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After yesterday’s seesaw day for equities, financial markets are displaying cautious optimism as the majority of participants focus on tomorrow’s FOMC rate decision, and whether the Fed decides to put the final nail in its asset purchase program.   Overnight action in equity markets was quiet due to a lack of economic data releases, though Bank of Japan Governor Kuroda was on the wires reiterating how a weak Japanese Yen was a positive for the economy.  The echoing of Kuroda’s dovish stance towards the Yen did little to prop up equity markets as the Nikkei traded with a soggy tone throughout most of its session and finished the day off by 0.38%; while the Yen didn’t hit its weakening stride until risk appetite started to take off during the European session.   Stronger than expected retail sales from Japan during the month of September were reported overnight with an increase of 2.7%, though the more important household spending figure that will be reported on Thursdaywill be the main data point to watch from a consumer demand perspective.  The consensus estimate calls for household spending to slow its contraction on an annualized basis with the release expected to come in at -4.3% vs. the drop of 4.7% witnessed in August.

The busy Thursday night of economic data for Japan will continue into Fridaymorning as the Bank of Japan is also set to meet, with rumors beginning to swirl the BoJ could cut this year’s GDP forecast and soften their language towards inflation due to lower oil prices.   The stance of the BoJ is that when adjusted for the sales tax hike, core inflation should hit 2% by FY2015, so any moderation or concern about being able to achieve that target will likely ratchet up expectations the central bank may also look to expand their QE program.   We would expect the Yen to trade with an offer basis throughout the week as traders focus on the divergence in monetary policy between the Fed and BoJ, with the pair currently trading in the high-107s.

As we get set for the opening bell in North America, durable goods for the month of September were released, and pressured the greenback lower in the wake of the figures dropping from the second straight month in a row.   All measures missed expectations by a wide margin, with the headline reading slipping a further 1.3% from the drop of 18.3% seen in August, but it was the proxy for business investment contracting by 1.7% that really put a damper on the report and displayed businesses are still cautious with their investment dollars due to global growth concerns.   S&P futures have managed to hold onto the majority of their overnight gains post release, but the USD is being sold across the board with the Aussie leading the charge.   The Loonie is also probing the top end of the range it has been confined too over the last week, gaining strength off the drop in durable goods orders along with the fact that oil is on the move higher.   Front-month WTI is probing back into the mid-$81/barrel range, and is putting downward pressure on USDCAD as it slides into the low 1.12s.   With the Fed in focus tomorrow, the support level of 1.12 for USDCAD will be paramount for today’s session, with buyers of USDCAD just south of the critical support area standing by to sop up supply.

Further reading:

EUR/USD Oct. 28 – Settling above 1.27 ahead of US data

DXY, EUR/USD: Is USD On The Edge Of A Big Move? – Goldman Sachs