The Dollar rose on haven flows in Asia but the move may be short-lived if another improvement on the US data front offers renewed support to risk appetite.

Talking Points

• Forex Traders May Sell US Dollar if Firm Richmond Fed Print Buoys Risk Appetite
• Cycle-Sensitive Names in Focus on Earnings Docket as Markets Refine Growth Bets
• Dollar, Yen Rise on Haven Flows After Moody’s Downgrades Five Spanish Regions

Another quiet day on the European economic data front keeps the focus on US event riskas traders weigh the ability of a cautious pickup in North America to offset sluggish performance in Europe and Asia. The Richmond Fed manufacturing activity gauge is in the spotlight. Expectations call for an improvement in October, hinting the positive cues seen in September’s releases are carrying forward.

As we discussed in our weekly Dollar forecast, forex traders are likely to respond to US economic data in terms of its implications for market-wide sentiment trends. With that in mind, a firmer Richmond Fed print may boost risk appetite, weighing on greenback against most of its top counterparts (with the notable exception of the Yen) as haven-seeking capital flows dry up. Needless to say, a disappointing outcome is likely to produce the opposite dynamic.

Turning to the corporate earnings docket, cycle-sensitive names with a global footprint including United Parcel Service, EI du Pont de Nemours and Ryder System are in focus as markets continue to fine-tune their global growth outlook. Guidance from these companies is likewise likely to be interpreted in terms of their implications for the global recovery as investors fine-tune broad-based growth expectations. S&P 500 index futures are pointing lower in late Asian trade, hinting at a lean toward risk aversion heading into the European session.

The US Dollar and Japanese Yen rose against the majors in overnight trade as Asian stocks declined, boosting safe-haven demand. The MSCI Asia Pacific regional benchmark equity index fell 0.4 percent. The rout followed a Moody’s ratings downgrade of five Spanish regions. The Yen outperformed, adding as much as 0.3 percent on average, as prices digested the previous day’s aggressive selloff. The Japanese unit slumped 0.9 percent in the 24 hours through the closing bell on Wall Street, marking the sharpest one-day decline in seven weeks.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

— Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

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Gold may rise with the S&P 500 as economic data hints the US economy continued to improve in October. Crude oil looks to inventory figures for direction.

Talking Points

• Gold, Silver May Rise with Stocks as Richmond Fed Survey Buoys Sentiment
• Copper Technical Setup Boosts Likelihood of Bounce with Overall Risk Trends
• Crude Oil Continues to Carve its Own Path, API Inventory Report in Focus

Commodity prices continue to look toward US event risk for direction cues as traders weigh the ability of a cautious pickup in North America to offset sluggish performance in Europe and Asia. On the economic data front, the focus is on the Richmond Fed manufacturing activity gauge. Expectations call for an improvement in October, hinting the positive cues seen in September’s releases are carrying forward. Turning to the earnings docket, cycle-sensitive names with a global footprint including United Parcel Service, EI du Pont de Nemours and Ryder System are in focus as markets continue to fine-tune their global growth outlook.

On balance, a risk-supportive mix of releases stands to boost gold and silver, where prices continue to track broad-based sentiment trends (reflected in a significant correlation with the S&P 500). Copper prices are likewise positioned to take advantage of such a scenario as correlation studies suggest the influence of risk appetite is reasserting itself. Needless to say, disappointing results on the data and/or earnings sides of the equation stand to produce the opposite results.

Crude oil continues to stand aside from the broader risk-on/risk-off dynamic guiding many benchmark assets across the financial markets. With that in mind, the weekly set of inventory figures from API may prove more significant. The monthly trend has pointed to a steady build in crude stockpiles since mid-August. A reinforcement of this dynamic may apply pressure to the WTI contract as prices approach technical support (see below) and may force a breakout. Alternatively, a meaningful drop may offer a lifeline after two days of aggressive selling.

WTI Crude Oil (NY Close): $88.65 // -1.79 // -1.98%

Prices continue to consolidate above support at 87.66, the 38.2% Fibonacci expansion. Resistance is at 92.25, marked by a falling trend line established from late September, with a break above that targeting a larger downward-sloping barrier set from the February top, now at 97.90. Alternatively, a drop through support exposes the 50% level at 83.76.

