Weekly Review and Outlook

Initial Weakness in Dollar and Yen Post G7

Top 5	Current	Last	Change (Pips)	Change (%)
EURCAD	1.5753	1.6016	-263	-1.67%
AUDCAD	0.9347	0.9463	-116	-1.24%
CADJPY	83.05	82.13	+92	+1.11%
GBPCAD	1.7218	1.7393	-175	-1.02%
USDCAD	1.0800	1.0905	-105	-0.97%
Dollar
EURUSD	1.4576	1.4690	-114	-0.78%
USDJPY	89.74	89.63	+11	+0.12%
GBPUSD	1.5941	1.5950	-9	-0.06%
USDCHF	1.0348	1.0272	+76	+0.73%
USDCAD	1.0800	1.0905	-105	-0.97%
Euro
EURUSD	1.4576	1.4690	-114	-0.78%
EURGBP	0.9142	0.9208	-66	-0.72%
EURCHF	1.5090	1.5091	-1	-0.01%
EURJPY	130.83	131.67	-84	-0.64%
EURCAD	1.5753	1.6016	-263	-1.67%
Yen
USDJPY	89.74	89.63	+11	+0.12%
EURJPY	130.83	131.67	-84	-0.64%
GBPJPY	143.08	142.95	+13	+0.09%
AUDJPY	77.65	77.75	-10	-0.13%
NZDJPY	64.36	64.42	-6	-0.09%
Sterling
GBPUSD	1.5941	1.5950	-9	-0.06%
EURGBP	0.9142	0.9208	-66	-0.72%
GBPCHF	1.6500	1.6382	+118	+0.72%
GBPJPY	143.08	142.95	+13	+0.09%
GBPCAD	1.7218	1.7393	-175	-1.02%

Markets were still in an indecisive mode. Disappointing manufacturing and job data from US did send stocks and treasury yields sharply lower last week. But corresponding strength was not seen in the greenback. The lack of follow through buying, and Friday's reversal in the dollar after taking out near term levels against major currencies cast much doubt on the case that it has bottomed. The picture was also complicated by the refusal to head lower in gold and crude oil. On the other hand, the Japanese yen had a roller-coaster ride last week on varying comments from Japan Finance Minister and ended the week mixed. Swiss franc remained firmed against Euro in spite of another intervention from SNB.

Dollar's strength in the early part of the week was partly fueled by comments from world finance leaders on the concern of weakness of the greenback. But after all, G7 finance chiefs didn't single out the weakness of dollar for criticism and just stuck to similar stance that "Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability." The statement released over the weekend could well disappoint dollar bulls who hoped for a drastic change in language and may trigger some initial selloff in the greenback this week.

On the other hand, Yen's spike higher last week was triggered by comments from Japan Finance Minister Fujii that he supported a strong yen policy. But the strength quickly faded after he reversed his rhetoric. Over the weekend in G7 meeting, Fujii emphasized again that if yen shows "excessive moves in a biased direction, we will take action," leaving room for the government to intervene. Yen crosses might recover further initially this week.

As mentioned before, expectations on economic data from US were high. But after all the results were generally disappointing. In particular, NFP missed the expectation much by showing -263k contraction in the job markets in September while unemployment rate also climbed to 26 year high of 9.8%. ISM manufacturing index also unexpected dropped back to 52.6 in September, showing that the recovery in manufacturing is losing momentum. Consumer confidence also unexpectedly dropped to 53.1 in September. Nevertheless, consumer spending rose slightly more than expected by 1.3% in August and was a relatively brighter spot in US economy. Q2 GDP was revised higher from -1.0% to -0.7% annualized contraction.

Data elsewhere were mixed. Germany unemployment rate dropped from 8.3% to 8.2% in September. But Eurozone unemployment rate rose to decade high of 9.6% in August. UK CBI distributive trades unexpected turned positive to +3 in September. Gfk consumer confidence also improved remarkably to -16 in September. However, PMI manufacturing missed expectation by dropping back to 49.5 in September. Japanese Tankan large manufacturer index rose to -33 in Q3 while non- manufacturing outlook rose to -24. Japanese CPI dropped -2.2% yoy in August, inline with expectations. Manufacturing PMI improved to 54.5 in September. Unemployment rate unexpectedly dropped to 5.5% in August. Canadian GDP was flat in July, missing expectation of 0.5% growth. Australian retail sales rose much more than expected by 0.9% mom in August.

