US Dollar, Japanese Yen Rally Further as Risk Aversion Reigns Ahead of US GDP Report on Thursday

US Dollar, Japanese Yen Rally Further as Risk Aversion Reigns Ahead of US GDP Report on Thursday
The US dollar and Japanese yen both dominated as stocks tumbled on speculation that expectations for a global rebound have been overstated. Economic news was mixed, as demand for US durable goods rose right in line with expectations during September, as the index of new orders increased 1.0 percent during the month, and excluding transportation, they rose by 0.9 percent. Non-defense capital goods orders excluding aircraft rose by 2.0 percent, following two straight months of contraction, suggesting that business investment is improving. On the other hand, new home sales unexpectedly fell 3.6 percent to an annual rate of 402,000 in September as median prices jumped 2.5 percent from August to $204,800, suggesting that the government's $8,000 tax credit for new homebuyers isn't necessarily enough to drive demand, especially in the face of higher values.

Looking ahead to Thursday, traders will get an answer to the big question: is the US emerging from recession? The advance reading of Q3 GDP is anticipated to show that the US economy grew by 3.2 percent during Q3, which would be the first quarterly expansion since Q2 2008 and the best reading since Q3 2007. Leading indicators for GDP are a bit mixed, as ISM manufacturing signaled growth during August and September, while ISM services just barely managed to indicate an expansion in business activity in September by rising to 50.9 from 48.4. However, trade could be one of the leading drivers of improvement, as exports have risen steadily through August, helped along by a weaker US dollar. All told, any positive quarterly GDP result would likely yield a very strong reaction from the US dollar, but if the figure continues to signal a contraction in the US economy, the currency could drop sharply.

Related Articles: US Dollar Weekly Trading Forecast, US GDP, RBNZ Rate Decision to Headline Event Risk for FX Trade Next Week

New Zealand Dollar Falls Sharply with Carry Trades - RBNZ Decision Rate Decision Today
The Reserve Bank of New Zealand (RBNZ) is anticipated to leave the Official Cash Rate target unchanged for the fourth straight meeting at 2.50 percent. In RBNZ Governor Alan Bollard's last policy statement on September 10, he sounded extremely cautious on the outlook for the economy, especially because the strength of the New Zealand dollar had created additional risks. Where the New Zealand dollar ends the trading day will likely have to do with the status of one statement though: the final portion. We also saw in the last policy statement that the RBNZ maintained that it was “appropriate to continue to provide substantial monetary policy stimulus to the economy” and that they “continue to expect to keep the OCR at or below the current level through until the latter part of 2010.” However, the RBNZ announced on October 14 that it would begin "removing and consolidating some of the temporary emergency liquidity facilities put in place during the financial crisis in 2008" as conditions had improved significantly, suggesting potential for a more hawkish tone. Overall, if the RBNZ eliminates the phrase noting that they could still lower rates, the New Zealand dollar is likely to surge in anticipation of rate hikes down the line. On the other hand, if the RBNZ maintains their dovish-neutral tone, the currency could dive as interest rate expectations would take a hit.

Euro Tumbles Further as German Import Prices Fall on Currency’s Appreciation
Preliminary readings of German CPI showed that consumer prices rose a slight 0.1 percent in October, leaving growth unchanged from a year ago. On the other hand, German import prices plunged 0.9 percent in September, highlighting the impact of the euro's appreciation on shipments from abroad. All told, the data could signal additional price weakness in the pipeline, which may prevent inflation from rising in line with the European Central Bank's previous forecasts. Meanwhile, Norges Bank became Europe's first central bank to raise interest rates since the beginning of the global financial crisis, as they hiked their key policy rate to 1.5 percent from 1.25 percent. Though the move was widely expected, a comment from Norwegian central bank governor Svein Gjedrem noting that the economy has "picked up more rapidly than expected" adds to evidence that global growth has improved, but the big question is if it will continue.

British Pound Holds Above 50 SMA Despite European Commission Announcement of Northern Rock Lending Restrictions
The British pound held up against many of the majors once again on Wednesday, as GBPUSD support at 1.6259 from the 50 SMA has proven resilient. There were no major indicators on hand, the European Commission did announce that Northern Rock limit new lending and retail deposits to less than 20 billion pounds over the next three years as part of a deal for their bailout. Northern Rock said that new lending will be restricted to 4 billion pounds in 2009, 9 billion pounds in 2010 and 8 billion pounds in 2011, which is significantly less than the 29.5 billion pounds it was lending at the housing market’s peak in 2007. Such restriction may only contribute to tight lending conditions, but at the same time, demand remains low as well.

Australian Dollar Down as Consumer Prices Fall to Lowest Since Q2 1999
The Australian consumer price index for the third quarter fell to an annual rate of 1.3 percent from 1.5 percent, marking the lowest reading since the second quarter of 1999. As we saw in the recent release of Australian producer prices, import costs have come down substantially because of the sharp appreciation of the Australian dollar, and this has led to a similar cooling of broader inflation pressures. That said, Credit Suisse overnight index swaps didn’t really respond to the news, as they are still fully pricing in a 25 basis point rate hike on November 2. The Australian dollar, on the other hand, has depreciated quite a bit, falling 2 percent against the US dollar and over 3 percent versus the Japanese yen over the course of the trading day. Economic news wasn’t the only source of the move though, as risk aversion led FX carry trades and US equities alike to take a hit.

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Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com