Daily Chart – Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1728.50 // +6.75 // +0.39%

Prices continue inch lower as expected following the formation of a bearish Dark Cloud Cover candlestick patter. Sellers have taken out support in the 1732.33-35.65 area, marked by a horizontal pivot level and the 23.6% Fibonacci retracement, exposing the 38.2% level at 1693.06. Resistance is at 1737.99, a falling trend line set from the October 5 swing high. A break above that targets 1777.32.

Daily Chart – Created Using FXCM Marketscope 2.0

Want to learn more about RSI? Watch this Video

Spot Silver (NY Close): $32.42 // +0.34 // +1.07%

Prices are inching lower as expected after completing a Bearish Engulfing candlestick pattern coupled with negative RSI divergence below the 35.00 figure. Sellers are now testing support at 31.83, the 38.2% Fibonacci retracement. A break below that exposes the 50% level at 30.74. Resistance is at the top of a falling channel set from October’s swing top (32.71), with a push above that targeting the 23.6% Fib at 33.19.

Daily Chart – Created Using FXCM Marketscope 2.0

Want to learn more about RSI? Watch this Video

COMEX E-Mini Copper (NY Close): $3.622 // -0.016 // -0.44%

Prices broke support at 3.695, the 23.6% Fibonacci retracement, exposing the 38.2% level at 3.608. A Spinning Top candle warns of indecision and hints a bounce may be ahead. The 3.695 level has been recast as resistance, with a push back above that exposing a falling trend line set from the September 14 high (now at 3.755). Alternatively, a break below support targets the 50% level at 3.537.

Daily Chart – Created Using FXCM Marketscope 2.0

— Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

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THE TAKEAWAY: US Dollar Index sold on Spanish bailout hopes but hit rising trendline support changing the trajectory of the greenback > A sour labor report and missed earnings caused what appeared to be the initial stages of risk aversion > Dollar ends week in strong position

The Dow Jones FXCM U.S. Dollar index began to decline in value after gaining ground last week but found traction bolstering the safe haven currency on what appeared to be the beginning stages of risk aversion. In the early hours of the European market open on October 16, rumors spread through the newswires reporting Spain may gain access to an additional line of credit prompting Forex traders to unload holdings in dollars and take on additional risk in higher yielding assets. The Spanish bailout talks appeared to have provided enough fuel to push the greenback lower throughout the next 33 hours of trading until technical support was found on October 17 at a rising trendline, prompting FX traders to ease their selling efforts.

The newly established bidding effort into the currency gained traction as U.S. initial jobless claims disappointed, reporting 388,000 new workers lost their pay, highlighting sluggish labor growth efforts and potentially fuelling Forex traders’ fears that another round of risk aversion may grip market sentiment. A few hours later Google reported earnings and missed heavily, possibly providing the catalyst market participants needed to begin unloading risky positions, as seen in the S&P 500’s decline.

Looking ahead, on October 24 the Federal Reserve will provide their rate decision where changes to currently monetary stimulus efforts are not likely. On October 25 the Chicago Fed will release its National Activity Index and durable goods along with weekly unemployment claims figures are scheduled for release.

US Dollar Index, 1 Hour Chart

S&P 500, 1 Hour Chart

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• Dollar Makes Critical Bullish Break, Don’t Dive in Just Yet
• Euro: No News is Good News as EURUSD Holds Above 1.3000
• Canadian Dollar More Attuned to BoC than Risk in Aim for 1.0000
• Japanese Yen Plunges Monday, USDJPY Hits Three-Month High
• British Pound Fundamental Strength Eroding with Growth and Yields
• Australian Dollar Correlation to Equities, Rate Outlook, China Holds
• Gold Stability Another Factor to Doubt Dollar’s Convictions

New to FX? Watch this Video; For live market updates, visitDailyFX’s Real Time News Feed

Dollar Makes Critical Bullish Break, Don’t Dive in Just Yet

The dollar made a serious technical move to open the week, but the fundamentals weren’t there to translate into true revival of its long side-lined bull run. For the Dow Jones FXCM Dollar Index, a close above the four-and-a-half month descending trend channel top that began back with the June 1 high threatens a changing of the guard for forex traders. However, the lack of follow through on this third consecutive daily advance for the Index should tell us of the market’s conviction level. More importantly, the standard benchmarks for risk appetite trends didn’t offer the kind of encouragement we would expect for serious buying interest – it is important to remember the dollar’s role as a favored safe haven. While both the S&P 500 and Dow Jones Industrial Average tested their respective support levels (1,425 and 13,300 respectively) both would rebound into the close of the day. For many of the majors, the dollar didn’t even come close to a meaningful bullish break: EURUSD stayed well away from 1.3000; AUDUSD cooled progress in its move back towards 1.0150; and GBPUSD couldn’t return to the 1.5980 swing low.

