Rallying government bonds sending JPY on a rocket ride. USD action still inconclusive.


MAJOR HEADLINES – PREVIOUS SESSION

  • New Zealand Q2 Producer Prices Inputs/Outputs out at 0.0/-0.7% QoQ vs. -1.0%/-0.5% expected, respectively

  • Australia Jun. Westpac Leading Index rose 0.7% MoM vs. -0.4% in May

  • Germany Jul. Producer Prices out at -1.5% MoM vs. -0.2% expected

  • EuroZone Current Account out at -5.3B vs. -0.1B in May

  • UK BoE Minutes showed 6-3 vote at last policy meeting

  • UK Aug. CBI Industrial Trends Total Orders rose to -54 from -59 in Jul.

  • Canada Jul. Consumer Price Index fell -0.3% MoM and -0.9% YoY vs. -0.2%/-0.8% expected, respectively

  • Canada Jul. CPI Core was 0.0% MoM and 1.8% YoY vs. 0.1%/1.8% expected, respectively

  • Canada Jul. Leading Indicators rose 0.4% vs. 0.2% expected


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • US Weekly Crude Oil and Product Inventories (1430)

  • Japan BoJ Board Member Mizuno to Speak (0130)

MARKET COMMENTS

The Shanghai Composite was the master of proceedings once again overnight, as a renewed precipitous drop in the index of over -4% after yesterday's rally attempt had the risk-mongers heading for cover once again. Bonds rallied, major equity indices sold off, and the JPY spiked to new recent highs against the rest of the market.

The other big independent mover in today's action has been the pound, which was knocked back from its rally attempt after the BoE minutes showed governor King pushing for a larger amount for asset purchases (200 billion vs. the 175 billion that was actually agreed upon) than the rest of the MPC was willing to allow. The dissenters in the 6-3 vote (King and two others) were looking for more asset purchases. Also grabbing headlines in the UK was opposition leader Cameron's comments about UK's indebtedness and whether the UK risked a default. This was more of an attention grabber than a market mover , but one can sense the platform of the Conservative party in the next elections from comments like these.

Canada's inflation data give little reason to fret inflation in the short term as USDCAD trades back up toward 1.1100 on the risk aversion in the market. 1.1120 was the recent high. The weekly US API crude oil inventories yesterday showed a massive drop in crude supplies, and oil prices responded with a sharp rally. Looking at inventory levels in general, a sharp drop is no major problem considering that supply levels are well above their recent historic norms for this time of the year. Gasoline supplies are also at the upper end of normal levels and distillate supplies are massively above the norms. One wonders why crude oil is trading at 70 dollars a barrel.... It looks like USDCAD wants to hold the 1.1000 area as support.

Looking at the market for today, we see that the JPY has made its move - why is AUD so unbelievably complacent? Yes, we have seen a considerable consolidation lower from recent highs in AUD, but the alarming developments in China should be triggering more worry than they have thus far. Is this a sign of strength for the Aussie or is the market dangerously ignoring the implications of what is going on. Perhaps some argue that all of the dovish central bank signals of late from other central banks and falling yields elsewhere are really making the Aussie shine on a yield comparison basis, what with its resilient economic fundamentals and hawkish central bank - but yield spreads are going to contract viciously if investors every try to put two and two together on what happens to the Australian economy if all of its external supports are torn away. Market positioning also suggest tremendous volatility risks if the sell-off extends below recent support levels.

The USD has also failed to convincingly make its move after its recent reversal from new lows. Something needs to happen soon here if we are to see this stronger USD scenario pan out, otherwise we fear a return to inconclusive and frustrating ranging activity. The next data point of interest on our radar is tomorrow's weekly jobless claims out of the US. Then we have the preliminary manufacturing and services PMIs from Europe on Friday ahead of Bernanke's appearance at the Fed's Jackson Hole conference.

Chart: EURUSD

EURUSD remains teetering on the brink of the 55-day moving average. Will a break be a catalyst for sharper downside action in days to come, or will the bears be frustrated once again. In 2008, EURUSD spent almost five months in the 1.53-1.60 range before breaking lower in August. This year, we've been in the 1.3750-1.4450 range for three months and counting. Let's hope for the sake of keeping our interest in the proceedings, that something gives soon either way.

EURUSD