IMF raised forecasts for global economic growth in 2010 from 2.5% to 3.1% as more than 2T stimulus packages and demand in Asia helped the world economy recovers. US is expected to grow 1.5% Eurozone is expected to grow 0.3% while UK is expected to expand by 0.9%. In a separate report from IMF, dollar's share of global currency reserves dropped in Q2 to 62.8%, hitting the lowest level in a decade. The share dropped from 65% in Q1 and 62.9% a year ago. On the other hand, Euro's share rose to a record of 27.5%, up from Q1's 25.9%.

Looking at the charts, investors are generally moving further away from a risk seeking mode to a risk averse mode. The sharp fall in US stocks over the week was inline with our view that a short term top is at least formed. S&P 500 is now 5% below September's high of 1080 after losing momentum on bearish divergence conditions in daily MACD. The key focus is now on whether such decline would extend beyond 100 level which is close to medium term trend line as well as 55 days EMA. At this moment, we're favoring more downside in stocks and are cautiously anticipate break of the 1000 level. If that happens, it will open up the possibility for deeper decline to at least have a test on 869/956 support zone in Q4 which will provide further support to dollar and yen in general.

The sharp fall in treasury yield last week is also inline with the view that investors are moving into safer assets. Yield on 10 year T note indeed dropped to as low as 3.106 last week. Even though strong rebound was seen that pushed yield to close at 3.22, there is no structure change in recent down trend. We'd maintain that yield on ten year note has topped out at 4.01 and it should continue to spiral down going forward, which should give some additional support to yen relative to dollar.

However, resilience in energies and precious metals are mixing up the bullish picture of the greenback. In particular, crude oil rebound strongly to close near to 70 level in spite of a bearish inventory report. The refusal to head lower after taking out the medium term trend line also dampens the immediate bearish view that it has topped out at 75.0. While we're still cautiously bearish in crude oil, any break of near term resistance at 73 level will put 75 high back in to radar and we could see the a test of 75 in oil accompanied by a test of 75.83 low in dollar index.

Looking back at the dollar index, the recovery lost momentum and was limited at 77.47 last week. While the break of medium term channel resistance is another sign of bottom, momentum remains unconvincing so far. We'll stay neutral initially this week and look at the post G7 reactions first. Further rise will be in favor as long as 76.50 minor support holds and above 77.47 will pave the way to key resistance level at 78.93 next. However, a break below 76.50 will put 75.83 back into focus.

In the biggest picture, out preferred view didn't change. Fall from 89.62 has likely completed at 75.83 on bullish convergence conditions in daily MACD, after hitting key support level of 75.89. Break of 78.93 resistance will confirm this case and will set the stage for at least a strong rebound to 38.2% retracement of 89.62 to 75.83 at 81.09. However, such view is far from being confirmed and a firm break of 75.83 will bring deeper fall to next key support level of 74.31.

Currency Heat Map Weekly View

	USD	EUR	JPY	GBP	CHF	CAD	AUD
USD
EUR
JPY
GBP

The Week Ahead

Initial focus of the week will be on reactions to the lack of criticism on dollar weakness from G7 statement as well as Japan FM Fujii's comment on intervention on Yen. Economic calendar is rather light, in particular in US and main focus will then turn too three central bank meetings, RBA, ECB and BoE.

RBA is widely expected to keep rate unchanged at 3.00% level this week. Nevertheless, markets are speculating that RBA would start the pave the way for a rate hike. Some economists are suggesting that the rate hike might happen in November. One important thing to note is that Aussie was sharply lower against dollar and euro last week and that was an early sign of topping, at least in near term. So, even in case of a change to hawkish stance in RBA, we'd prefer to see 0.8857 in AUD/USD and 1.6512 in EUR/AUD to be firmly taken out before confirming resumption in recent up trend. Otherwise, we're stay near term neutral even in case of strong rebound.

ECB is always widely expected to keep rates unchanged at 1.00% this week. ECB surprised the markets by allotting only EUR 75.2b in last week's 12 month long-term refinancing operation. The amount was much lower than markets' expectation of around EUR 100 to 200bn and raised some speculations that ECB is starting to pave the way for exiting non-standard monetary policies and would possibly hike next summer. The speculation was somewhat immature at this point. Nevertheless, focus will still be on hints from Trichet on the timing of policy reversal.

