General: despite mixed stocks other risk currencies up, commodity currencies continue strong Dlr index drops as low as 78.111, its lowest this year Aussie climbs to 10-mth high and sterling hits 9-mth peak Euro reverses gains to 2-mth high The biggest market focus will be Friday's U.S. job reports as U.S. economy appears to be picking up steam even without its strongest engine -- consumer spending. Masafumi Yamamoto Head of FX strategy for Japan at Royal Bank of Scotland said the Aussie would rise further against the dollar and the yen this week if U.S. data adds to hopes for an economic recovery.
• EUR Up on Friday as risk appetite rises despite stocks. If stocks can stay near highs, EUR could stay strong near term. We continue to see the euro struggling in the immediate future and see greater likelihood of correction towards 1.300 than towards further upside. CHF: KoF index strong Eurozone CPI came in at -0.6%y/y, the lowest ever. This wasn't a great surprise following Wednesday's weak German read (also -0.6%y/y). In a report published on Thursday, the IMF warned that the ECB should use any remaining margin for cuts a soon as possible and noted the EUR was overvalued between 0~15%. But Yamamoto also said in his note to clients that further gains in the euro were hard to see with caution ahead of more earning reports from European banks this week. We maintain our 3m EURUSD forecast that the EUR could go as low as 1.30 forecast as recent price action shows a lack of investor conviction in challenging EURUSD upside, regardless of developments in risk.
• USD: Down w/ increased risk appetite, no sign of QE exit or other reason to hold USD. However, in the short term BEWARE REVERSAL given that stocks are high and the USD has been heavily shorted, meaning any decline in risk appetite could send the USD and other safe-haven currencies moving up fast. Non-farm payrolls are the main focus this week and our economists look for a decline of 'only' -250k, better than consensus for a -350k decline. The dollar's slide was driven largely by technical factors such as stop-loss buying in sterling, which hit its highest level in nine-months, traders said. "The dollar looks set to fall further with the dollar index breaking decisively below recent lows," said a trader for a Japanese trust bank. The trader also said the sustainability of the dollar's broad drop will be tested by a slew of U.S. economic data out this week starting with the Institute for Supply Management's manufacturing index for July, which is due later in the day.
• CAD: generally moving w/ risk appetite, down against AUD
• JPY: Down with rising risk appetite Industrial production released Core CPI for June fell by 1.7%, in line with expectations, but was the biggest annual decline on record. Industrial production came in at 2.4%m/m yesterday, slightly worse than expectations of 2.5%. The annualized print was better than expected at -23.4% (cons. -23.6%). Vehicle sales came in at -34% on the year, also better than last month's -41.4% print. Housing starts fell by 32.4%y/y, more than expected but construction orders' annualized figure was better at -28%y/y (-41.9%y/y previously). The unemployment rate increased to 5.4%, worse than expectations and household spending figures only registered a 0.2%y/y increase in June The Bank of Japan's policy board member Tadao Noda said yesterday that changing policy too early would cause problems and voiced concerns over the current state of corporate financing. He said Japan's GDP would likely improve sharply in Q2 but is still cautious about the outlook. Weak run of data
• CHF: generally down
• GBP: rising against lower yielders and EUR (?why no reasons given) mixed news The BoE announced last week that it has completed all gilt purchases for the ?125bln asset purchase program. It plans to review the scale of purchases at the August meeting and we believe an expansion will be announced
• NZD: overall up RBNZ unchanged as expected The RBNZ kept the OCR at 2.5% as expected and retained its easing bias, as RBNZ's Bollard said the OCR would remain at or below 2.5% until late 2010
• AUD: overall up. Traders said the Aussie is being supported by expectations that the Reserve Bank of Australia may drop a key reference on monetary easing at its policy meeting on Tuesday while keeping the cash rate unchanged at 3 percent. Building approvals were better than expected at 9.3% on the month, much better than the expected 8.0% print. The annualized figure was also much better at -14.3%y/y (cons. -18.2%).
