It also plans to slow the pace of its bond-buying program


MAJOR HEADLINES – PREVIOUS SESSION

  • CA Jun. Int’l Merchandise Trade out at -0.1 bln vs. -0.7 bln expected and revised -1.1 bln prior

  • CA Jun. New Housing Price Index out at -0.2% vs. flat expected and -0.1% prior

  • US Jun. Trade Balance out at -$27.0 bln vs. -$28.7 bln expected and -$26.0 bln prior

  • NZ Jul. Business NZ PMI out at 49.7 vs. revised 46.5 prior

  • AU Aug. Consumer Inflation Expectation out at 3.5% vs. 3.2% prior

  • AU May Avg. Weekly Wages out at 1.2% q/q, 6.1% y/y vs. 0.7%/5.3% expected and 1.3%/5.7% prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • GE Q2 GDP (0600)

  • Swiss Producer/Import Prices (0715)

  • Sweden Industrial Production/Orders (0730)

  • EU ECB Publishes Monthly Report (0800)

  • EU Euro-zone Q2 GDP (0900)

  • US Retail Sales (1230)

  • US Import Price Index (1230)

  • US Initial Jobless Claims (1230)

  • US Business Inventories (1400)

Market Comments:

Of the central banks that held major events yesterday, the Bank of England proved to be the most despondent and Norway’s Norges Bank the most hawkish. While the BOE did not announce any downgrades to its UK growth forecasts, as many had anticipated, and acknowledged the improvement in shorter-term indicators, BOE governor Mervyn King was at his most dovish on rates, almost explicitly saying that current market expectations were wildly overdone. In addition, he said that the pace of growth and recovery would be highly uncertain. He was particularly scathing about the level of bank lending and, while not engaging in an outright call for banks lend more to customers, he warned that growth could be curbed if banks continued to limit lending to businesses and consumers in an attempt to repair their balance sheets. He even threatened to slash the interest the BOE pays on cash held in banks’ reserve accounts to encourage them to lend more.

Norway’s Norges Bank was at the other end of the spectrum, mentioning the vague possibility of a hike in interest rates in the future. Certainly the least bearish of the central banks of late, the market interpreted the comments as positive for the NOK.

The Federal Reserve were somewhere between the two. The statement from the FOMC was largely as expected, though there were some more hawkish (or shall we say less-dovish) tones detected in places. Rates were left unchanged and the Fed reiterated its stance that exceptionally low levels of rates would be warranted for an extended period. The best hint of a marginal hawkish adjustment was in its outlook for the economy, which it saw a stabilizing. With regard to its longer-term bond purchase program, the Fed maintained its limit of USD300 bln but would “gradually slow” its Treasury buying program, with the time-frame extended to October from September. The Fed indicated that it aimed for a "smooth transition" to ending the treasury buying program - perhaps thus hinting at an exit strategy down the road.

Before the FOMC revealed its intentions on the bond front, Wednesday’s auction of $23 bln worth of 10-year notes was relatively well received, though the yield was slightly higher than expected at 3.734% rather than 3.708%. The bid/cover ratio was a healthy 2.49 and indirect bidders accounted for 45%, the most since November 2005. A slight steepening of the curve was seen with 30-years up 10bp to 4.53% and the 2-years down 2bp at 1.15%. This was probably another catalyst helping USDJPY rebound from its lows just above 95.0.

Overall, the market liked the mildly hawkish approach and began to embrace risk again. The USD retreated from its pre-FOMC highs and the commodity currencies rebounded. Asian bourses followed on from wall St’s firmer close and most posted gains around 1%. The Shanghai Composite lagged behind however, suffering from a hangover of 6 sessions of selling, and proved to be a drag on the rally in the JPY crosses.

Despite the better view on risk, Asian FX markets were content to sit in slightly higher ranges. Early attention was focused on an article in the Wall Street Journal which reported that the Democratic Party of Japan (DPJ) may tolerate a rising JPY in its drive to jump-start domestic demand, if it takes power later this month (a highly likely event). The piece highlighted that DPJ officials had highlighted that they had no express intention to guide the JPY higher, they were more attuned to the benefits rather than the drawbacks of a strong domestic currency compared to the last administration. USDJPY eventually slid below the 96.0 mark, helped along by exporter selling as well.

Heading into Europe today, we have Q2 German and EU GDP, Swiss PPI, and Sweden’s industrial production on tap. EUR might get a tad nervous ahead of the GDP data. The US session is probably more critical with US retail sales and initial jobless claims grabbing the spotlight, closely followed by US business inventories.