Risk aversion was evident in the market again today. Stocks are generally down in Europe, EUR/USD is lower and the yen has made additional progress. Yen gains accelerated around the London open before running into sellers, USD/JPY is modestly lower but EUR/JPY and AUD/JPY have both registered significant falls. The USD posed little reaction from comments made at the G8 apparently aimed at its dominance as a global reserve currency. Better than expected industrial production data this morning from France and Italy had little impact. However, insofar as these data come on the back of this week's better German data they do soften the economic outlook in the Eurozone. UK PPI inflation data was weaker than expected. This will stir up additional interest in what policy decision the BoE will likely take in August following its decision yesterday not to increase its asset purchases plan.
UK Jun PPI output fell -1.2% y/y. The weakness in this series is in contrast with that of the CPI. The latter is edging lower but is proving to be more stubborn on the downside than the market has been expected. The failure so far of CPI (at 2.2% y/y in May), to fall below the BoE's 2.0% y/y target may be a factor in the yesterday's decision by the MPC not to announce further quantitative easing. In contrast the PPI highlights an absence of underlying inflationary pressures. June CPI is due next week, the market expects a fall to 1.8% y/y. Given that the BoE has apparently deferred a decision on QE, the August MPC meeting will now be a crucial event for the UK markets. This morning cable has edged lower in tune with the more risk adverse tone of the market today. Of interest, is that EUR/GBP is holding below last night's close, re-establishing its downtrend and suggesting that sterling continues to find support in yesterday's decision by the BoE not to extend its QE program.
The Chinese State Councillor stated at the G8 meeting last night that we should have a better system for reserve currency issuance and regulation so that we can maintain relative stability of major reserve currencies. The statement made no direct reference to the USD. This factor and the fact that the market is coming to terms with the fact that a change in the system of reserve currencies will take a long time to change allowed the USD to largely ignore the statement.
The US July preliminary University of Michigan confidence index is due this afternoon, the market is expecting a slight softening in the index. A modest worsening in the US trade balance is also forecast. Canadian Jun employment data will also be of interest today. The unemployment rate is expected to climb to 8.7%.