Though the dollar can theoretically find strength through fundamental sources outside the pull of risk appetite trends, the focus on growth, financial threats and the return-volatility imbalance makes anything outside this singular concern unlikely to hold sway over the market for long. Reading the headlines from this opening 24 hours of trade, there were two significant updates of note. The 3Q earnings season is showing a little more staying power than expected. Blue chip Caterpillar reported EPS that were better than expected ($2.26 versus $2.22 expected), but it would also cut its 4Q guidance. Lowering forecasts is a common theme this quarter – as is the difference in performance between the financials and non-financials. Given the pull that Google’s earnings had over broader risk trends last week, we cannot ignore this catalyst going forward.

The other newswire item of note was a rumor – but it was a rumor that exploits the market’s appetite for external market support (stimulus). Capital markets bulls who are running short on fundamental support were weighing reports that the Fed would discuss an increase to its MBS purchases at its upcoming meeting. Given the purchases of Treasury notes under the Operation Twist program are scheduled to come to a close at the end of the year, such an expectation is well justified. However, considering we were just introduced to the QE3 program (purchases of $40 billion in MBS per month) at the last meeting, it is highly unlikely that they move to increase the size of the program so soon. Playing to the hopes of the bulls for higher yield assets means what would otherwise be a non-event can prove a disappointment.

Euro: No News is Good News as EURUSD Holds Above 1.3000

The economic docket and newswires didn’t do the Euro any favors Monday, but neither did they do much damage. And, given the euro’s natural rebound effort, that means a net bullish move. On the headlines, Spain’s elections found Rajoy’s party holding power in his home region; but the broader results were more mixed. Nevertheless, there is no imminent threat to the Prime Minister or his policy course for now. A little more significant was Moody’s downgrade of 5 Spanish regions, yet that doesn’t translate into a sovereign rating cut that prevents it from borrowing from the ECB. In Greece, two members of Prime Minister Samar’s party left due to disagreements on austerity. A concern but nothing new.

Canadian Dollar More Attuned to BoC than Risk in Aim for 1.0000

Of the three major central bank policy meetings this week, the Bank of Canada carries the greatest potential for surprise. In Governor Carney’s more recent remarks, we have heard a clearer concern about the influence that outside economic troubles could have on Canada as well as some emerging, domestic apprehensions. The below-target inflation figures (1.3 percent headline, 1.4 percent core) from last week add to the risk of a more dovish policy lean. A cut isn’t necessary for the loonie to tumble. A more dovish tone and backing off hike threats can do it.

Japanese Yen Plunges Monday, USDJPY Hits Three-Month High

It wasn’t difficult to see that the Japanese yen was the biggest mover on the day through the opening session. The currency plummeted against its most liquid counterparts while the rest of the forex market was essentially meandering. This slump was catalyzed by a number of unfavorable factors. On the docket, Japan’s adjusted September trade deficit hit a record 980 billion yen as exports dropped 10.3 percent. That is the economic hit that leverages a policy reaction. On that front, a local paper reported that the Japanese government was asking the BoJ to increase its asset purchases by 20 trillion yen. That was later refuted, but further stimulus (either from the BoJ or government) is inevitable.

British Pound Fundamental Strength Eroding with Growth and Yields

What does the sterling have going for it through the short-term? The currency is in some aspects a regional safe haven to European funds, but that is a fundamental card that doesn’t reach very far. Meanwhile, the economy is looking at an extended economic slump and growing anger over the government’s austerity push. In the meantime, the benchmark market rate (3-month Libor) hit a fresh record low (0.5294 percent).

Australian Dollar Correlation to Equities, Rate Outlook, China Holds

Looking at the correlation between AUDUSD price action and equities (basic risk tends), Aussie interest rate expectations and Chinese market measures; we see that the currency is well synced to all three. That said, it is important to realize that the general level of sentiment can alter rate expectations and the assessment China is given. In the upcoming session, we will focus a little more on rates with 3Q CPI data due. The swaps market is currently pricing in an 84 percent probability that the RBA will hike at the next meeting.

