Japanese data fed the perception that the global economy is turning the corner.  The Sep coincident index matched market expectations of 92.5, this being the sixth consecutive rise.  This news was in tune with comments from the BoJ’s Yamaguchi who commented that the recovery will continue at a gradual pace but the tone was in contrast with the warnings from the Japanese PM that there is a risk that the economy may resume its deterioration. 

Feeding risk appetite overnight was the latest statement of monetary policy from the RBA which predicted further gradual lessening of monetary policy and forecast  GDP “at a little more than 2% over the year to mid 2010”; a significant improvement on recent projections.  AUD/USD spiked higher on the news towards the 0.9080 level before sellers emerged. 

UK data failed to have much impact.  Oct PPI input surged by a faster than expected 2.6% m/m.  However, y/y rates remain subdued with the impact of the decline from last year peak’s in oil prices still having an impact.  On balance, the outlook for medium-term inflation remains subdued in the UK despite sterling weakness vs the EUR and despite the likelihood that the BoE will revise higher its near-term inflation forecasts in next week’s Inflation Report. 

This weekend’s G-20 meeting has this morning being overshadowed by the forthcoming payrolls report.  While the issue of fx is likely to be secondary to that of banking regulation during the weekend meetings, the gathering does provide a platform for further jawboning in support of the US Treasury’s strong USD policy.  Of particular interest is whether the Europeans complain further about the EUR bearing the brunt of the USD’s downward adjustment.  This will be an attack on the Chinese/USD peg and could be taken as indication that this will be a growing political theme in the New Year.

In addition to US payrolls, Canadian Oct labour data is also due today.

With many traders sitting today out, the ranges were small, even by Asia standards. EUR/USD stayed in a less than 25 pip range near 1.4870. USD/JPY traded between 90.86 and 90.56. The AUD/USD was lackluster as well despite the RBA monetary policy statement that said rates would likely increase gradually after the central bank hiked forecasts for 2010 GDP. It still seems like a coin toss if the RBA will raise rates one final time for 2009 in December. Although the AUD/USD made solid gains to highs just shy of 0.9140, the move was only worth 50 pips in total.   The pound also was bid in Asia today, gaining almost 60 pips from 1.6560 to 1.6620 despite data that showed a slump in GDP data for the past three months.

This weekend also brings a G-20 Meeting in Scotland where the attendees face the daunting task of trying to pull their economies out of the weakening grasp of the global financial crisis. With too many competing views, expect much of the focus of the meeting to be on crisis exit strategies as opposed to foreign exchange. Have a good weekend.

The Bank of England created a stir by raising its asset purchase program by a smaller than anticipated 25B to 200B. Consensus was for an increase of 50B. The notion that this means less money printing helped GBP extend gains ahead of the NY open. However, Cable pared gains from the 1.6630/35 highs towards 1.6580 at the close.

ECB President Trichet offered no earth-shattering developments but was a touch more optimistic about the economic outlook in the Eurozone. This and the comment that liquidity will likely not be extended further (no more money printing) helped EUR/USD squeeze up from 1.4865 towards the highs above 1.4900. The pair eventually gave up the ECB gains and settled right where it went into the event.

The focus now turns to tomorrow’s NFP report. We look for October headline nonfarm payrolls to decline by a steeper than expected -190K and the unemployment rate to jump to 10.0% from 9.8% currently. Per the price action of the last six NFP releases, we think a similarly negative reaction in risky assets - and positive reaction in USD - will follow any downside surprise to NFP.  See the full report and trading strategy: http://www.forex.com/09-11-05-nfp.html