCC summit is now behind us, and leaves us with no resolution on the USD depegging issue, as no statement was made on this issue. Apparently, there were signs of discord, as the UAE ( in favor of depeg) was at odds with Qatar and Saudi (who would like to keep the USD peg for now). Instead, the summit focused more on political issues and the only announcment made relating to currencies was that the GCC powers would push for a currency union in 2010.

The Bank of Canada came through with the 25 bp cut that we, and about half of the market, were looking for yesterday. If energy prices remain under pressure in the US, USDCAD could continue higher - with the next interesting level of resistance at the old low around 1.0340. The RBA kept rates unchanged as everyone expected overnight, but the guidance was more dovish than expected as the RBA's Stevens said "the current stance on monetary policy should be maintained." This would seem to remove the prospects for any tightening going forward. As well, the RBA's statement (which it normally does not release, so it had particular significance) indicated that it expected inflation to remain contained due to credit market conditions.

Today we see the Services PMI for EuroZone countries and for the US. As the bulk of the US economy is services-driven, we should focus on this number to see how much it agrees with the panic levels we're seeing in fixed income markets. The ADP employment number is also interesting, as we stress again that the risks of an ugly employment report on Friday are high.

Tomorrow we have the very key BOE meeting and the ECB meeting as well. Trichet needs to come out dovish to stem the strength in EUR - more on this front tomorrow.

Charts: GBPUSD and EURSEK

GBPUSD: GBPUSD is headed back to what looks like a very critical 55-day SMA (in red) and it would seem that a move below here and the rising trendline could have serious implications for further downside. Also note the head-and-shoulders like formation with the neckline around 2.0420. A 50-bp cut from the BOE tomorrow could seal the deal, though the market has only priced in high odds of a 25 bp cut so far.

EURSEK: Although we have had some bearish data out of Sweden and the Riksbank was out yesterday with rather dovish guidance that has fully removed the prospects of any further tightening (Riksbank rate at par with ECB's), the SEK has been beaten far too low. Part of the weakness has been on the recent risk-aversion front, but with risk appetite not showing signs of further panic, and a bit of a technical turnaround here in EURSEK at key levels, we wonder if this pair might adjust a good deal lower in the coming sessions. A dovish ECB tomorrow might help. Note the tendency of EURSEK to find resistance in the 9.4000 area. Watch the 9.3500/3400 area as this is the first big support area of interest.