USD limps weakly into the weakly close as risk aversion fails to come to its rescue so far...

MAJOR HEADLINES - PREVIOUS SESSION

  • New Zealand Jul. REINZ House Sales rose 34.0% YoY vs. 40.3% in Jun.
  • New Zealand Jun. Retail Sales out at +0.1% and -0.4% ex Autos vs. -0.3%/-0.5% expected
  • New Zealand Jul. Resident Bond Holdings rose 76.6% vs. 73.0% expected
  • Sweden Jul. Average House Prices fell to 1.704M from 1.905M in Jun.
  • EuroZone Jul. CPI out at -0.7% MoM vs. -0.6% expected
  • EuroZone Jul. Core CPI out at 1.3% YoY as expected
  • Canada Jun. Manufacturing Sales rose 1.9% vs. -0.2% expected
  • US Jul. Consumer Price Index out at 0.0% and 0.1% ex Food and Energy - both as expected
  • US Jul. Industrial Production rose 0.5% vs. 0.4% expected
  • US Jul. Capacity Utilization rose to 68.5% vs. 68.3% expected and 68.1% in Jun.

THEMES TO WATCH - UPCOMING SESSION

(All times GMT)

  • US Aug. University of Michigan Confidence (1400)
  • New Zealand Jul. Performance of Services Index (Sun 2230)
  • UK Aug. Rightmove House Prices (Sun 2301)
  • Japan Q2 GDP (Sun 2350)

Market Comments:

Weak Chinese equities overnight and a strong US T-bond auction yesterday kept the bid under the Japanese Yen for now, as USDJPY and EURJPY are struggling to find support again. At the same time, it is odd to note that risk appetite still seems strong in equities (of the non-Asian variety at least) and commodity currencies, giving a very confusing macro picture. Normally we see the USD and the JPY moving in the same direction, but the FX market overnight looks more than a touch discombobulated trying to disentangle the various themes.

We continue to look for a pivot in the market action as it feels like the old trends (weak USD, commodity currency rally, etc...) are getting very long in the tooth. Last week delivered a strong setup pivot with the reversal back to a stronger USD on Friday, and this week saw a strong pivot back to JPY strength, but we have yet to see any kind of follow through. For the USD, it really needs to make a stand right here (with a grace period until Monday) if it is to avoid a trip to at least marginal new lows - especially if the wild-eyed optimism in Western equity markets continues.

AUD was pulled in two different directions overnight as well, with a hawkish Stevens testimony to parliament pulling it higher while the Chinese developments were a negative drag. At Stevens semi-annual address to parliament, he indicated that the emergency interest rate levels would have to be reversed at some point and had many positive things to say about the economy. He said he felt there was no need for further stimulus and that Australia's debt, at 15% of GDP, was not a serious problem. Stevens seemed less concerned about the Australian housing market than other commentators, saying that he wouldn't call it a bubble. In the coming weeks - the ebb and flow of Chinese news should trump any other AUstralisn news, as it seems the Aussie functions as a China derivative. The AUD strength looks profoundly over-extended.....

New Zealand housing sales/retail sales data wasn't overwhelmingly strong, but one of the keys to the recent NZD strength was in evidence with the strong Non-resident bond holdings data, which shot higher 3.6% higher in just a month. With its enormous current account deficit, the country is highly dependent on capital flows (and traditionally a higher interest rate) to keep its currency from melting down. NZD got enough pep in its step from the news overnight to post new highs versus the AUD.

As a brief final note, the strong US Industrial Production numbers are likely heavily influenced by the auto manufacturing sector, which rose 41.6% month-on-month. Overall the July YoY number is down -13.1%

Chart: USDJPY

A lot of talk about the USDJPY as the US morning session is well under way as the pair is trading at Ichimoku cloud support and just below the 200-day moving average. Last Friday's crazy action certainly looks like a running of the complacent stops considering the subsequent action. Judging from the recent past, it would seem that the best way to be long the JPY, however, is versus perhaps European currencies or elsewhere in the G-10, as the USD and the JPY strength have been positively correlated for some time.

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