Credit worries dominate once again - are we in for another wild Friday? Is EURUSD ready to consolidate lower?

Gold tumbled yesterday - has AUD priced in enough worry?

MAJOR HEADLINES – PREVIOUS SESSION

Overnight developments:

* US Philadelphia Fed out at 8.2 vs. 5.0 expected
* US Fed's Hoenig says he is in "wait and see" mode on interest rate policy
* China Oct Fixed Assets Investment rose 26.9% YoY vs. 26.2% expected
* Switzerland Retail Sales rose 7.1% in Sep (YoY) vs. 4.2% expected


THEMES TO WATCH – UPCOMING SESSION

Key event risks today (all times GMT):

*

US Fed's Kroszner to speak on Economic Outlook (1345)
*

US Sep Net Long-term TIC Flows (1400)
*

US Oct Industrial Prodution and Capacity Utilization (1415)

Market Comments

Credit worries are accelerating as the likes of Fannie Mae are being dragged into the fray and dark rumors of various other market behemoths in trouble are swirling. This could be a day to remember in markets as risk aversion could remain very elevated. Again, we think this favors JPY above all, but also the USD and CHF.

Looking at how things have played out in this very large correction, we notice that many of the riskier currencies have already taken a rather large hit versus the USD - here we're talking about the "other dollars" and the likes of NOK and GBP. But the EUR has remained perhaps a bit too elevated, as normally it's relative movements to the USD have been tightly correlated with other currencies' movements versus the greenback. The short term support at 1.4600 is breaking as this is being written, and we wonder if this could be the kick-off point for further waterfall declines toward a reasonable consolidation levels. Although credit worries are grabbing the headlines, there seems to be a growing noise level on the prospects of a global growth slowdown, which means that other currencies' forward expectations have further room to fall compare to the expectations for the US economy, which are already very low.

Still, the emerging markets are amazingly resilient as not all of the panic buttons have been pressed, and there's always the risk of "one more round" of short-term optimism, or the risk that the market gets overpositioned in the short term. Still, it would seem that this risk aversion theme has further to run as real systemic risk in the financial industry is increasingly evident. This could mean a wild ride into the close today.

In the UK, the negative Retail Sales reading pushed GBPUSD below the 2.0500 level, and the pair could be set to test the next key support area at 2.0000 with 2.0500 serving as resistance now.

One of the currencies that should be really suffering in this environement is the AUD, and with yesterday's more than 30-dollar drop in gold prices and copper prices breaking to new lows this morning, we wonder why AUD is not even weaker - keep an eye on that one as a global growth slowdown should be devastating for AUD. One possible reason AUD is finding support is continued capital flows and the fact that the interest rate view for Australia hasn't seen any downward adjustment thus far.

Chart: EURUSD was breaking the short-term support at 1.4600 this morning and is having a look at breaking the rising trendline here. A sustained sell-off here could have the pair focusing on the 0.618 Fibo down at 1.4365, which is also close to the old high at 1.4345.




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