BoE is expected to leave rates unchanged at 0.50% and keep the asset-purchase program unchanged. However, recent comments from King suggest the bank is considering a cut in deposit rates, the interest rate paid by BoE on commercial banks reserves held at the bank. Sterling will be vulnerable to another sharp fall, in particular against Euro, in case of some related announcement from BoE.

Important economic data to be released this week include:

• Monday: UK Services PMI; Eurozone Retail Sales; US ISM Manufacturing Index
• Tuesday: RBA Rate Decision; Swiss CPI; UK Industrial and Manufacturing Productions; Canada Ivey PMI
• Wednesday: Swiss Unemployment; Eurozone GDP Final
• Thursday: Australian Employment; BoE Rate Decision; ECB Rate Decision and Conference
• Friday: UK Trade Balance, PPI; Canadian Employment, Trade Balance; US Trade Balance

AUD/USD Weekly Outlook

After edging higher to 0.8857 initially last week, AUD/USD reversed and dropped sharply to as low as 0.8567 before recovering. The break of 0.8585 support indicates that a short term top is at least formed at 0.8857 with bearish divergence conditions in 4 hours MACD and RSI. Hence, while some consolidation might be seen initially this week, upside of recovery is expected to be limited well below 0.8857 and bring fall resumption. Below 0.8567 will target 0.8154/8468 support zone first.

In the bigger picture, recent rally in AUD/USD is losing some momentum with mild bearish divergence conditions in 4 hours daily MACD. Hence, even in case of another rise, upside is expected to be limited by 61.8% projection of 0.6284 to 0.8262 from 0.7702 at 0.8924 and bring deep pull back. Sustained trading below medium term rising trend line (now at 0.8573) will indicate that a medium term top is formed and bring pull back to 0.7267/7702 support zone.

Nevertheless, note that the strength of the rise from 0.6008 argues that AUD/USD is developing into another up trend. In other words, long term correction from 0.9849 has possibly completed at 0.6008 already, after being support slightly above 76.4% retracement of 0.4773 (01 low) to 0.9849 (08 high). Hence, the anticipated medium term pull back is expected to be contained by 0.7267/7702 support zone and bring rally resumption to retest 0.9849 high eventually. Break of 0.7267 resistance turned support is needed to indicate that whole rise from 0.6008 has completed. Otherwise, we'll continue to favor the longer term bullish case even in case of deep correction.

Statement by Secretary Timothy F. Geithner at the International Monetary and Financial Committee (IMFC) Meeting

On behalf of the United States and our delegation, I'd like to thank Turkey and the people of Istanbul for hosting this year's Annual Meetings. We meet as the global economy makes a critical transition away from crisis and toward recovery. Less than one year ago, with the global economy facing serious and unprecedented challenges, countries put in place significant and extraordinary measures to stabilize financial markets and support the global economy. The United States has been a leader throughout this period, with the Administration enacting a sizeable stimulus plan; restoring confidence in the financial system and the flow of credit to consumers and households through the Financial Stability Plan; and helping marshal resources for emerging markets and developing countries through President Obama's call for large scale resources to backstop the global financial system.

Conditions have improved considerably. Stresses in financial markets have declined, confidence has improved, international trade is recovering, and economic growth has resumed in most countries and globally. While global growth is forecast to accelerate in 2010, output gaps will persist, unemployment may rise further, and downside risks remain. For this reason, Leaders in Pittsburgh agreed to sustain their strong policy responses and not prematurely withdraw fiscal, monetary and financial sector support measures until durable, private sector-led growth is firmly achieved. When the time is right, credible exit strategies will be prepared to begin gradually withdrawing public sector support in a way that is cooperative and coordinated but does not jeopardize the recovery.

In Pittsburgh, G-20 Leaders reached an historic agreement to put the G-20 at the center of their efforts to work together to build a durable economic recovery while avoiding the fragilities and excesses of the past that led to the crisis. They pledged to adopt the policies needed to lay the foundations for a healthy global economy by creating a Framework for Strong, Sustainable, and Balanced Growth; by building a robust system of financial supervision and regulation; and by modernizing the international financial institutions to take on the challenges of the 21^st As IMF Governors, we have an important responsibility to work collaboratively to advance the reform agenda to support a durable recovery and head off future crises. century.

