With the U.K. markets closed for a bank holiday and U.S. traders slowly crawling back to their desks after hunkering down for Hurricane Irene, it has been a quiet morning in the foreign exchange market. An early rally in the euro caused by news of 2 Greek banks merging to create a stronger unit and a rally in the Japanese Yen fizzled quickly. In Japan, elections will be the main focus this week with the ruling party picking Noda to replace Kan as Prime Minister. He will be the country's seventh Prime Minister in 5 years and he walks into the office with a handful challenges that range from a huge deficit, a strong Yen, zero growth, nominal inflation and lingering nuclear / tsunami problems.
In the U.S., better than elected economic data failed to help the greenback. In fact, the knee jerk reaction following the personal income and spending numbers was to buy risk and not the dollar. USD/JPY held steady while the euro and pound trickled higher. Personal income rose 0.3 percent in the month of July while personal spending surged 0.8 percent. The turnaround in spending was the most impressive considering that consumption fell 0.2 percent the previous month. Unfortunately it is never good when spending surpasses income growth because it suggests that Americans are once again falling back into the ugly habit of spending above their means. The details of the report confirm that this is the problem because the personal savings rate dropped to 5.0 from 5.5 percent. Last week, Federal Reserve Chairman Ben Bernanke opted to postpone a decision on more stimulus to September or November. Doing so would give central bankers more time to assess the state of the U.S. economy and every little piece of data counts. This morning's U.S. economic reports will make Fed officials feel slightly better about the outlook for the U.S. economy but the slower rise in incomes relative to spending means that their they cannot take their hands off the go button.
Although pending home sales are scheduled for release later this morning, it should remain a quiet day in the foreign exchange market. With the NYC subway systems slowing coming back online, U.K. traders are for holiday and some Americans taking off the entire week for Labor Day, it should be thin trading. However, the release of non-farm payrolls on Friday will keep things interesting and volatility should pick up as the week progresses.
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