Watch out for the Bank of England meeting later – could provide some volatility


MAJOR HEADLINES – PREVIOUS SESSION

  • CA Aug. Housing Starts out at 150.4k vs. 139.5k expected and 134.2k prior

  • NZ RBNZ leaves rates unchanged

  • NZ Q2 Terms of Trade Index out at -9.0% vs. -3.2% expected and revised -2.7% prior

  • JP Jul. Machine Orders out at -9.3% m/m, -34.8% y/y vs. -3.5%/-31.0% exp. and +9.7%/-29.7% prior resp.

  • JP Aug. Domestic CGPI out at flat m/m, -8.5% y/y vs. 0.2%/-8.4% expected and 0.4%/-8.5% prior resp.

  • AU Sep. Consumer Inflation Expectation out at 3.5%, unchanged from prior

  • AU Aug. Employment Change out at -27.1k vs. -15.0k expected and +33.6k prior

  • AU Aug. Unemployment Rate out at 5.8% vs. 5.9% expected and 5.8% prior

  • AU Aug. Full-time Employment Change out at -30.8 vs. revised -17.3 prior

  • AU Aug. Participation Rate out at 65.1% vs. 65.3% expected and 65.3% prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • Sweden CPI (0730)

  • Denmark CPI (0730)

  • Norway CPI/PPI (0800)

  • Sweden Unemployment (0800)

  • EU ECB’s Liikanen to speak (0900)

  • UK BOE Rate announcement (1100)

  • EU ECB’s Weber to speak (1215)

  • US Trade Balance (1230)

  • US Initial Jobless Claims (1230)

  • CA Int’l Merchandise trade (1230)

  • CA BOC Rate Decision (1300)

  • EU ECB’s Nowotny to speak (1530)

  • US Fed’s Lockhart to speak (1630)

Market Comments:

The bias to sell the dollar was evident for most of yesterday’s session but the greenback was able to recover some lost ground into the close. Nevertheless, EUR was able to print a new 2009 high just above 1.46 and most pairs exhibited the same tendencies as the dollar index posted now lows for 2009 and hit its lowest level in almost one year. Reasons for the rebound from the lows came from a strong response to the $20 bln 10-year note auction (drawing a yield of 3.51% versus 3.53% expected), comments from Fed’s Evans that the Fed will need to be faster a tightening than during the 2004-06 period, adding that deflation had been avoided and that the recovery had started. Very hawkish indeed whereas the Fed’s Beige Book report noted stabilizing conditions though with the cloud of “soft” consumer spending and the weak employment situation.

In the early Asian session today, the RBNZ stuck largely to the script the markets had prepared - no change in rates although there was some surprise about comments that “…we continue to keep the OCR at or below the current level through until the latter part of 2010…”. In a later newswire interview, Bollard continued his jawboning about the strength of the NZD, saying that NZ business profits were under pressure due to the slow economic activity and high value of the NZD currency. He was sure that the market would correct lower once it reassesses NZ’s recovery and fundamentals. Markets displayed only limited reaction to the comments, though the 0.70 psychological mark seems to have slipped further away (0.7006 high overnight, looks suspiciously like a barrier trigger).

Further excitement in Asia came from the unemployment report for August. While the unemployment rate was actually better than expected at 5.8% rather than 5.9%, a larger number of jobs were lost than forecast, 27,100 versus 15,000, and the participation rate slid to 65.1% from 65.3% prior (and forecast). In the details, a poor showing in full-time employment with 30,800 jobs lost was the final catalyst the pressured the AUD, seeing the commodity currency sliding to intra-day support at 0.8580 from 0.8635. Interest rate futures have extended their rally and look now to be questioning whether a rate hike will come in December. In response to the report, Australia’s employment minister, Julia Gillard, noted that it had troubling aspects and showed the need to continue with stimulus measures. A side-note on the commodity aspect – gold looks to be struggling to regain the 1,000 handle again after failing at 1,006 with a risk that we fall back through the 990 level.

There were also comments in Asia surrounding the four-day rally in EURUSD. It is suggested that a major force behind the rally has been the IMF’s need to translate the $50bln deal with China which needs to be translated into SDRs. The last review of the weighting of currencies making up the SDR basket (November 2005) shows the dollar at 44%, EUR 34%, JPY 11% and GBP 11%. As a result, the IMF would need to buy chunks of these currencies and the market has got wind of this and hence pushed levels higher. Smaller amounts would have to be bought in the JPY and GBP.

The highlights for today include the remaining two central bank meetings. Of the two, the Bank of England meet may provide the most fireworks. While no change in rates is expected, early-week press reports showed the British Chamber of Commerce calling for a cut in rates to help credit flow to businesses. There has been talk of reducing the interest paid on bank reserves in order to make them more active and this has led to a slow under-performance by GBP. Conversely, if there is no change then this would be GBP positive. The Bank of Canada announcement is probably more straight-forward with no change in rates and, in a similar vein to the RBNZ, jawboning on CAD strength.