Forging a Framework for Strong, Sustainable, and Balanced Growth

The crisis revealed critical weaknesses in the pattern of global growth, in which some countries consumed well beyond their incomes and others relied heavily on exports to generate growth and, in the process, accumulated vast amounts of foreign exchange reserves. This pattern of demand growth and global capital flows was excessively unbalanced and ultimately unsustainable.

To manage the transition to a more balanced and sustainable pattern of global demand, Leaders have created a new framework for economic cooperation, the Framework for Strong, Sustainable, and Balanced Growth, in which G-20 Finance Ministers and Central Bank Governors will work together, through mutual assessment, to help ensure that our individual policies are collectively consistent and more balanced, within a forward-looking framework.

We are committed to seeing this cooperative process of mutual assessment work so as to help prevent unsustainable trajectories of debt, credit, leverage, demand, and reserve accumulation becoming forces of destabilization in the future. We look to the IMF to play a key role in assisting the assessment of G-20 economic and financial policies and in providing its view on the likely balance and sustainability of the global economy. We expect that the IMF will report regularly to the G-20, in addition to the IMFC.

Strengthening Financial Sector Supervision and Regulation

Perhaps most dramatically, the crisis revealed gaps in our regulatory system that allowed the build-up of excess leverage and risk within and alongside the banking system. In the United States, we are working to implement reforms designed to protect consumers and investors and create a more stable, more resilient financial system.

In Pittsburgh, G-20 Leaders advanced an ambitious agenda to create a seamless web of financial regulation and supervision – addressing the deficiencies in our financial regulatory framework that contributed to the virulence and global spread of the financial crisis. Strengthening firms' capital must be at the core of this effort. The United States is committed to specific deadlines for implementation of more and higher quality capital, stronger liquidity, a simple leverage ratio to constrain excess risk-taking and building buffers that firms can draw down in periods of stress.

Compensation reform is also critical, and the United States has shown leadership in this area by already taking a number of actions to reform compensation practices to support financial stability. Since the April G-20 meeting, we have put in place tough new restrictions for firms receiving public assistance, including restrictions on bonuses and golden parachutes and a requirement that boards of directors review the relationship between compensation and risk; appointed a Special Master for Executive Compensation, empowered to review compensation structures for the top 100 employees at firms receiving exceptional assistance; and proposed legislation, already passed by the House, that will require all public companies to permit shareholders to cast an annual "say on pay" vote and make their compensation committees independent in fact, not just in name.

The U.S. has also moved to strengthen the transparency and the functioning of the over-the-counter derivatives market, and is working to develop tools to effectively resolve large failed financial institutions.

As we in the United States strengthen our system, we urge other nations to take steps to strengthen their own systems and ensure that the global financial system is safer and more stable. The United States is undergoing an IMF Financial Sector Assessment Program, reflecting our commitment to accept the obligations and responsibilities of being an IMF member. The IMF's work, through annual surveillance, the FSAP, Global Financial Stability Reports, new early warning exercises, and intensified cooperation with the expanded Financial Stability Board (FSB), is making an important contribution to strengthening financial systems around the world. IMF-FSB collaboration is essential to a stronger, more resilient global financial system.

Modernizing the IMF

Enhanced Resources

The IMF's actions since the crisis began have stabilized markets and boosted confidence, winning broad support and underscoring the Fund's central role in crisis response. A critical component of the response was ensuring the IMF has adequate resources to address the needs of members hard hit by the global crisis. To this end, countries delivered on commitments to renew and expand the IMF's New Arrangements to Borrow (NAB) by over $500 billion to backstop the IMF. Dynamic emerging economies contributed a critical share to an expanded NAB, and the U.S. moved quickly to pass legislation enabling our $100 billion contribution. The IMF's action to supplement members' reserves and boost global liquidity through an allocation of Special Drawing Rights (SDRs) also demonstrated the international community's willingness to take bold steps in support of a global recovery.

