Risk FX Rally Continues - A Turn in the Pound?

• AUD Employment Change 40.6K vs. -9.7K eyed
• AUD Unemployment Rate 5.7% vs. 6.0%
• JPY Economy Watchers Sentiment 43.1 vs.42.5
• JPY Prelim Machine Tool Orders -61.9% vs. -71.5% last
• GBP CB Leading Index 0.9% vs. 0.5% last
• EUR German Industrial Production n/a
• GBP MPC Rate Statement n/a

• CAD Housing Starts expected at 147K
• USD Unemployment Claims expected at 54.3K

• USD/JPY continues to press the 88.00 level holds so far
• AUD/USD blows through the .9000 handle after labor data surprises to the upside
• GBP/USD boosted by news of Llyods possible offering takes out 1.6000
• EUR/USD 1.4800 remains resistance ahead of ECB

Risk FX staged another strong rally in Asian and early European sessions today aided by a number of factors that supported the global economic recovery trade. In US the better than expected numbers from Alcoa which saw aluminum demand rise by 11% in Q3 helped lift equity futures in after market hours and sent Nikkei higher by more than 1%. Despite the fact that some of Alcoa’s gains may have been exaggerated by cash for clunkers program the markets were encouraged to see ongoing demand from EM nations as infrastructure build outs continue in the region. As we’ve noted many times in the past China, not US is the new driver of global growth and until and unless Chinese demand cools, the recovery theme will continue to dominate trade in the Currency market.

Meanwhile, Australia - the one Anglo Saxon economy that has benefitted the most from Chinese demand - saw its Unemployment Rate improve markedly as it dropped to 5.7% from 6.0% eyed while the country generated 40.6K new jobs against forecasts of a -9.7K contraction. The news sent Aussie skyrocketing above the .9000 figure as traders Started to price in the possibility of a second rate hike by the RBA in November. Yesterday we stated that AUD/USD had a good chance of reaching .9000 before the week’s end should risk flows prove supportive, and now that it has taken that target, the longer term forecast for Aussie indicates that the unit could hit parity with the buck if global GDP growth returns to trend in 2010. The case for AUD/USD 1.0000 rests on three factors – further increases in Australian interest rates, a stationary US interest rate environment and continued rally in gold which is a peripheral but nevertheless important support for the Aussie given the fact that Australia is one of the largest producers of the yellow metal.

Today, the rally in risk even helped the pound, which soared above the 1.6000 level to hit a high of 1.6072 after Lloyds banking group announced its intent to file for a rights offering that may help it escape the UK Asset Protection Scheme earlier than the market had anticipated. Cable has been weighed down by UK’s hobbled financial sector which has been rescued by required billions of tax payer funds. The Lloyds’ announcement was taken very positively by the market as it was the first sign of possible relief for the UK Treasury with public capital now being replaced by private funds.

We have been arguing all week that Cable was showing signs of a bottoming out and today’s Price Action suggests that a turn in sentiment is taking place. We noted that 1.6000 needed to be pierced with authority in order to establish a counter trend rally in the pair and if it can maintain this level for the day, sterling could see further strength in the days ahead.

With no major data out of the US today all attention will be focused on the BoE and ECB rate decisions due later in the day. The markets expect no Changes from either central bank, but the statements from the monetary authorities will be heavily scrutinized for any Change of tone. With MPC, markets will likely zero in on any reference to further QE measures, while with the ECB the key concern will be on exit strategies. We expect the MPC to remain stationary on QE while the ECB will maintain its cautious tone suggesting that it is too early to change its accommodative stance. If that scenario were to develop, EUR/GBP which has already dropped sharply in Europe could continue to fall f or the rest of the day as traders unwind their sterling shorts.