Will the short-squeeze continue as we head into the long weekend in the US?


MAJOR HEADLINES – PREVIOUS SESSION

  • UK BOE leaves key rates unchanged

  • EU ECB leaves key rates unchanged

  • CA Sep. Housing Starts out at 150.1k vs. 148.0k expected and revised 157.3k prior

  • US Weekly Initial Jobless Claims out at 521k vs. 540k expected and revised 554k prior

  • US Weekly Continuing Claims out at 6040k vs. 6105k expected and revised 6112k prior

  • US Aug. Wholesale Inventories out at -1.3% vs. -1.0% expected and revised -1.6% prior

  • NZ Sep. Card Spending out at +0.7% m/m vs. revised +0.3% prior

  • JP Aug. Machine Orders out at +0.5% m/m, -26.5% y/y vs. 2.1%/-25.4% expected and -9.3%/-34.8% prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • GE Trade Balance (0600)

  • GE CPI (0600)

  • UK PPI Input/Output (0830)

  • UK Trade Balance (0830)

  • CA Unemployment Rate (1100)

  • CA Int’l Merchandise Trade (1230)

  • US Trade Balance (1230)

  • US Fed’s Lockhart to speak (1230)

  • CA Business Outlook (1430)

  • CA BOC Senior Loan Officer Survey (1430)

  • US Fed’s Kohn to speak (1615)

Market Comments:

No change in interest rates from both the Bank of England and the European Central Bank yesterday and, for a change, no drama from the BOE on the quantitative easing front with the Asset Purchase Target held steady at £175 bln. The MPC revealed that they would wait until the November inflation report is published before reviewing policy. Those anticipating a comment on the EUR’s strength following the G7 meeting were disappointed and the EUR managed a brief rally through 1.48 but soon ran out of steam. No problem there for the AUD though, as the commodity currency posted new 2009 highs at 0.9090 as gold also touched new all-time highs, riding the hawkish wave even longer following yesterday’s stronger employment report.

Fed speakers were out in force overnight and it was Chairman Bernanke’s comments that produced the most market impact. While Bernanke effectively said nothing new in his comments (while the Fed’s support for the economy will likely be needed for a while, the Fed must remove that help as the economy heals to ward off inflation), focus was more on the latter comments and the dollar was trading with a bid tone during the morning session. Heading into the long weekend in the States and a market overly short USD saw a minor short-squeeze of these shorts into the Asian lunch.

Fed’s Hoenig maintained the hawkish tone, adding that the worst of the crisis was behind us and expects the recovery to gather steam over the next 12-18 months, albeit at a relative snail’s pace. In line with Bernanke, he added that the Fed would remain very accommodative as the economy recovers but monetary policy must be forward-looking and shift to a more neutral bias as the economy strengthens. On the RBA’s move, he said the rate hike decision reflected the better performance of the Australian economy.

Despite the move by the RBA earlier this week and recent hawkish talk from the Bank of Korea, the BOK left key rates unchanged at 2.0%, possibly due to the current KRW strength. Indeed, the BOK was again seen intervening in local markets to prevent the KRW from strengthening too aggressively and this theme, seen across many South East Asian currencies in recent times since China effectively re-pegged the Renmimbi to the USD last year as export growth faltered. The activity by numerous SE Asian central banks has been quite aggressive and caught the attention in press reports in the FT. One aspect of the intervention is that, in the reserve portfolio asset re-balancing, these central banks have also been seen buying other major currencies against the USD, notably the EUR.

As Asia passes the ball onto Europe heading into the long weekend in the USA, some currency pairs are hovering above key supports to preserve the recent uptrend. The data releases tonight are unlikely to provide the dollar with much support, with the trade balance for August expected to show a wider deficit of $33 bln. However, if the afore-mentioned supports have broken beforehand then it will only provide a temporary barrier to a stronger USD rebound near-term.

Other data releases are more Canada-centric with unemployment, trade balance and BOC business and loan officer surveys on tap. Prior to that, we will see German CPI and trade balance data followed by UK PPI numbers.