We welcome IMF approval of a package of extraordinary measures to sharply increase the resources available to low-income countries. Resources from the planned sale of IMF gold and other internal sources will more than double the Fund's medium-term concessional lending capacity and frontload these resources over the next two years. In addition, the new Standby Credit Facility will fill a longstanding gap in the concessional facilities architecture, by providing maturing low-income countries with an instrument specifically designed for intermittent Fund engagement. These welcome and ambitious measures will allow the IMF to help meet the needs of the poorest countries through the crisis and beyond.

Mandate

Resources are only part of the equation. The tools available to the IMF, and the institution's capacity to identify potential vulnerabilities and appropriate policy responses, are equally important to restoring and maintaining confidence.

The Fund recently enhanced its lending toolkit to provide countries with contingent finance to guard against sudden stops. The newly created Flexible Credit Line (FCL) is proving to be an effective crisis prevention instrument for the strongest performing emerging market countries. Both the FCL and the High Access Precautionary Arrangement (HAPA) have helped restore confidence in countries that have used them during the current crisis. We continue to support the Fund's efforts to strengthen its capacity to help its members cope with financial volatility, reducing the economic disruption from sudden swings in capital flows and the perceived need for excessive reserve accumulation.

The IMF's role in the newly announced Framework highlights the importance of candid surveillance assessments, especially when individual country policies have systemic implications. The crisis underscored the importance of strengthening financial sector surveillance, including linkages between the financial sector and the real economy. Effective exchange rate surveillance for all members remains at the core of the IMF's duties. The Fund should complement its unique role on exchange rate surveillance with stepped-up engagement in making the international system less prone to crisis. Moreover, greater transparency is critical to underpin the credibility and effectiveness of IMF surveillance. Since the crisis has taught us that no nation is immune, we call upon all IMF members to allow the publication of their annual Article IV reviews.

Governance Reform

A more representative, responsive and accountable governance structure is essential to strengthening the IMF's legitimacy, ensuring that it remains at the center of an evolving international monetary and financial system. Agreement in Pittsburgh to reform the global architecture to meet the needs of the 21^st century was a watershed event. In addition to designating the G-20 as the premier forum for international economic cooperation, G-20 Leaders committed to a shift in IMF quota share to dynamic emerging market and developing countries of at least 5% from over-represented to under-represented countries. Attention must now shift to implementing this agreement, and we call on the IMF to facilitate this process by providing scenarios of how the quota shift could be implemented in the very near-term.

Reform of the Executive Board remains an essential component to modernizing the IMF's governance structure to better reflect the 21^st century global economy. The United States has called for reducing the size of the Board while preserving the existing number of emerging market and developing country chairs. Further, the past six months have plainly demonstrated the benefits of securing stronger Ministerial engagement in setting strategic policies and priorities of the International Financial Institutions. To sustain this level of Ministerial engagement, we must find a way to enhance the effectiveness and efficiency of the IMFC. I look forward to discussion of concrete proposals to achieve greater involvement of the Fund's Governors in providing strategic direction to the IMF.

Global Cooperation to Combat Illicit Finance

We strongly support the cooperation among the Financial Action Task Force, the IMF, the World Bank, the FSB and the Global Forum to strengthen compliance with international standards. For example, global cooperation to address cross-border tax evasion has led to more tax information exchange agreements being signed in the last ten months than had been signed in the prior ten years. We continue to emphasize the importance of global efforts to combat money laundering, terrorist financing, financing of proliferation of weapons of mass destruction, and other forms of illicit finance.

We underscore our concerns over illicit finance emanating from Iran and the severe deficiencies in its regulatory regime. We emphasize FATF statements calling upon the international community to implement countermeasures to protect the international financial system from money laundering and terror financing risks emanating from Iran, and we urge all nations to respond appropriately. We further urge all nations to implement the financial provisions of UNSCR 1803 by exercising enhanced vigilance over the activities of their financial institutions with Iranian financial institutions – including branches and subsidiaries abroad – and particularly with respect to Bank Saderat and Bank Melli.

Statement by Secretary Geithner at the IMF/World Bank Annual Meetings in Istanbul

Let me thank Prime Minister Erdogan, Mr. Strauss-Kahn and Mr. Zoellick, as well as the staff of the IMF and the World Bank, for hosting the Annual Meetings in Istanbul.

