The euro depreciated vis-a-vis the U.S. dollar today as the single currency tested bids around the US$ 1.4145 level and was capped around the $1.4225 level. Technically, today’s intraday low was right around the 50% retracement of the move from $1.4280 to $1.4015. Many factors were dominant in the market today. First, the common currency came off on news that Turkey’s parliament may positively vote in the next-24 hours to conduct military operations in northern Iraq against the Kurdistan Worker’s Party (PKK). This is a very important development because it can potentially disrupt Iraqi oil exports, leading to higher energy prices and increased risk aversion. Second, Fed Chairman Bernanke spoke last night and said the FOMC voted to “do more sooner” in its most recent 50bps rate cut. Bernanke did not offer much in the way of clues as to how the FOMC will vote on 30-31 October. Many traders believe the FOMC will wait until December to ease policy further. Third, the German October ZEW expectations index was stronger-than-expected at -18.1. Fourth, EMU-13 September final harmonized consumer inflation was up 2.1% y/y, unchanged from provisional estimates. Fifth, Germany’s DIW institute trimmed its 2007 GDP forecast to 2.4% from 2.6%. Sixth, ECB President Trichet reiterated the U.S.’s continued call for a strong U.S. dollar while outgoing IMF boss Rato said the U.S. dollar is “overvalued” and subject to “further depreciation.” In U.S. news, many economic data were released. First, long-term August TICS capital flows fell to –US$ 69.3 billion from US$ 19.5 billion in July with total net foreign capital purchases at –US$ 163.0 billion. Foreign governments sold massive amounts of Treasury bonds during the market volatility turmoil that followed the sub-prime mortgage crisis. Second, September industrial production was up 0.1% while capacity utilization printed at 82.1%. Euro bids are cited around the US$ 1.4105/ 1.4080 levels.

The yen appreciated vis-a-vis the U.S. dollar today as the greenback tested bids around the 116.45 level and was capped around the 117.45 level. Technically, today’s intraday low was right around the 38.2% retracement of the move from 124.15 to 111.60. Risk aversion returned to the markets and short yen carry trades became unwound. Absent any major Japanese numbers last night, trades shunned risk on account of pending military action from Turkey, elevated energy prices, and negative earnings reports from Sweden’s Ericsson. Most traders believe the BoJ will keep the overnight call rate unchanged at 0.50% through the end of the year. The Nikkei 225 stock index lost 1.27% to close at 17,137.92. Dollar bids are cited around the 114.75 level. The euro fell sharply vis-a-vis the yen as the single currency tested bids around the ?164.90 level and was capped around the 166.95 level. The British pound and Swiss franc weakened vis-a-vis the yen as the crosses tested bids around the 236.85 and 98.45 levels, respectively. The Chinese yuan appreciated vis-a-vis the U.S. dollar as the greenback closed at CNY 7.5180 in the over-the-counter market, down from CNY 7.5284. PBOC’s investment arm was sold for US$ 67 billion to China’s new foreign exchange reserves management agency.

The British extended its recent slide vis-a-vis the U.S. dollar today as cable tested bids around the US$ 2.0295 level and was capped around the $2.0435 level. Technically, today’s intraday high and low were right around the 76.4% and 23.6% retracements of the move from $2.0495 to $2.0245. Sterling was hit hard after the release of weaker-than-expected September consumer price inflation in the U.K. that saw CPI up 0.1% m/m and unchanged at 1.8% y/y, a 30-month low. This means CPI has remained below the BoE’s 2.0% target rate for three consecutive months. Traders are reducing their expectations regarding possible further monetary tightenings from Bank of England’s Monetary Policy Committee. Some dealers are speculating there could be some votes at the November MPC meeting to ease rates. Core inflation fell to an eleven-month low of 1.5% y/y in September. Cable bids are cited around the $2.0185 level. The euro moved higher vis-a-vis the British pound as the single currency tested offers around the 0.6975 level and was supported around the 0.6950 level.

The Swiss franc depreciated vis-a-vis the U.S. dollar today as the greenback tested offers around the CHF 1.1845 level and was supported around the CHF 1.1785 level. Technically, today’s intraday low was right around the 38.2% retracement of the move from CHF 1.1620 to CHF 1.1895. Data released in Switzerland today saw August retail sales rise 3.8% y/y. The Swiss franc is benefiting from heightened global risk aversion. Dollar offers are cited around the CHF 1.1885/ 1.1945 levels. The euro and British pound weakened vis-a-vis the Swiss franc as the crosses tested bids around the CHF 1.6740 and CHF 2.4015 levels, respectively.

The Australian dollar fell sharply vis-a-vis the U.S. dollar today as the Aussie tested bids around the US$ 0.8820 level and was capped around the $0.9010 level. Stops were hit below the $0.8850 level, representing the 50% retracement of the move from $0.8610 to $0.9075. Australian dollar bids are cited around the US$ 0.8785 level. The New Zealand dollar again moved sharply lower vis-a-vis the U.S. dollar today as the kiwi tested bids around the US$ 0.7395 level and was capped around the $0.7645 level. Technically, today’s intraday low was right around the 38.2% retracement of the move from $0.6815 to $0.7785. New Zealand dollar bids are cited around the US$ 0.7305 level.

The Canadian dollar lost marginal ground vis-a-vis the U.S. dollar today as the greenback tested offers around the US$ 0.9815 level and was supported around the $0.9745 level. As expected, Bank of Canada kept its official bank rate unchanged at 4.50% today. BoC reported “Against a backdrop of robust global economic expansion and strong commodity prices, information received since the July Monetary Policy Report Update (MPRU) indicates that the Canadian economy is now operating further above its production potential than had been previously expected. The core rate of inflation, which has been above 2 per cent for the past year, was 2.2 per cent in August.” Regarding the loonie’s recent move to above parity, BoC added “On the downside, if the Canadian dollar exchange rate were to persist above the 98 cent U.S. level assumed over the projection horizon for reasons not associated with stronger-than-projected demand for Canadian products, Canadian output and inflation would be lower. In addition, the effect of the past appreciation of the Canadian dollar on demand and inflation could be stronger than expected and the effect of the weakness in the U.S. housing sector could be greater than anticipated.” Traders are paying close attention to a speech later today from Prime Minister Harper amid speculation it could precipitate a no-confidence vote. Data released in Canada today saw August manufacturing sales fall 1.7% after climbing 1.3% in July. U.S. dollar offers are cited around the C$ 0.9860 level.