Gold Stability Another Factor to Doubt Dollar’s Convictions

The first advance in three days means little for gold. The metal covered little ground with its bounce, while the CBOE’s gold volatility index eased back and futures volume returned to anemic levels. The dollar’s struggle to make progress is certainly a factor here; but rumor that the BoJ could be forced into upping its stimulus effort while the market talks increases MBS purchases from the Fed adds a little more weight.

**For a full list of upcoming event risk and past releases, go towww.dailyfx.com/calendar

ECONOMIC DATA

Next 24 Hours

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visitTechnical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit ourPivot Point Table

CLASSIC SUPPORT AND RESISTANCE

INTRA-DAY PROBABILITY BANDS 18:00 GMT

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— Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com

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Although the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) remains 0.10 percent higher from the open, the greenback may continue to pare the advance carried over from the previous week as there appears to be a bearish divergence in the 30-minute relative strength index. As the oscillator continues to come off of overbought territory, we may see a larger correction in the index, but the bearish formation may fail to take shape should as the RSI appears to be finding interim support around the 50 figure. In turn, we may see the dollar continue to recoup the losses from earlier this month, and the index may make another run at 9,950 as the economic docket is expected to instill an improved outlook for the U.S.

Although the USDOLLAR looks as though its breaking out of the downward trending channel from the end of July, we would like to see a close above the 50-Day SMA (9,918) to see the reversal from 9,740 gather pace. As the recent batch of fundamental developments coming out of the world’s largest economy instills an improved outlook for growth, we may see the FOMC soften its dovish tone for monetary policy, and Fed Chairman Ben Bernanke may see a narrowing case to push for more easing as the recovery gets on a more sustainable path. In turn the rate decision on tap for later this week generate a bullish reaction in the USD, and the greenback may track higher throughout the week as the preliminary 3Q GDP report is expected to show the growth rate expanding an annualized 1.9% versus the 1.3% rise during the three-months through June.

Two of the four components weakened against the greenback, led by a 0.70 percent decline in the Japanese Yen, and the low-yielding currency may face additional headwinds over the near-term as the weakening outlook for the world’s third-largest economy fuels bets for more easing. Indeed, the Bank of Japan lowered its growth forecast for the region as the recovery appears to have ‘paused,’ and the central bank may face increased pressure to intervene in the currency market amid the ongoing downturn in global trade, but we may see Governor Masaaki Shirakawa reply on quantitative easing to address the risks surrounding the region as its previous attempts to depreciate the local currency failed to have a lasting impact. As the RSI on the USDJPY pushes deeper into overbought territory, we should see the exchange rate continue to track higher, and we will look for a short-term correction once the oscillator falls back below 70.

— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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Join us to discuss the outlook for the major currencies on the DailyFX Forums

Meet the DailyFX team in Las Vegas at the annual FXCM Traders Expo, November 2-4, 2012 at the Rio All Suite Hotel & Casino. For additional information regarding the schedule, workshops and accommodations, visit the FXCM Trading Expo website.

Interest Rates: Rates Edging Higher on Growth Optimism

Peter Possing Andersen, Senior Analyst, Danske Bank

The long end of the rate curves moved higher this week. This was driven by increasing growth optimism, which was partly fuelled by a better-than-expected run in Q3 earnings reports but also by improving economic data from the US and China.All in all, incoming data have provided further evidence that the global economy is bottoming out. This is particularly evident in the US, where the economic surprise index has moved into very positive territory over the past couple of weeks, but also in emerging markets and in Europe the economic surprise indices moved higher this week.

Full Story

Is Chinese Growth Beginning to Stabilize?

John E. Silvia, Chief Economist, Wells Fargo

As widely expected, the real GDP data reported this week in China indicated that the economy slowed further. Specifically, the year-over-year rate of real GDP growth in the third quarter slowed to 7.4 percent—the slowest rate of growth since the global financial crisis—from 7.6 percent during the previous quarter (see chart on front page).

Full Story

Canada – Household Debt Higher Than We Thought

Diana Petramala, Economist, TD Bank Financial Group

Arguably, the juiciest release this week was Statistics Canada’s release of revised National balance sheet data. The revisions showed that the household debt-to-income ratio is 163%, well above the 152% previously reported. The media grabbed onto the fact that the Canadian debt-to-income ratio now tops the pre-recession peak reached by U.S. households.

Full Story

Compiled by David Song, Currency Analyst