Traditionally recessions that are caused by financial crises tend to be longer, deeper, and more destructive. And the recoveries that follow tend to be weaker and more fragile. We are trying to break that pattern. The unprecedented, coordinated global response to the crisis has limited the depths of the downturn, and we are working to raise the trajectory of future growth. We said we would act together. We acted. And the strategy worked and helped pull us back from the brink.

We are seeing signs of recovery sooner and stronger than we had expected. Financial conditions, particularly in the U.S., have improved dramatically. The U.S. housing sector is showing early signs of stabilizing.* *Global trade is expanding again. Emerging markets have demonstrated remarkable resilience, in part because of the mobilization of substantial resources by the international financial institutions. Forecasts among private-sector economists and by the IMF are being revised upwards significantly, with the Blue Chip now forecasting 2.4 percent U.S. real GDP growth next year, up from their 1.8 percent forecast in April. The IMF now projects 3.1 percent growth for the world economy in 2010, well above the 1.9 percent forecast in April.

Despite this progress, we are still only in the early stages of recovery. Unemployment is unacceptably high. The financial sector remains damaged. Conditions for a sustained recovery led by private demand are not yet fully established. We face challenging risks ahead.

As we move from crisis to recovery, we need to focus not just on strengthening growth, incomes, and employment, but also on how we grow. Let me highlight a few key priorities that will guide that new growth strategy going forward.

First, it is important we sustain support for global demand and growth. We need to avoid the mistakes made in past crises when policy makers stepped on the brakes too soon. Planning for an eventual exit is the responsible and necessary thing to do, but we are not yet in the position where it would be prudent to begin to withdraw fiscal and monetary policy support. Exit will not be like flipping a switch. Instead, as conditions stabilize and growth strengthens, we will unwind the extraordinary policy measures we've taken, phasing them out carefully to avoid a damaging cliff.

Second, in order to make sure we have strong growth in the future, we need to pay more attention to where that growth comes from, its composition, and its quality, both within and across countries. We need a shift towards growth that is more balanced and sustainable, less prone to distortions and to crises.

This shift is already underway. After years of taking on too much debt, Americans are starting to save again, and we have reduced what we are borrowing from the rest of the world dramatically. That's a necessary and very healthy adjustment for us. But as we save and invest more as a country, the world will not be able to rely as much on U.S. spending to drive future growth. So if we want the world to grow at a higher rate, this shift must be offset by a broad structural shift to domestic demand-led and less export-intensive growth in the rest of the world.

And this isn't a hard case to make. Because we've all suffered from the fallout of this imbalance--both American consumers who borrowed too much and the countries who depended on those consumers to drive their growth. We've seen growth fall sharply. And so we all have a strong interest in making this fundamental shift.

To achieve this growth, we also need to make the investments that will drive productivity and innovation in the future. And that's why this Administration is making significant investments in education, infrastructure, clean energy and health care reform. These are critical economic imperatives. It is encouraging that productivity growth in the U.S. has stayed so strong throughout this crisis. American companies are at the frontier of innovation and technology. However, for us to sustain that, we need to make greater investments in research and development, improve the quality of education, and reduce the burden of health care costs. At this point, with financial markets more stable and growth reemerging, it is time to give new energy to the multilateral effort to lower trade barriers. Expanding trade with a more level playing field is a key component of any strategy to rebalance global growth.

Third, we need financial reform so that our global financial system is more stable and more efficient in allocating resources. We want our financial institutions to fund the most productive and innovative investments, not booms in real estate or the modern equivalent of tulips. Growth should be driven by new ideas and inventions, not by distorted incentives that produce financial bubbles.

And that won't work if we let huge amounts of leverage and risk build up in the system or if failure in one institution can threaten the health of the system overall. We need stronger capital requirements and constraints on leverage. We need to make the system resilient enough to allow institutions to fail without collateral damage, so we don't force taxpayers to bear the burden of putting out financial fires caused by excess risk-taking by banks.

Over the course of the last year, in London, Pittsburgh, and now in Istanbul, you've seen the countries of the world act together to tackle the most damaging economic crisis in generations. And the challenges we face going forward--from expanding trade to combating climate change and reducing poverty to confronting terrorism and nuclear proliferation--require the same level of cooperation and aggressive action. The devastating consequences of inaction, and potential for catastrophic damage, demand the same force, urgency, and collective leadership that you've witnessed over the last year.

U.S. Department of the Treasury