Risk appetite still on the menu after hitting a few speed bumps yesterday
USD continues to weaken, but are we approaching a turning point?
MAJOR HEADLINES – PREVIOUS SESSION
US Aug. CPI out at +0.4% m/m, -1.5% y/y vs. +0.3%/-1.7% expected and flat/-2.1% prior
US Q2 Current Account Balance out at -$98.8 bln vs. -$92.0 bln expected and -$104.5 bln prior
US Jul. Net long-term TIC flows out at +$15.3 bln vs. +$60 bln expected and +$90.2 bln prior
US Aug. Industrial production out at +0.8% vs. +0.6% expected and revised +1.0% prior
US Aug. Capacity Utilization out at 69.6% vs. 69.0% expected and revised 69.0% prior
US Sep. NAHB Housing market Index out at 19, as expected, vs. 18 prior
NZ Aug. Business PMI out at 48.7 vs. revised 49.6 prior
JP Q3 BSI Large All Industry Index out at 0.3 vs. -22.4 prior
JP Q3 BSI Large Manufacturing Index out at 15.5 vs. -13.2 prior
JP Jul. Tertiary Industry Index out at 0.6% vs. 0.5% expected and 0.2% prior
JP BOJ leaves rates unchanged at 0.1%
SI Aug. Non-oil Domestic Exports out at -7.1% y/y vs. -5.0% expected and revised -8.7% prior
THEMES TO WATCH – UPCOMING SESSION
(All times GMT)
UK Retail Sales (0830)
EU Euro-zone Trade Balance (0900)
EU Construction Output (0900)
UK CBI Sep. Industrial Trends (1000)
CA CPI (1100)
Swiss SNB Rate Decision (1200)
CA Leading Indicators (1230)
US Housing Starts (1230)
US Building Permits (1230)
US Initial Jobless Claims (1230)
US Philadelphia Fed Index (1400)
A session of sharp swings yesterday but the dollar finished the session still with a weaker bias as risk sentiment remained intact. US bond markets took a hit amid reports that a leading think-tank suggested 2 senior Fed officials were turning more hawkish and that markets jumped to the conclusion thast they could advocate a rate hike as early as next week, and look for an early exit strategy. The kneejerk reaction was to buy the dollar as US yields rose with USDJPY staging the smartest turnaround from the low 90’s to head back to mid 91’s. Earlier the pair had gravitated towards the 90.0 mark after Japan’s new finance minister Fujii had said he supported a strong JPY and was against intervention if markets moves were not too rapid.
The dollar’s strength proved short-lived however as US data continued to come in on the better side of forecasts (CPI, industrial production and capacity utilization)and we soon hit new 2009 highs for the EUR, CHF AUD and NZD. GBP was again a laggard even though UK employment data was better than expected with the hangover from BOE King’s comments on Tuesday still a threat.
During the Asian session, the BOJ kept the call rate unanimously unchanged at 0.10% and its Lombard rate steady at 0.30%, as had been widely expected. However it's economic assessment was upgraded by saying the economy now showed signs of recovering versus its view in the prior month that the economy had stopped worsening. Otherwise everything else was more or less the same, with the central bank sticking to its stance that the economy would likely pick up in the latter half of the year to March 2010. The BOJ also still saw downside risks but noted financial conditions, though severe, were increasingly showing signs of improvement.
While on the topic of central banks, the Swiss National Bank holds its rate meeting today and, while the market is expecting no change in rates from their current 0.25%, eyes will be glued to the accompanying statement for further comments relating to CHF strength. With a sense that the market is heavily positioned short of CHF, there is a risk that any reaction to weakening the CHF may be muted. Watch for that at 1200GMT.
Elsewhere in Europe, UK retail sales and Euro-zone trade data will grab the attention. While the UK sales data is notoriously fickle and unreliable, markets will pounce on any sign of weakness as another excuse to pound the pound. On the other hand, if US data matches market expectations (initial jobless claims at 555k versus 550k last, housing starts at 598k versus 581k, building permits at 583k (564k prior) and the Philly Fed Index at 8.0 from 4.2 last) then expect to see an extension of the recent trend – Wall Street higher, the USD lower and commodity currencies in demand.
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