Euro officials ready to go to China to complain about the yuan. Brazil creates tax to slow currency appreciation.


MAJOR HEADLINES – PREVIOUS SESSION

  • US Oct. NAHB Housing Market Index out at 18 vs. 20 expected and 19 in Sep.

  • Germany Sep. Producer Prices fell -7.6% YoY vs. -7.1% expected an -6.9% in Aug.

  • EuroZone Aug. Construction Output fell -11.3% YoY vs. -9.8% in Jul.

  • Canada Aug. Wholesale Sales out at -1.4% MoM vs. -0.4% expected

  • Canada Sep. Leading Indicators out at 1.1% vs. 0.8% expected

  • US Sep. PPI out at -0.6% MoM and -0.1% ex Food and Energy, vs. 0.0%/+0.1% expected, respectively

  • US Sep. Housing Starts out at 590k vs. 610k expected and 587k in Aug.

  • US Sep. Building Permits out at 573k vs. 595k expected and 580k in Aug.

  • Bank of Canada keeps rates steady at 0.25% as expected


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • UK Bank of England's King to Speak (1915)

  • US Fed's Yellen to talk with reporters (1930)

  • US Weekly API Crude Oil and Product Inventories (2030)

  • US Weekly ABC Consumer Confidence (2100)

Market Comments:

The greenback touched a new low in the Asia session and into early European trading after stronger than expected corporate earnings from Apple boosted equity futures after the New York close yesterday. But the big round number at 1.5000 in EURUSD seemed to have the market shying away from pushing the USD further into its hole at least briefly. In Asia, the RBA minutes supported the hawkish RBA theme (the RBA said it was "possibly imprudent" to keep rates at such low levels and simply commented on the reasons for the Aussie's strength without expressing any concern) and pulled AUDUSD above 0.9300 briefly before the pair eased back in European trading. Trichet was out trying to talk up the greenback once again with the usual comments about his interest in the US purported strong dollar policy. Other European officials were far more stark in their comments today, with one French official calling the strong Euro a "disaster". The unfairly strong Euro has become so pressing an issue that Trichet, Luxembourgs Juncker, and European Union Monetary Affairs Commissioner are planning a trip to China before the New Year. The intent is clear, though Juncker declined to "preannounce a message".

NY Fed practices its exit strategies

Yesterday, the New York Fed issued a statement about the Fed's test driving of the "reverse repo" exit strategy aimed eventually at soaking up liquidity from its massive easing and quantitative easing programs of the last year if a withdrawal of monetary accommodation becomes necessary. The statement was apparently aimed at stamping out speculation that the Fed is gearing up for an imminent end to its accommodative stance. The statement underlined that reverse repos are a normal part of the Fed's activities, including "triparty" settlements:

"This work is a matter of prudent advance planning by the Federal Reserve, and no inference should be drawn about the timing of monetary policy tightening. We have recently begun testing this capability with all involved parties and systems, and it is likely that the Federal Reserve will engage in additional tests in the future. No actual operations have been conducted as part of these tests. Recent Federal Reserve communications have also raised the possibility of expanding the set of counterparties he Desk might employ for conducting reverse repos beyond the Primary Dealers.....no decisions have been made regarding the types of firms that may be included."

Brazil to tax inflows

Brazil has taken an interesting step in attempting to slow the pace of capital inflows and stem the appreciation of its currency by reintroducing a special capital inflow tax that it has used in the past. The 2.0% tax on all inflows is higher than the previous 1.5% tax and does not apply to equity transactions. Still, the move is strong enough that it is likely to disrupt the strength of the trend. This move came after yesterday's story about Asian exporters looking to stem speculation in their currencies. Clearly, the development in currency markets are increasingly garnering a stronger and stronger official response from around the world and could slow the progress of recent USD weakening trend, all other factors being equal.

US Data, the USD and the JPY

The US data was a good test of the market's current themes: very ugly housing data puts a damper on risk, which is USD positive, while the very low PPI data suggests the Fed can continue to keep an accommodative stance as long as it wants to - a USD negative. Which side wins? The answer - as always of late - will be provided in the short term by the move in risk appetite. The housing starts data and yesterday's NAHB survey suggest that homebuilding is still barely moving and traffic of interested buyers is falling again now that it is too late to close a deal on a house purchase for first time buyers ahead of the expiration of the tax credit. Regardless of the effect on risk, the strong move higher in bonds today in the wake of the weak US data is likely to boost the JPY and see a reasonable correction in the overbought JPY crosses. USDJPY was down flirting with the 90.00 level after breaking through 90.40 support and could be in for a retest of recent lows if the round figure can't hold.

Bank of Canada Guidance

The Bank of Canada was out with its interest rate decision just as we are finishing up this piece. The most interesting headlines are that the bank continues to expect to hold the rate at 0.25% through June of next year, that the strong CAD will more than offset growth factors, that it sees the Canadian economy at capacity in Q3 of 2011 (such confidence in a forecast!), that it still has policy flexibility despite low rates, and that risks to the economy are roughly balanced. This is relatively dovish relative to expectations due to the promise to keep rates low through June.

The rest of today...

With GBP trading at interesting levels of late, watch out for the speech from the BoE's King later today. Also watch out for the US oil inventory data today and tomorrow. With oil up tickling the 80-dollar per barrel level, energy markets could suddenly become a drag on risk if they continue to rally as strongly as they have in the last few weeks.

Chart: GBPUSD

A lot of focus on GBPUSD today with its move through the trendline resistance. The big support at 0.9080 is also in play today in EURGBP. Mervyn King's appearance could either confirm or spoil the technical break later in the day. From a fundamental perspective, it's tough to see what the driver should be for a further appreciation in GBPUSD.

GBPUSD