Some stories will run and run and this morning's report from the Independent newspaper regarding a possible replacement of the USD as the exchange currency for oil is another chapter in the plot against the USD as the world's most dominant reserve currency. The story concerns 'secret meetings' between finance ministers and central bank governors in Russia, China, Japan and Brazil to trash out how the USD could be replaced in oil trades by a basket of currencies that would include the JPY, CNY, EUR, gold and a new unified currency from the Gulf region. The denials from Saudi were swift, with the central bank governor citing the report as being absolutely incorrect. There is no smoke without fire, however. While the Saudis may not have been involved in talks to reduce their dependence on the USD, Chinese interest this year in bilateral trade deals and in taking stakes in energy and commodities producers around the globe clearly illustrates that China is already taking steps to diversify from the USD. The crux of this story is, of course, the USD's failing credentials as the world's reserve currency. The USD may be falling from grace, but it remains the case that since there are no alternatives its fall from pole position will be slow. EUR/USD rallied through the 1.4700 level overnight but stalled ahead of 1.4750. Comments from ECB President Trichet last night indicating his concern on EUR strength are a reminder of political sensitivity connected with EUR/USD at present and this should offer the USD support.
Sterling took a tumble on the release of much worse than expected production data this morning. All 13 sub-sectors of the manufacturing index (-1.9% m/m) showed weakness. This supports survey evidence that the recovery in the production sector is stalling. That said, over the past 3 mths manufacturing has managed to maintain a +0.2% gain. The broader IP data (-2.5%) was weighed down further by planned closures in the oil and gas industries. EUR/GBP spiked higher on the news reaching a high of 0.9243 before GBP buyers emerged. Cable found support above 1.5940. Earlier the Halifax had provided further signs that the UK housing market is stabilising though this had little impact. This afternoon, attention will turn to the second day of the Tory party conference.
The RBA hiked interest rates by 25bps to 3.25% overnight pushing AUD/USD to a high of 0.883. While the move was sooner than many participants had expected, it was not a complete surprise; speculation that the RBA would act before year end has been doing the rounds for months. The RBA confirmed that economic forecasts are being revised higher and predicted that growth in 2010 will likely be close to trend. Further rate hikes are on the cards with the RBA warning that it will 'gradually' lessen stimulus. However, the impact of fiscal stimulus is set to falter over the coming months and this could slow the hand of the RBA. Also, the overnight release of the Australian August trade deficit was worse than expected (at AUD1.52 bln). The relative softness in the export sector, if sustained would also weigh against an aggressive upswing in rates.
This afternoon the US ABC consumer confidence index will be released. Canadian PMI and building permits will also be of interest.