• JPY weakening on sell-off in US treasuries. NZD takes a hit on ugly Retail Sales data.

MAJOR HEADLINES – PREVIOUS SESSION

  • New Zealand Aug. REINZ House Sales rose 39.0% YoY vs. 34.0% in Jul.
  • New Zealand Jul. Retail Sales fell -0.5% and -0.5% ex Autos vs. +0.4%/+0.5% expected, respectively
  • Switzerland Aug. Producer and Import Prices fell -5.5% YoY vs. -5.4% expected
  • EuroZone Q2 Employment fell -1.8% YoY vs. -1.2% expected
  • EuroZone Jul. Industrial Production fell -15.9% YoY vs. -16.7% expected
  • Canada Q2 Capacity Utilization Rate out at 67,4% vs. 65.5% expected

THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • US Fed's Lacker to Speak about Financial Regulation (1630)
  • UK BoE's Haldane to Speak (1700)
  • US Fed's Yellen to Speak (1950)
  • New Zealand Q2 Manufacturing Activity (2245)
  • UK Aug. RICS House Price Balance (2301)
  • Australia Q2 Dwelling Starts (0130)
  • Australia RBA Meeting Minutes (0130)
  • New Zealand Aug. Non-residential Bond Holdings (0300)

Market Comments:

Trade tensions materialized between US and China over the weekend after President Obama announced new tariffs on Chinese-made tires Friday. China retaliated Sunday with threats to invoke tariffs on chicken products and automobiles. This theme hit the market out of nowhere, and we have seen a quick consolidation of some of last week's weak USD trade. The question now is whether this situation follows the trajectory of similar tensions in the past (an eventual scuttling of direct tariffs due to WTO objections or after a round of negotiations) or develops into an all out trade war. Certainly, if we were to judge from Obama's campaign promises, the president is no free trader and this could be a developing theme going forward, but there have been an endless series of greater and lesser trade confrontations in the past, and the present general environment of "we're on the road to recovery" wouldn't seem to be conducive to the beginning of a serious confrontation with China on trade issues. If the recovery falters again and official unemployment is shooting past 12%, on the other hand, then we might have a different situation on our hands. The Chinese press may even have it right: this could just be a way for Obama to garner new marginal support as his health care proposals go to a vote, as trade issues are normally a populist issue.

Much attention was given to statements by Nobel-prize winning economist Joseph Stiglitz this weekend, namely that the bank problems have become even larger in the wake of the Lehman collapse due to the new, even bigger banks that dominate the landscape. His comments are very apt: how can regulators maintain a two-tier system with extra large banks that are forced into a special, and awkward yokes of oversight. It is interesting to see the focus on limitation of compensation and strict oversight on "systemic risks" rather than a focus on breaking up banks into more limited structures that would prevent the presence of megabanks in the first place (similar to the way they were before the Glass Steagall act was repealed in 1999). It is really remarkable, considering the extent of the financial crisis unleashed last year, how little has really changed, and the "recovery" is jeopardizing the administration's ability to reform anything. Stiglitz is also encouraging a refocusing of attention by the public sector on other measures of economic prosperity besides GDP. Now that would be a change...

An ugly retail sales data point and the weekend's trade tremors knocked the stuffing out of the NZDUSD rally, as it feels like anything much north of 0.7000 could give that pair a nosebleed for a while. As with AUDUSD (on an interest rate spread basis) there has been nothing to justify this latest rally in the currency versus the greenback, which seems mostly to be weakening on market "emotion" for lack of a better word. Speculative positioning in the US futures market (a somewhat delayed measure as the Friday report showed Tuesday's positions) continues to show extremely lopsided positioning in favor of USD weakness - a signal for the contrarians. It seems there may be a risk in the higher beta currencies for a more two-way market in the near term - but that will still require that the equity market cool its heels for a while as well....something we've seen no signs of just yet.

Looking ahead at economic data points of interest, we note the RICS House Price Balance, which is the best of the many UK housing surveys. The number for August is expected to show a reading as high as 0.0% (in which an equal number of estate agents are seeing rising vs. falling prices) since July of 2007. Is this the high point for the recovery in the UK? It is hard to fathom the idea of a sustainable rise in house prices again in the UK. Again, if we are to see the beginnings of a double dip somewhere in the world economy, it may be in the UK. Then tomorrow we have the UK and US inflation data, the German ZEW (an overrated survey), and importantly, the US Retail Sales number for August, where the focus will most certainly be on the "ex Autos" data after the recent auto-buying incentives were in full swing in that month.

It is also interesting to note the JPY weakness this morning as US treasuries have taken a significant hit since Friday's highs. Meanwhile, EuroBunds are well bid - is this all part of the trade tensions story or is something else afoot?


Chart: EURUSD

A brief tremor overnight has been rejected in today's trade as EURUSD looks poised to have a try at the 1.4635 area resistance. But the action has been very steep of late in the USD crosses and we're getting interest rate signals that are relatively supportive of the USD.