Yesterday's soft US data hit risk sentiment like a cannonball. Although the day was generally slow due to light data releases, the weaker US data sent summer participants away from risk-correlated trades in droves. Initial US jobless claims contained some distortions that were not mentioned in the report but as it was understood by participants, the 500k print validated to some that the US labor market is faltering. The Philadelphia Fed manufacturing index - while generally disregarded as only a small representation of manufacturing, fell to -7.7 from 5.1. The small loss has many concerned that broader US manufacturing indexes will fall below the critical 50 threshold.

Interestingly, G10 Forex pairs were split against the USD with beta currencies such as CAD and AUD losing ground while safe-havens such as CHF and JPY were accumulated heavily against the greenback. As to be expected, treasury yields dropped across the curves and traders once again began to chatter about further Fed QE options.

As we suspected, the Fed is also doing the we are in a holding pattern until we see more directional economic data. However, we suspect that the market's dramatic response yesterday was overdone and largely a function of low liquidity and the lack of relevant drivers. The weak US number briefly pushed the USDJPY below the 85.0 level and on cue, triggered a wave of comments of Japanese policy makers.

Finance Minister Noda stated that he had been in communication with other G7 countries regarding the recent movements in the Forex market. He didn't provide any real details and for the most part, the markets shrugged the verbal intervention off. As we have been asserting, if Japanese policy makers truly want to back traders off the Yen, they will have to use more powerfully tools since verbal comments have a diminishing effect (the boy who cried wolf).

For the scheduled meeting between the Prime Minister and BoJ, there still hasn't been official confirmation that the two men will meet Monday. We believe that there is enough event risk surrounding this meeting to keep playing the USDJPY on the long side, looking for short-term opportunities. With US 10 yr rates dropping below 2.75% and not looking to head higher anytime soon, market intervention seems to be the only possible salvation for the Yen.

As for today, markets are chattering about the Australian national elections, mostly because there is nothing else to talk about. Historically, Australian elections have had little impact on global markets but this time there are some differences between the contestants surrounding taxation on the mining sector. We suspect the election to be a nonevent since we doubt commodity trading partners such as China will seriously adjust their demand in response. The best result for the AUD would be an outright victory by the Liberal National Party, who has pledged to repeal the MRRT (mining tax).

With no Tier-1 economic data and a completely devoid economic calendar, FX markets will be taking their cues today from equity markets. Canadian CPI is on the docket and if you are trading the CAD, an uptick from the expected 0.1% m/m [1.8% y/y] will highly increase the probability that the BoC will hike rates in September.


Today's Key Issues (time in GMT):
11:00 CAD CPI 0.1% (y/y 1.8%) exp
14:00 MXN GDP, 4.3 prior
14:00 MXN Interest rate announcement, 4.5% exp/prior