1.40 Euro within Reach, Retail Sales Fuel Trend

Market participants completed the task of erasing the final two weeks of September on Friday on newfound optimism about US growth. The commodity currencies soared and JPY floundered in a classic risk-off fashion. Despite the swelling sentiment, USD longs expanded for the fifth week in the Commitment of Traders report. The 1.3940-90s stand as the next objective, as the 55 & 200 MA loom.

September US retail sales grew 1.1% -- the most in 7 months and the August report was revised to +0.3% from unchanged. The consensus estimate was for a 0.7% rise. Ex-autos climbed 0.6% versus the +0.2% consensus.

The data, combined with the earlier benign Chinese inflation report, sparked another round of risk appetite. The S&P 500 climbed 1.7% to 1224 to cap the largest weekly gain (6%) in more than two years.

In most markets its as if the market has done a complete re-think of the late-September trade. Optimism about a solution in Europe has been the driving force but unexpected stability in the US and China has underpinned sentiment.

Despite the turnaround, markets remain well under mid-July levels. A reminder of the apprehension came in the U Mich consumer sentiment survey as it fell to 57.5 from 59.4 and missed the 61.0 consensus. The sub-index measure expectations for six months from now fell to the lowest since 1980.

The divergence between hard data and sentiment along with the volatility in markets cannot persist. Markets appear to be pricing in an outcome close to the best-case scenario in Europe and the US while underestimating risks in the developing world.

Weekly Chats

Its an exciting time to look at the weekly charts.

EUR/USD climbed nearly 500 pips in the week and generated a bullish morning star pattern. Although this points to gains we caution that the market was extremely short EURs and that may have exaggerated the recent upside. Key hurdles in the week ahead include 1.3936 and the 200dma.

GBP/USD also made strong strides, closing the week above the July lows. Congested resistance lies in the 1.59-1.60 range with clear sailing afterwards.

AUD/USD has posted a convincing four-candle reversal on the weekly chart but it also closed directly below the downtrend from the July and Sept highs. The direction of the trade on Monday is highly likely to continue for the rest of the week.

The other key levels to watch on the weekly chart are 1230 on the S&P 500, 1691 in gold and 33.51 in gold.

CFTC Commitment of Traders

Futures position showed the net dollar value of longs expanded to $14.24B from $13.77 at the CME as yen bets were scaled back. We warn, as always, that the data is calculated at the close on Tuesday. The euro remains in a deeply net short position at -74K contracts but that was pared back from -83K. Similarly GBP shorts declined to -62K from -69K.

JPY remains the favoured currency but the net yen long was scaled back to 35K from 43K. Commodity currencies were mixed as CAD fell to -25K from -16K and AUD to +11K from +13K. The NZD position expanded to +7K from +6K.