• USD: Mixed, equities fall sharply in China, risk aversion rises, upside limited by a rally in crude prices
  • JPY: Higher, supported by safe haven demand as equity markets trade lower
  • EUR: Higher, German PPI falls most on record, warning about second wave of credit risk
  • GBP: Lower, MPC split on expansion of quantitative ease, warning about risk of UK debt default
  • CAD and AUD: AUD & CAD lower, tracking global equities, Canada’s CPI declines to 56 year low

Overview

USD and JPY traded higher Wednesday supported by a spike in risk aversion as global equity markets decline. The Shanghai Index declined 4.7% pressured by concern about the global recovery. Equity markets in Europe and the US followed the decline in Asia. USD was also supported by a number of factors that include report of a split on the BOE’s monetary policy board over the size of the expansion of quantitative ease. Three MPC members including BOE Governor King wanted a larger expansion of quantitative ease. GBP was pressured by the MPC minutes and warning from the Tory party of possible risk of UK government debt default. EUR opened lower pressured by report that German PPI fell at a record pace in July. EUR rallied in US session supported by a recovery in US equities gains in cross trade to GBP and a surge in crude prices. Crude prices rallied in reaction to DOE report of a sharp drop in crude stocks. Commodity currencies were hit hard by the spike in risk aversion and falling equity markets with CAD pressured by report that Canada's inflation rate fell to 56 year low. Commodity currencies reversed early losses supported by the rebound in crude and recovery in US equities. There was limited reaction to an IMF report which says that the global recession has ended. The IMF warned that the impact of the recession will last for many years. Warren Buffett says that the US is out of the emergency room and appears to be a slow path to recovery but he warned that the US federal debt poses risks to the economy. USD price direction is closely tracking risk sentiment and the direction of equities with the direction of the Shanghai Stock Index leading the way. As more analysts conclude that the global recession is ending investors will be looking to gauge the strength of the recovery. Most analysts see an uneven global economic recovery and this could lead to more back and forth price action in equity markets, commodities and FX trade. The decline in China’s stock market generates speculation that the recent global equity market rally was not justified by underlying fundamentals.

Today’s US data:

No major US economic data was released in today's trade.

Upcoming US data:

On August 20th initial claims for August 15th will be released expected at 540k compared to the 558k last week. Also on August 20th July leading indicators will be released along with the August Philly Fed. Leading economic indicators expected to rise 0.4% compared to 0.7% last month. The Philly Fed survey is expected to fall to -3 from -2 last month. On August 21st July existing home sales will be released expected at 4990k compared to 4890k last month.