A certain amount of regrouping appears to be underway as investors try to size-up the risks to the growing theme that world growth continues albeit modestly. That's the glass half-full version of what some believed might mark the onset of a double-dip recession. Tuesday's amelioration in consumer confidence at the U.S. Conference Board has served to rein in some of the attitude to risk. However, Asian markets ran ahead catching up to recent strong performances on Wall Street while a marginally stronger Japanese yen isn't depicting a complete reversal in the recent theme. Indeed the commodity currencies remain buoyant on a fundamental basis although the big story overnight was a dump in the Aussie dollar.

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Aussie dollar - Yet it wasn't a sudden reversal of confidence in the growth outlook that caused investors to send the Aussie back to 89.23 U.S. cents overnight having staged a 10-week high in the U.S. session. Rather it was a weakening of inflationary pressures that caused a rethink on the likelihood of an August 3 interest rate increase from the central bank. The taming of second quarter consumer prices was indeed a surprise given the heated pace of regional and domestic activity. Analysts predicted a 1% quarterly increase, which in the event turned out to be just 0.6%. That lowered the annual pace of consumer price inflation to 3.1% rather than the 3.4% projected. The report enables the Reserve Bank to state that measures already in place along with a moderation in the pace of activity and price pressures allows it more time to consider any further adjustment to monetary policy.

Canadian dollar - The Aussie recovered to stand at 89.56 cents as New York traders arrived and the question is whether or not the overnight slide comes to be seen as a buying opportunity. That appears to be happening to the Canadian dollar, which reversed course on Tuesday after the consumer confidence data unsettled bulls. This morning the Canadian dollar has risen back towards 97.00 U.S. cents despite an earlier overnight slide to as low as 96.18 cents. The Canadian unit is on course for its first monthly gain versus the dollar since April following rising equity and crude oil prices to which the Canadian dollar maintains strong positive correlations.

Euro - The punctuation in the risk-on theme is self-evident in the static performance of the euro, which is polarized at exactly $1.3000 this morning. Its overnight performance ranges from $1.2982 to $1.3042, which is just below Tuesday's best intraday level. Positive carry costs and evidence of stronger growth relative to the U.S. are forcing investors to consider favoring the euro after the stress tests came and left without any major stir over the weekend. The single currency remains supported above ¥114.00 against the yen although at ¥114.14 is lower on the day against an admittedly stronger Japanese unit. The unit remains unchanged against the pound at 83.38 pence.

Japanese yen -A Bank of Japan official highlighted the economic risks to the Japanese economy from a stronger yen. Mr. Kamezaki said that the central bank would continue its efforts in leaving behind deflation, exacerbated by a stronger currency and also threatening the recovery through dampening exporters' profits. The deeper problem should it continue is an erosion of business investment and weaker consumer spending. Mr. Kamezaki also said that at present there was no change to the Bank of Japan's positive assessment of the world recovery as evidenced by strengthening profits. The dollar earlier advanced to near a two-week high against the yen at ¥88.11 before easing to ¥87.82. The yen advanced against the Aussie, which fell to ¥78.55 from ¥79.35.

British pound - Bank of England officials had plenty to say at their regular meeting with a panel of lawmakers in London today. Governor King said that it may be a long time before the economy is ready to withstand any increase in the burden of monetary policy. However, the committee noted that it is prepared to act in either direction should matters change. Mr. King also noted that the nation's banking system still needed to repair its balance sheet in order to expand lending to improve the economic recovery. One might have thought that the recent recovery in the pound would take a hit from the testimony, but that's hardly the case today as the unit remains unchanged at $1.5593 and close to its recent highs. Buyers were swift to return as soon as the pound reached $1.5550 this morning. With no additional data to shed light on the performance today, I conclude that investors continue to see the glass half-full rather than wanting to turn pessimistic.

U.S. Dollar - The dollar faces two key reports today with the first this morning in the form of durable goods orders. Later the Fed's Beige Book report will detail the regional activity compiled by the 12 Fed districts and will give a sense of the health of business confidence around the nation. The dollar index is subdued and is only marginally weaker on the session at 82.02.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com       

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