The faltering rally in stock markets yesterday had drawn speculation that a correction could be brewing. As a consequence, the USD and the JPY were both favoured in Asia overnight as investors positioned for a pull back in risk appetite. However, the tone of earnings reports this morning has been positive and, as European stocks pushed higher, both the USD and the JPY have given back some of their overnight gains.
EUR/USD bounced from a low of 1.4115 in to the London open, though gains back to 1.4170 have not been sustained. EUR/JPY saw a low of 133.82 as London markets opened but has retraced its losses back to last night's close. The AUD has suffered a hefty correction following yesterday's surge.
AUD/USD hit a low of 0.8174 at the London open before stabilising. USD/NZD is little changed from the close ahead of tonight's RBNZ policy meeting.
The RBNZ's Bollard commented on July 14 that Australia is better positioned to benefit from Chinese growth given its industrial commodities based. The NZ growth outlook is not in as strong as Australia's suggesting that Bollard is set to be more dovish this week than his Australian counterpart. In the current environment NZD strength is unlikely to be welcome and some remark along these lines is possible tonight, though this should be priced in.
Sterling is a little softer against both the USD and the EUR this morning. It was little changed on better than expected Jun mortgage approvals data at GBP 47.6K. While on the margin this number furthers the view that the BOE may not extend its QE program at next week's MPC meeting, soft net consumer credit data at 0.1 bln highlights that the improvement in lending remains modest. The ECB's bank lending survey showed that the tightening in credit conditions in the Eurozone became less bad in Q2.
The results of the ECB's survey on lending were as expected. Credit conditions remain tight but the pace of tightening is slowing. Coincident with this data were this morning's German Lander CPI releases. In four German States prices declined in July relative to the year earlier. While a rebound in inflation is expected towards the end of the year, for now it seems likely that the ECB will maintain its policy of generous liquidity provision.
Easy monetary policy and growth which could contract as far at -6% in Germany this year are not currency positive factors, nevertheless the EUR could rise this afternoon if the better tone in stocks is extended and risk appetite extends. That said, many better than expected corporate earnings in Q2 have been drawn from cost cutting which questions their ability to be sustained into Q3 in an environment of rising unemployment. A rise in such concerns could undermine the ability of stocks to plough higher from current levels and would support the likelihood of a USD correction. This afternoon the USD may draw additional incentive from the Beige Book and from durable goods data.
