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Dollar Gains as Fears of QE 2 Ease

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Top Stories

  • UK Retail Sales and Housing prices slow markedly
  • All eyes on FOMC today
  • Nikkei off -0.22% Europe called lower
  • Oil back below $81/bbl
  • Gold edges belwo $1200 to $1198/oz last

Overnight Eco

  • AUD NAB Business Confidence 2 vs. 4
  • JPY Overnight Call Rate 0.1 %
  • JPY Prelim Machine Tool Orders y/y 144.8% vs. 143.8%
  • CHF SECO Consumer Climate 16 vs. 16
  • EUR German Final CPI m/m 0.3% vs. 0.2%
  • WPI m/m -0.3% vs. 0.35
  • EUR French Industrial Production m/m -1.7% vs. -0.1%
  • GBP Trade Balance -7.4B vs. -7.7B eyed
  • GBP DCLG HPI y/y 9.9% vs 11.9%
  • GBP CB Leading Index m/m 0.5%

Event Risk on Tap

  • USD Prelim Nonfarm Productivity q/q expected at 0.3%
  • USD Prelim Unit Labor Costs q/q expected at 1.5%
  • USD IBD/TIPP Economic Optimism expected at 45.6
  • USD Wholesale Inventories m/m expected at 45.6
  • USD Federal Funds Rate expected at
  • CAD Housing Starts expected at 185K
  • CAD NHPI m/m expected at 0.3%

Price Action

  • USD/JPY 86.00 caps rally for now as trares await FOMC
  • AUD/USD drops towards .9100 after weak Chinese import data
  • GBP/USD weak RICS and BRC Retail knocks pound towards 1.5800
  • EUR/USD slips to 1.3150 on pro dollar flows but stages mild recovery to 1.3170 by mid morning Europe

The dollar was relatively well bid in Asian and early European trade today ahead of the key FOMC decision later in the day, as the unit was helped by a combination of risk aversion flows and growing consensus that the Fed is unlikely to make any dramatic changes in monetary policy just yet. The pound was the weakest major of the night as disappointing BRC Retail Sales Monitor results and a sharp drop in RICS house survey, sent the currency tumbling by more than 100 points on fears that UK economy was slowing into the second half of the year.

UK BRC Retail Sales monitor printed at 0.5% in July versus 1.2% in June. The rate of growth in retail sales was less than half of the month prior. Sales of food and clothing increased, but sales of durable goods such as furniture declined sharply. As we wrote earlier, "The data suggests that the UK consumer remains cautious and unwilling to make large discretionary purchases for the household. The news also dovetails with today's poor RICS house price balance data which came in at -8% versus 5% expected. As demand for UK housing begins to decline once again the drop off in durable goods purchases is likely to continue for the rest of the year depressing retail sales and GDP growth."

On a more positive note, UK Trade Balance saw some improvement with the deficit at -7.4 Billion GBP versus -7.7 Billion GBP expected with Non -EU exports rising to their highest level on record. However, exports are a relatively minor contributor to UK GDP and today's incremental improvement in trade balances was unlikely to offset the sharp decline in consumer spending. For the time being cable has found support at the 1.5800 level as traders squared up ahead of the FOMC meeting, but the unit is likely to remain weak for the rest of the day and should underperform the other majors as markets price in the prospect of slower UK growth going forward.

In Asia Pacific today, risk FX was also hurt by the latest Chinese Trade Data. Although China recorded its best trade surplus in 18 months seeing it rise to $28.7 Billion the gains we made at the expense of much lower than expected imports which increased only 22.7% versus 34.1% the month prior. The news instantly raised concerns that Chinese demand was slowing and that the country would no longer be able to act as the lead locomotive for the global economic recovery. Another release showing that car sales slipped below the 10M annual run rate only served to intensify the fears that Chinese growth in the second half of this year is likely to disappoint. Aussie dropped towards the .9100 as a result of the news and was also hobbled by the weak NAB business confidence reading which slipped to 2 from 4 the month prior.

As North America prepares to open all focus will turn to the FOMC statement due at 18:15 GMT. We continue to believe that the Fed is unlikely to make any significant changes to its language preferring to see more data points before considering any changes to its policy. US monetary officials may acknowledge the slow pace of economic recovery but will nevertheless maintain their wait and see attitude until at least next month. The greenback may see further relief rally on any news that QE 2 is off the table for now, but as we noted yesterday, the buck's true test of strength will come at the end of the week after the market gets a look the latest US Retail Sales data.

FX Upcoming

Currency GMT EST Release Expected Prior
USD 12:30 8:30 Prelim Nonfarm Productivity q/q 0.3% 2.8%
USD 12:30 8:30 Prelim Unit Labor Costs q/q 1.5% -1.3%
USD 14:00 10:00 IBD/TIPP Economic Optimism 45.6 0.5%
USD 14:00 10:00 Wholesale Inventories m/m 0.5% 0.5%
USD 6:15 2:15 Federal Funds Rate
CAD 12:15 8:15 Housing Starts 185K 193K
CAD 12:30 8:30 NHPI m/m 0.3% 0.3%

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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