Forex Market Update: EUR Shows Its Resilience Despite IMF's Dealings With Hungary, Ireland Downgrade

Asia embraces risk again, possibly in a runup to Friday's bank stress tests?

MAJOR HEADLINES - PREVIOUS SESSION

• CA May Int'l Securities Transactions out at C$23.156b vs. C$6.5b expected and revised C$12.361b prior
• US Jul. NAHB Housing Market Index out at 14 vs. 16 expected and revised 16 prior
• JP Final May Leading Index out at 98.6 vs. 98.7 previously
• JP Final May Coincident Index out at 101.2, unchanged from previously

THEMES TO WATCH - UPCOMING SESSION

• GE Producer prices (0600)
• Swiss Trade Balance (0615)
• JP Convenience Store Sales (0700)
• UK Public Finances (0830)
• UK M4 Money Supply (0830)
• UK Mortgage Approvals
• HK Unemployment (0830)
• EU ECB Allots Funds in Weekly Operation (0915)
• UK CBI Business Optimism/Orders (1000)
• US Housing Starts (1230)
• US Building Permits (1230)
• CA BOC Rate Announcement (1300)
• US Fed's Tarullo to testify (1400)

Market Comments

A relatively non-descript session overnight with early EUR weakness, on the back of IMF's dealings with Hungary and a Moody's downgrade for Ireland (only bringing on par with S&P and one notch above Fitch), soon overcome. Another weak US data print with NAHB housing market index dipping to 14 from 16 last (a 15 month low) was also easily shrugged off and EUR made another attempt at the 1.30 handle, falling just short.

USDJPY found some support in the low 86s following newswire chatter that the BOJ would consider 'action' as we approach 85.0, though more likely in the form of further monetary easing rather than direct intervention, and a slight uptick in US yields. USDCAD saw early weakness ahead of today's expected rate hike, while data also showed strong demand from overseas for Canadian securities. No data or events for GBP so that was left ranging, while AUD still lagged the EUR's rally. Wall St staged a small relief rally into the close but after-bell earnings releases from Texas Instruments and IBM both disappointed, lending a slight negative tone to S&P futures into the Asian open.

Yet Asian bourses were steady with Nikkei weakness a catch-up play for yesterday's holiday. The major focus for Asia was the release of the RBA minutes from the July meeting and the general tone was seen as less hawkish than the post-meeting statement. Members said the past interest rate hike has afforded the central bank the flexibility to pause given the global uncertainty concerning the current rebound. The statement had emphasized the Q2 inflation data but minutes showed RBA staff expects underlying inflation to fall below 3% in Q2 (note data is due on July 28). The central bank also 'welcomed' the slowdown in Asian growth although there remained some uncertainty about the extent of the slowdown. AUD slid 15-20 ticks post-minutes but was soon finding support as China equities forged 1% into positive territory.

Data releases are more frequent heading into Europe with German producer prices, Swiss trade data, UK public finances and the CBI's report on business optimism and orders all on tap. The US session features further housing data in the form of housing starts and building permits (with the market likely to interpret another weak number as confirmation of the double-dip theory). The Bank of Canada's rate announcement will garner much attention though a 25bp hike to 0.75% is fully expected and factored in. The question is whether the accompanying statement will continue the hawkish tone of late, especially given the evidence of a slowing economy south of the border.