• USD: Higher, jobless claims fall more than expected, stocks turn mixed on liquidation ahead of Friday’s nfp
  • JPY: Lower, pressured by increased risk of deflation in Japan, PBOC may cap lending
  • EUR: Lower, ECB holds rates policy steady, German industrial orders rise more than expected
  • GBP: Lower, BOE unexpectedly extends quantitative ease by £50 bln to £175 bln, BOE hold’s policy steady
  • CAD and AUD: AUD & CAD lower, Australia’s unemployment steady in July, Canadian building permits rise

Overview

GBP and JPY traded sharply lower in Thursday’s trade with GBP pressured by BOE’s unexpected decision to extend quantitative ease. The JPY was pressured by a Reuter’s report which suggests that the BOJ may forecast that Japan faces three years of deflation. The BOE extended quantitative ease by £50 bln to £175bln and held rate policy steady at all 0.5%. Analysts were generally split over whether the BOE would elect to expand quantitative ease because recent UK economic data including today's report of a rise in RICS house prices suggests that the UK economy was stabilizing. Essentially the BOE has elected to print more money to try to boost the UK economy and GBP traded lower. If the Reuters report is correct and the Bank of Japan is prepared to acknowledge deflation risk in Japan it could discourage safe haven demand for the JPY. EUR drifted lower with downside limited by gains in cross trade GBP and JPY and report of stronger than expected German industrial orders. The ECB elected to hold rate policy steady as expected and signaled a wait-and-see approach to future monetary policy decisions. The ECB expects gradual recovery in the EU economy in 2010 and said that inflation expectations are well anchored. CHF traded lower pressured by report that Swiss Q3 consumer confidence fell to its lowest level in 16 years. The AUD traded higher supported by report of better than expected Australian employment report which showed that the unemployment rate in Australia unexpectedly held steady in July. The trade had expected a 0.2% rise in Australia's unemployment rate. The USD extended its gains against the JPY and drifted off its highs against the majors in reaction to report of a bigger than expected drop in US jobless claims. Focus turns to Friday's release of US unemployment and on farm payroll for July. Today's better than expected US jobless claims report suggests that Friday's unemployment report will confirm a slower pace of job's destruction in the US.

Today’s US data:

US jobless claims for week ending 8/1 fell 38k to 550k, a reading of 580k was expected. The jobless claims report suggests that US labor market is stabilizing and the report may be confirmation that the US economy is also stabilizing. Manufacturing hiring is improving. Continuing jobless claims rose for the first time in three weeks which suggests that labor conditions remain weak.

Upcoming US data:

On August 7th July unemployment and nonfarm payrolls will be released. The unemployment rate is expected to rise to 9.6% from 9.5% last month with nonfarm payrolls at -320k compared to -467k in June.