JPY also on the back foot again after strong push into this morning. Core US PPI dips into negative territory...


MAJOR HEADLINES – PREVIOUS SESSION

  • US Jun. NAHB out at 15 vs. 17 expected and 16 in May

  • New Zealand May Non-resident Bond Holdings out at 73.3% vs. 71.2% in Apr.

  • Japan BoJ Target steady at 0.10% as expected

  • Japan May Tokyo Condominium Sales out at -19.4% YoY vs. -8.5% in Apr.

  • Switzerland Q1 Industrial Production fell -13.1% QoQ vs. -11.8% expected

  • Sweden May Average House Prices rose to 1.869M from 1.826M in Apr.

  • UK May CPI out at +0.6% MoM and 2.2% YoY vs. +0.3%/2.0% expected, respectively

  • UK May Retail Price Index out at +0.6% MoM and -1.1% YoY vs. +0.2%/-1.5% expected, respectively

  • Germany Jun. ZEW Survey rose to 44.8 vs. 35.0 expected and 31.1 in May

  • EuroZone May CPI out at 0.1% MoM and 0.0% YoY vs. 0.0%/0.0% expected, respectively

  • US May PPI out at +0.2% MoM and -5.0% YoY vs. +0.6%/-4.4% expected, respectively

  • US May PPI ex Food and Energy out at -0.1% MoM and 3.0% YoY vs. +0.1%/3.2% expected, respectively

  • US May Housing Starts out at 532k vs. 485k expected

  • US May Building Permits out at 518k vs. 508k expected


THEMES TO WATCH – UPCOMING SESSION

  • US May Industrial Production (1315)

  • US May Capacity Utilization (1315)

  • US Fed's Warsh to Speak (1715)

  • US API Weekly Crude Oil and Product Inventories (2030)

  • US ABC Weekly Consumer Confidence (2100)

  • Australia Q1 Dwelling Starts (0130)

  • Japan BoJ Monthly Report (0500)

Market Comments:

The USD responded true to its pattern of late yesterday as it strengthened while equities finally took a larger adjustment to the downside. The pressure continued overnight, as the Yen joined the hunt as well. EURUSD touched new lows for the last three weeks. By mid-session today, the USD bulls were on the defensive and the riskier currencies were rocketing higher across the board, with marginal support from equities and lots of support from the commodity complex (especiall oil is up sharply on the day.) If commodity prices are strong enough to do their own thing without implicit support from equities, this could certainly be a threat to any USD rally as it likely represents continued strong Chinese buying interest. In any case, the greenback's reversal here is a disappointment for the USD recovery attempt and the USD bulls really need that 1.3725/00 area to be taken out to make a better case for the USD. The Yen followed largely in the greenback's footsteps and even outperformed the USD as USDJPY was sharply lower intraday after the Imoku cloud support finally gave out with a bang. Later, the JPY proved its high beta mettle by weakening faster than the USD. One wonders how large the Iranian situation looms ias well.

We're getting more verbal intervention than ever on the USD, with Japan FinMin Yosano out overnight saying that Japanese confidence in the US debt and currency is "absolutely unshakable". The Russian finance minister was out doing the same thing yesterday, despite very public declarations from Medvedev that an alternative is needed. It seems the market is playing this reserve diversification theme despite this rhetoric, with the BRIC meeting today and the speculation that the biggest item on the agenda may be discussions of alternatives to the US dollar. As well, the BRICs are likely to discuss settling trade deals in their own currencies - a key threat to the USD in the long term/ It is clear there is a growing discomfort in the largest holders of USD reserves with its USD holdings. The question is whether the alternatives look any better if risk aversion returns with a vengeance. So far we don't know the answer to that question as yesterday's downtick is a one-off downtick unless it is followed up with an extension of the sell-off.

The US PPI ex Food and Energy reading actually dipped into negative territory on the monthly comparisons.
There is a rather persistent downward trend developing in the monthly comparisons as well, after years of choppy numbers that were far less trending. This is very interesting in the face of rising risk appetite - is there deflation on the ground that suggests persistent slack demand? The ISM Prices Paid data has yet to rise above the 50 level as well. And yet the media are still talking up hyperinflation and exit strategies - next week's FOMC meeting is shaping up to be an interesting one.

The US housing starts numbers were better than expected, though we have said in the past that these have become unsustainably low and we are likely to see a basing and even small rebound in these numbers in the coming year. More worrisome is the drop in the NAHB survey, which likely dipped this month as mortgage rates have surged again. The German ZEW survey was far better than expected, but this may simply be an after effect of the large rally in risk since early March that this survey has largely tracked. Looking forward, we wonder if anyone is going to take the noseplugs out long enough to smell the stench emanating from European banks. Even the ECB has been out fretting publicly about the need for more and larger writedowns. Is anyone paying attention?