Forex Market Update: Asian Stock Losses Not Enough To Deter Yen Funded Carries

While the moderate gains in American stocks has failed excite the Asian stocks, the steady outflow of yen from Japan continues to keep yen on offer and carry traders well equipped.

MAJOR HEADLINES - PREVIOUS SESSION

• JN Machine Tool Orders YoY (Jul F) out at -8.9% vs. -8.9% prior.
• SZ Trade Balance (Jul) out at 2.37B vs. 2.00B expected.
• SZ PPI MoM/YoY (Jul) out at 0.5%/4.9% vs. 0.3%/4.6% expected.
• GE PMI Manufacturing (Aug A) out at 49.9 vs. 50.5 expected.
• GE PMI Services (Aug A) out at 50.6 vs. 52.1 expected.
• SW Unemployment Rate (Jul) out at 5.8% vs. 5.9% expected.
• NO GDP sa QoQ (2Q) out at 0.6% vs. 0.4% expected.
• NO GDP Mainland QoQ (2Q) out at 1.0% vs. 0.6% expected.
• EC PMI Manufacturing (Aug A) out at 47.5 vs. 47.0 expected.
• EC PMI Services (Aug A) out at 48.2 vs. 48.0 expected.
• EC PMI Composite (Aug A) out at 48.0 vs. 47.7 expected.
• UK Retail Sales MoM/YoY (Jul) out at 0.8%/2.1% vs. -0.2%/1.8% expected.
• UK Total Business Investment QoQ/YoY (2Q P) out at 1.9%/-1.9% vs. 3.1%/-0.7% expected.
• SZ ZEW Survey Expectations (Aug) out at -79.6 vs. -76.9 prior.
• CA CPI MoM/YoY (Jul) out at 0.3%/3.4% vs. 0.4%/3.4% expected.
• CA Core MoM/YoY (Jul) out at 0.1%/1.5% vs. 0.2%/1.6% expected.
• US Initial/Continuing Jobless Claims out at 432K/3362K vs. 440K/3405K expected.
• US Philly Fed (Aug) out at -12.7 vs. -12.6 expected.
• US Leading Indicators (Jul) out at -0.7% vs. -0.2% expected.
• US EIA Natural Gas Storage Change out at 88 vs. 84 expected.
• JN Supermarket Sales YoY (Jul) out at 0.9% vs. -0.9% prior.

THEMES TO WATCH - UPCOMING SESSION

Key event risks today (all times GMT):

• Euro-Zone June Industrial New Orders (09:00)
• Fed Chairman Bernanke speaks on financial stability at Jackson (14:00)

Market Comments

While the USD remains on the offer before readying itself for another wave higher, the carry trades are bolstered by the weak yen. A notable example of this carry willingness is the price action in USDTRY, a popular carry pair, that has seen a good dosage of TRY buying, with all USD-advances against TRY in August being capped by the 1.20 level, despite the geopolitical risk factors now acutely surrounding Turkey.

Today's quiet markets look to be have so far been stirred only by the UK GDP release:

Not entirely surprising, the UK second quarter gross domestic product release earlier today has shown the poor state of the island economy. While growth on quarterly basis has now slumped to zero in 2Q, annualized expansion rate, at 1.4%, marks the lowest level since 1992, further solidifying the outlook of sterling bears. As slowdown takes a firmer hold in a country highly dependent on financial sector and suffering from a earnest housing slump- much like its larger peer across the Atlantic divide- it is the capital formation along with private consumption, at -5.3% and -0.1% respectively, that are seen to contract the most. Such a picture inevitably spells deeper growth concerns, bolstering further the expectations of a rate cut(s) BoE in the remainder of the year.

The longer term picture in cable is indicative of the troubled predicament the sterling is in: Having very briefly visited territory above 2.10 just at the end of last year, the pair has dropped around 17% from those highs, with the weekly drop this week having pushed for a break of longer term trend line support below 1.87. The 38.2% fibo retracement level at 1.8300 (from 2.1161, high of 2007 to 1.3670, low of 2001) now would seem to indicate the next big level the pair is headed. Break of this will, in turn, open the way towards the 1.7420 area.

Note: the support/resistance levels used in the matrix’s of this document are levels derived from yesterday high, low and close. Reference in the text to other support/resistance levels will occur.

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