The Japanese yen strengthened against most of its counterparts as reports showed Chinese exports and new loans fell and global stock markets declined, boosting demand for the yen as a safe-haven asset. Earlier in the day, China reported growth in factory output and investment was below the consensus forecast, reminding investors that the world’s third-largest economy is not as solid as initially estimated. China’s statistics bureau said that exports slid 23% in July from a year earlier and the central bank stated that new loans plunged to less that a quarter of June’s level. Eur/jpy fell from 137.37 to 135.25, gbp/jpy tumbled from 160.21 to 157.84 and aud/jpy dropped from 81.37 to 79.29. The greenback also weakened versus the yen from 97.17 to 95.75. DJI closed down 96.50 points or 1.04% after a prominent banking analyst warned that the financial sector’s fundamentals have yet to improve and an unexpectedly large drop in U.S. wholesale inventories raised worries about the strength of the recent economic recovery.
Euro rose to an intra-day high of 1.4186 against the dollar in late European afternoon, however, price then dropped sharply to 1.4110 on the back of the declines in U.S. and European stock markets. German CPI decreased by 0.5% y/y in July, its first annual drop since the index was introduced, however, monthly CPI was unchanged compared to the consensus forecast of -0.1%, giving the European Central Bank more reasons to keep interest rates at a record low.
The British pound traded near this week’s low of 1.6431 against the dollar on Tuesday as investors expected that BoE Governor Mervyn King would highlight the downside risks to the U.K. economy in the inflation report due on Wednesday. Although short-covering and the better-than-expected U.K. BRC retail sales and RICS housing data lifted cable to an intra-day high of 1.6528 on Tuesday Asian morning, price fell to as low as 1.6431 after the release of wider-than-expected U.K. trade deficit. The British Retail Consortium showed the consumer mood was slowly improving with retail sales rising 1.8% in July from 1.4% in June. In addition, the Royal Institution of Chartered Surveyors said its seasonally-adjusted monthly house price balance came out at –8.1% versus the upwardly-revised reading of –17.6% from prior month, suggesting the drop in house prices in England and Wales eased further in July. Sterling hit a two-week low versus the euro at 0.8616 before retreating.
The FOMC is likely to keep interest rates at 0.00-0.25% on Wednesday (18:15GMT) but the following statement may paint a slightly brighter economic picture while dampening expectations of a rate hike. The FOMC is scheduled to end its $300 billion Treasury purchases program.
Earlier in the day, the BOJ announced that it left the overnight call rate unchanged at 0.1%. In addition, the central bank kept its economic assessment unchanged and said that Japan's economy has stopped worsening and is likely to pick up in the latter half of 2009 to March 2010.
Data to be released on Wednesday include Japan CGPI data, Australia Westpac consumer confidence, Japan industrial production, capacity utilisation, U.K. claimant count, ILO unemployment rate, eurozone industrial production, U.S. and Canada trade balance, Canada new housing price index and U.S. Fed budget and FOMC rate announcement.