TODAY'S BIGGEST PERCENTAGE MOVERS

EUR/NZD		+247 pips	+1.40%
NZD/USD		-89 pips	-1.14%
NZD/JPY		-50 pips	-0.85%

THE STORIES IN THE CURRENCY MARKET

• FX: RATING AGENCIES RUIN THE PARTY
• EUR: LIFTED BY EFSF PASSAGE AND DATA
• GBP: HOUSING MARKET REMAINS WEAK
• NZD: SURPRISE DOWNGRADE BY FITCH
• CAD: MIXED INFLATION NUMBERS
• AUD: JOB VACANCIES RISE
• JPY: CONSUMER SPENDING WEAKENS

EXPECTATIONS FOR UPCOMING FED MEETINGS

** PERCENTAGES MAY NOT ADD UP TO 100% BECAUSE OF THE PROBABILITY OF LARGER OR SMALLER MOVES BEYOND THOSE SHOWN ON THIS TABLE

FX: RATING AGENCIES RUIN THE PARTY

Blame it on the rating agencies! Throughout the past few years, the decision of rating agencies has played a big role in the movements of the markets. Their failure to accurately assess the risk of collateralized assets contributed in a large way to the subprime / Global Financial Crisis. Since then, they have been working hard to regain their reputation at the expense of investors because their rash decisions to downgrade the sovereign debt ratings of many countries have increased volatility across the financial markets. Many of the countries deserved their downgrades but other decisions were more questionable. In every case however, the downgrades have sapped the optimism in the market and today's decision by Fitch Ratings to downgrade New Zealand wasn't any different. Despite the relative stability of New Zealand's economy and the central bank's positive outlook, Fitch believes that the country's high level of net external debt warranted a lowered credit rating. The ratings firm cut New Zealand's long term debt rating one notch to AA. When the announcement was made, the New Zealand dollar fell sharply and other high yielding currencies such as the euro, British pound and Australian dollar followed suit. Investors felt that if Fitch was willing to downgrade the rating of a country with as rosy of an outlook say New Zealand, they would probably not hesitate to downgrade the rating of many other countries, particularly those in Europe. Fitch still rates the U.S. as AAA but if they start to get downgrade happy, they could follow in the footsteps of Standard & Poor's and lower the country's rating.

Meanwhile, better than expected U.S. economic data kept the dollar supported against the Japanese Yen. Jobless claims fell 37k to 391k from last week to the lowest level since April. Normally, the dip below 400k would be extremely encouraging but even the Labor Department does not believe in the improvement. A department official attributed the large decline last week not to stability in the labor market, but rather technical issues and seasonal adjustments. However the dollar still rallied on the news because the four week moving average of claims, which gives a more accurate sense of the overall trend in the labor market declined by 5,250, allowing investors to overlook the "technical issues." Second quarter GDP was also revised up to 1.3 from 1 percent. Although economists had expected an upward revision, growth in the second quarter was firmer than expected thanks to stronger retail sales and spending on structures. Pending home sales also fell less than expected. Although we are encouraged by the U.S. economic reports and they may reduce the urgency for QE3, they do not change the fact that the U.S. economy is weak and that more stimulus is expected from the Federal Reserve. Even uber hawk Plosser seems to agree that more needs to be done. The Philadelphia Fed President expressed skepticism about the central bank's latest move along with the effectiveness of Operation Twist and said he is open to reducing interest on excess reserves. Personal income and spending are schedule for release tomorrow along with the PCE Deflator, Chicago PMI and final September University of Michigan Consumer Sentiment numbers. Weaker numbers are expected for spending and income but manufacturing activity in the Chicago region could tick higher following similar improvements in Philadelphia and Richmond. We don't expect any major changes to risk appetite with little in the way of ground breaking event risks on Friday.

EUR: LIFTED BY EFSF PASSAGE AND DATA

The euro may have ended the day in positive territory against the U.S. dollar but it is well off its earlier highs and in fact appears to be at the cusp of turning negative. The currency pair has held above 1.35 for the past 3 trading days but the long wicks suggests that the bulls are losing control. Better than expected German economic data and the smooth passage of the amendments to the European Financial Stability Facility helped to keep the EUR/USD supported but investors are beginning to run out of patience. Aside from approving the prior extension to the EFSF, which the market has already deemed to not be enough, we have heard little in the way of a tangible plan to provide broader support for the region. According to EU's Juncker, the size of the EFSF bailout fund does not need to increase and officials close to the matter do not believe that a decision will be made on EFSF leverage at the Eurozone finance ministers meeting on Monday. Tomorrow, Austria votes on increasing their contribution to the EFSF and like the Germans, they should approve the changes easily. With 523 members of the Bundestag voting for the increase in the EFSF and only 85 voting against the decision, the vote in Germany was as close to being unanimous as German Chancellor Merkel could have hoped for. Most importantly, 315 members of her own coalition backed the proposal, helping her keep a Chancellor's majority. Having such a large number of her own party support the decision was important because it signals potential support for future bailouts. Investors have looked beyond the EUR440 billion expansion and now expect, not want the Europeans to come up with a much larger bailout package. Merkel will need the support of her own party in order to get this done. Germany's unemployment report was also much better than expected with the number of people filing for unemployment benefits falling by 26k in the month of September. The larger decline pushed the unemployment rate down to 6.9 from 7 percent. Unfortunately, the euro failed to hold onto its gains as the confidence numbers from the region showed a deterioration in sentiment in the month of September. German retail sales numbers are scheduled for release on Friday. Despite the improvement in the labor market, a decline in Retail PMI suggests that consumer spending pulled back slightly last month.

