* The dollar reversed overnight gains as risk appetite returned and US stocks rallied in New York trading Wednesday. Risk appetite increased as the Federal Reserve and the Bank of England see policy rates low for the foreseeable future. The Federal Open Market Committee maintained the federal funds rate target between 0 to 0.25%, as expected, and said the rate will stay ï¿½ï¿½exceptionally lowï¿½ï¿½ for an ï¿½ï¿½extended period.ï¿½ï¿½ The FOMC also said the US economy is ï¿½ï¿½leveling out,ï¿½ï¿½ adding that it will slow its treasury bonds purchases but extend the time through October. The yen was pressured as risk sentiment improved. Japanï¿½ï¿½s wholesale goods prices dropped at a record annual rate. The euro rose even though eurozone industrial production unexpectedly fell. The Australian and Canadian dollars, tracking the rally in stocks and commodities, gained the most among major currencies.
* The GBP/USD was little changed after testing the support from the long-term uptrend. Initially pressured by the BOE's quarterly inflation report, the GBP/USD was later supported by better risk sentiment as equity and commodity prices rose. The BOE, expecting inflation to undershoot its inflation target, indicated that there will not be any monetary tightening for the foreseeable future as the UK economic recovery will be slow. There are resistance in the 1.70 area and support in the 1.64. If the support is broken, the GBP/USD will fall significantly.
Financial and Economic News and Comments
US & Canada
*The US trade deficit widened less than expected to $27.0 billion in June from $26.0 billion in May, according to figures released by the Commerce Department. Exports increased 2.0% to $125.78 billion, a second consecutive gain, led by fuel oil, chemicals, coal, and semiconductors. Imports grew 2.3% to $152.79 billion, driven by oil and other petroleum products.
*The US budget deficit totaled a record $1.27 trillion so far for the fiscal year ending September 30, compared with a $389 billion year-to-date gap in 2008, the Treasury Department said. The excess of spending over revenue rose to $180.7 billion for July, compared with a $102.8 billion gap in July 2008.
*The Federal Open Market Committee kept the target range for the federal funds rate at 0 to 0.25%, as forecast, and said ï¿½ï¿½economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.ï¿½ï¿½ The Fed plans to slow the pace of its purchases of US Treasuries and signaled that the $300 billion program will end in October. ï¿½ï¿½To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October,ï¿½ï¿½ the FOMC said in a statement.
*Canadaï¿½ï¿½s trade deficit narrowed more than expected in June to C$55 million ($50 million) from Mayï¿½ï¿½s revised record of C$1.1 billion, according to figures from Statistics Canada. Exports rose 2.3% to C$29.3 billion in June, the first gain in four months, while imports declined 1.3% to C$29.3 billion, a fourth consecutive decrease.
*Canadian new housing prices unexpectedly fell 0.2% m/m in June, an ninth consecutive month-on-month fall, after a 0.1% m/m decline in May, a separate report from Statistics Canada showed. June new housing prices fell 3.3% y/y, with the largest drops in Western Canada.
* Eurozone industrial production unexpectedly declined 0.6% m/m in June after an upwardly revised 0.6% m/m increase in May, data from Eurostat showed, signaling the euro area is having a difficult time emerging from the recession. June industrial production fell a more-than-expected 17.0% y/y, following Mayï¿½ï¿½s downwardly revised 17.6% y/y drop.
* UK jobless claims rose a less-than-expected 24,900 to 1.58 million in July after increasing a downwardly revised 21,500 in June, figures from the Office for National Statistics showed. The claimant count rate was at 4.9% in July, the highest level since 1997. Overall unemployment in the three months through June climbed 220,000 to 2.44 million, the highest level since 1995. The unemployment rate based on International Labour Organization methods was at 7.8% in the three months through June, the most since 1996. Average earnings including bonuses increased 2.5% y/y in the three months through June. Average earnings excluding bonuses also increased 2.5% y/y, the least since records began in 2001.
* Bank of England Governor Mervyn King said itï¿½ï¿½s ï¿½ï¿½likelyï¿½ï¿½ that UK inflation will slow below 1.00% in 2009 and stay below the BOEï¿½ï¿½s 2.00% target until at least the end of 2012. An increase in the key rate above 1.00% in Q2 from the current record-low 0.50% would ensure inflation trails the target, according to the BOEï¿½ï¿½s forecasts.
* Japanï¿½ï¿½s domestic corporate goods prices unexpectedly increased 0.4% m/m in July after ten straight monthon- month drops, according to the Bank of Japan corporate goods price index. June data was downwardly revised to a 0.4% m/m decline. July CGPI fell a less-than-expected 8.5% y/y, the largest fall since records began in 1960, following Juneï¿½ï¿½s downwardly revised 6.7% y/y decrease.
*Japanï¿½ï¿½s industrial production growth was revised downward to 2.3% m/m for June from a preliminarily reported 2.4% m/m, a fourth consecutive month-on-month gain, after Mayï¿½ï¿½s 5.7% m/m, according to final June data released by the Ministry of Economy, Trade and Industry. June industrial production fell 23.5% y/y, revised from a preliminarily reported 23.4% y/y fall, after Mayï¿½ï¿½s 29.5% y/y drop. Capacity utilization growth was revised downward to 2.3% m/m for June from a preliminarily reported 8.0% m/m.
* The Westpacï¿½Melbourne Institute consumer sentiment index for Australia increased 3.7% m/m to 113.4 in August after a 9.3% m/m rise to 109.4 in July, indicating Australian consumer confidence climbed to the highest level in almost two years, according to a Westpac Banking Corp. and Melbourne Institute survey. The index has risen 27.8% since May, the largest 3-month gain since the survey began in 1975.
*Australiaï¿½ï¿½s wage price index increased 0.8% q/q in Q2 2009, as forecast and the same rate as in Q1, according to data from Westpac Banking Corp. Wage growth eased as estimated to 3.8% y/y from Q1ï¿½ï¿½s 4.2% y/y, the lowest pace since Q3 2006, approaching its full history average rate of 3.6% y/y.