JPY stronger again after odd-ball 20 bp cut. USD also plows stronger as recent EURUSD rally was apparently just a short squeeze.

The Bank of Japan was apparently trying to send some kind of message to markets overnight by only cutting 20 bps rather than moving in the usual and expected 25 bp increment. One can only imagine that they are trying to leave room to be able to cut 10 or 15 bps at a time, but they have so little yield left with which to work that the entire exercise is rather silly. In any case, the JPY hardly budged and its strengthening again late in the Asian session on nosediving equities suggests that the recent rally sequence in JPY crosses was mostly a short squeeze (this may be the case across markets really, combined with the equity/bond rebalancing we discussed previously). Still, one wonders whether we will be able to do much more than go back and test recent lows in some of these JPY crosses as the BoJ will undoubtedly be lurking the next time the action heats up. Still plenty of room on the downside between here and there.

UK confidence was out overnight at the lowest levels since the oil crisis of 1974. And yet GBP has remained relatively bid in some of the crosses - especially vs. the Euro. One focus for the Euro of late has been its vulnerability relative to the turmoil in CEE currencies and it was notable that as these turned sharply south yesterday, so did EUR. Also weighing on the Euro are the divergent yields on various countries in the EU, what some have called the PIGS spreads (The yield on paper from Portugal, Italy, Greece, Spain vs. that of German benchmarks.) Still, with the JPY and USD moving stronger again, GBP is likely to stay on a weak footing against these currencies. With things looking so dire on the sceptered isle, many are talking up the possibility of the BoE moving by 100 bps next week.

Up today we have the final regional US manufacturing survey with the Chicago PMI. The other regional surveys have been awful this month and could set up the worst ISM number on Monday since the early 1980's. The trends are all pointing to a truly ugly Q4 GDP picture for the USA: First, the strong export market was propping up US growth numbers previously, but the financial and economic implosion unfolding in EM and elsewhere have put an end to this phenomenon. So the slightly better than expected Q3 growth numbers still contained a bit of residual strength from the export sector that will not be there in Q4. Also, the Q3 growth numbers showed a sharp deceleration in consumer spending that is clearly deepening into Q4 and the combination will prove toxic for Q4 growth data. Clearly, none of this spells ill so far for the US dollar, where its strength related mostly to the global deleveraging issue - the more mayhem, the more the greenback strengthens, in other words. We're also very curious to see the ISM non-manufacturing data for October next Wednesday as the resilient September number simply defied belief.

The EuroZone picture looks far from rosy as well. Just this morning, German retail sales for September look very weak and we have to consider that unemployment numbers in the less flexible European labor market have not even begun to tick higher in some places while they've already risen by a third in the USA. It's hard to believe that the October unemployment rate for Germany, for example, ticked down to a new low since the integration of East Germany began in the early 1990's - this in an economy that is crash landing....

Liquidity is absolutely atrocious and one should adjust leverage accordingly. At one point this morning in the late Asian session, GBPUSD jumped around 60+ pips back and forth - likely on hardly any flow at all. Today is also the last trading day of the month, which means end of month fixing based on relative market performance around the world and this could mean drastic swings in the 1200-1600 time block in London.

Be careful out there - markets may be more than a bit ghoulish on this Halloween.

Chart: EURUSD
EURUSD currently following through lower after yesterday's climax reversal. If we are seeing a bigger attempt at consolidation here, we could look for support around the current 1.2700 levels (the 0.618 retracement level) or at the 1.2550 area ( the 0.764 retracement shown below). As long as equities remain under pressure, however, we could be looking at a full resumption of the bear trend if 1.2330 gives way in the coming days, in which case a try toward 1.2000 or lower would be in order.