GBP: HOUSING MARKET REMAINS WEAK

The British pound edged lower versus the euro while rising slightly against the U.S. dollar despite weaker housing market data. According to Nationwide Building Society, the country's house prices were little changed in September printing at 0.1 percent. As consumers are hit with high inflation rate and government's austerity plans, the housing market has struggled to recover. The average cost of a home has dropped 0.3 percent from a year earlier. While house prices remain subdued, mortgage approvals increased more than expected to 52.4K in August. This print hit a 20-month high rising the most since December 2009. Nonetheless, with a possible Greek default looming, consumer confidence waning, and sluggish manufacturing and service sectors, the U.K. economy is still faced with significant downside risks. BoE, as suggested by MPC member Ben Broadbent on September 26^th, is contemplating to expand its asset purchasing program in order to resuscitate the faltering recovery. In addition, MPC member David Miles stated the possibility for more QE in an interview yesterday as "the case for quantitative easing has become quite finely balanced" in his mind. With more policymakers leaning towards quantitative easing, sterling could see more weakness in the months ahead. On the docket tonight, we have the GfK Consumer Confidence, which could show more sign of distress.

NZD: SURPRISE DOWNGRADE BY FITCH

The New Zealand, Canadian and Australian dollars fell sharply against the greenback. The losses in NZD were the most pronounced which is not surprising considering that the pullback in risk was triggered by Fitch Rating's downgrade of New Zealand's sovereign debt. The NZD/USD is trading a whisker above its 5 month low and we believe that further losses are likely as funds adjust their positions in reaction to the downgrade. We expect either the RBNZ Governor or the Finance Minister to make comments this evening in reponse and in all likelihood, they will downplay the decision by Fitch by saying that Asian growth will keep the New Zealand economy and its balances well supported. At the end of the day, the outlook for New Zealand is still brighter than that of many other countries and for this reason, the pullback in the NZD/USD could be limited. New Zealand business confidence numbers are scheduled for release this evening. Meanwhile the Canadian dollar fell to an 11 month low against the U.S. dollar amid mixed inflation numbers. Industrial product prices rose 0.5 percent in August while raw material prices dropped 3.2 percent. The Australian dollar fell the least compared to the other two commodity producing currencies thanks in part to an uptick in job vacancies. The RBA however is not optimistic on the outlook for the Australian economy with RBA member Broadent warning that it will be a long time before Australian retailers will be able to enjoy the same level of growth as before.

JPY: CONSUMER SPENDING WEAKENS

The Japanese yen traded lower versus all of the major currencies. The encouraging development from EZ's debt crisis sparked improvement in risk appetite as traders shunned the low-yielding yen. While this progress allows the Bank of Japan some room to breathe, this break is likely temporary. The Japanese domestic economy could be returning back to a slump with retail sales dropping 2.6 percent in August versus a forecast of 0.6 percent decline. Although the retail sales rebounded from a plunge caused by the March earthquake, the relief was unable to extend beyond June and July. The more-than-expected decline led by shrinking demand for autos and appliances amid a growing concern over the tax increases. The tax proposal initiated by the incumbent Prime Minister Yoshihiko Noda could be a drag on Japan where personal consumption makes up 60 percent of the economy. Meanwhile, the BoJ Governor Masaaki Shirakawa remains steadfast on bank's forecast indicating that Japanese economy will resume a moderate recovery later this year. "Japan's economy is picking up steadily but is still in the midst of recovering from the slump after the (March 11) earthquake," he said in a speech to a meeting of credit unions. The bank will be closely watching developments in Europe as the upside risk in yen presents further damaging effects to the Japanese exporters. Any further worsening in EZ's sovereign debt crisis could drive flocks of investors to the yen pushing the country's currency back to its record high. Looking forward, we have manufacturing PMI, household spending, CPI, and unemployment data from Japan tonight.

USD/CAD: Currency in Play for Next 24 Hours

The USD/CAD will be our currency pair in play for the next 24 hours. From the U.S., we expect Personal Consumption at 8:30 AM ET/ 12:30 GMT, followed by U of Michigan Confidence Index at 9:55 AM ET/ 13:55 GMT. From Canada, we expect GDP data at 8:30 AM ET/ 12:30 GMT.

The USD/CAD is making new 14-months high and currently trades in an uptrend which we determined using the Bollinger Bands. The USD/CAD tested its first resistance level - the psychologically significant 1.04 handle as the pair's rally could not sustain. Beyond that, heavy resistance could be found at 1.0564, the 50% Fibonacci retracement. We drew our Fibonacci levels from the high in July '09 to the swing low in July '11. On the flip side, the nearest support is at 1.0205, the upper first standard dev. Bollinger Band. Should USD/CAD collapse through that level, the pair could find significant support at 1.0143 (10-day SMA).