Forex Market Update: The Dollar Looks In Retreat As Month-End And Japanese Half-Year Approach

Australian data back on the strong side - rate hike talk in vogue

HEADLINES - PREVIOUS SESSION

• US Jul. S&P/Case-Shiller Home Prices out at -13.3% y/y vs. -14.2% expected and revised -15.4% prior
• US Sep. Consumer Confidence out at 53.1 vs. 57.0 expected and revised 54.5 prior
• US Weekly ABC Consumer Confidence out at -46 vs. -45 expected and -46 prior
• UK Sep. GfK Consumer Confidence out at -16 vs. -24 expected and -25 prior
• JP Sep. Nomura/JMMA Manufacturing PMI out at 54.5 vs. 53.6 prior
• JP Aug. Industrial Production out at +1.8% m/m, -18.7% y/y vs. 1.8%/-18.8% expected and 2.1%/-22.7% prior
• AU Jul. Leading Indicators out at +0.7% vs. revised +0.6% prior
• JP Aug. Labor Cash Earnings out at -3.1% y/y vs. -4.0% expected and revised -5.6% prior
• AU Aug. Retail Sales out at +0.9% m/m vs. +0.5% expected and revised -0.9% prior
• AU Aug. Private Sector Credit out at +0.1% m/m, +2.5% y/y vs. +0.2%/+2.7% expected and +0.2%/+2.9% prior
• AU Aug. Building Approvals out at -0.1% m/m, flat y/y vs. +2.5%/+1.5% expected and +6.6%/-3.0% prior
• NZ Sep. NBNZ Business Confidence out at 49.1 vs. 34.2 prior
• China Sep. HSBC Manufacturing PMI out at 55.0 vs. 55.1 prior
• JP Aug. Housing Starts out at -38.3% y/y vs. -31.7% expected and -32.1% prior
• JP Construction Orders out at -25.2% y/y vs. -42.8% prior

THEMES TO WATCH - UPCOMING SESSION

• Denmark Q2 GDP (0730)
• EU ECB's Papademos to speak (0745)
• EU ECB's Weber to speak (0745)
• GE Unemployment Rate (0755)
• UK Index of Services (0830)
• EU Euro-zone CPI estimate (0900)
• EU ECB's Noyer to speak (0930)
• EU ECB's Kranjec to speak (1000)
• US Weekly MBA Mortgage Applications (1100)
• US ADP Employment Change (1215)
• CA Industrial Product/Raw Material prices (1230)
• CA GDP (1230)
• US Personal Consumption (1230)
• US Chicago PMI (1400)
• US Fed's Lockhart to speak (1430)
• US Fed's Kohn to speak (1635)

Market Comments

When it comes to consumer confidence, it would appear that the UK is now riding high above the US, a sharp contrast to the actual performance of the respective economies. Yesterday, US consumer confidence disappointed with a weak 53.1 reading, down from the previous month's 54.5 and an expected improvement to 57. The UK confidence indicator on the other hand, released early this morning, showed a strong improvement to -16 from -25 last and an expected -24. Granted the indicator is still heavily in negative territory, but it has been below zero since May 2005! with a recent low at -39 in July 2008.

Early market talk in Asia was for very strong demand for USD at the Tokyo month-end fix (12 months ago similar sentiment saw USDJPY jump over 100 points)and so traders were heavily positioned long of dollars ahead of that. The hefty buying never really materialized and so USDJPY soon gave back the 90.0 handle as longs scrambled to liquidate.

The Australian data offered more food for the hawks flying around as retail sales rebounded from July's disappointment and came in at a stronger than expected 0.9% versus 0.5% forecast. Despite suspicions that the impact of earlier stimulus measures is being wound down, a buoyant stock market, a revival in the property market and a surge in consumer confidence all combined to help sustain demand at a respectable level. On a more pessimistic note, building approvals unexpectedly slipped for the first time in 3 months, falling 0.1% versus an expected strong +2.5%, with a fallback in private unit sector mainly responsible. While private sector credit also rose a subdued 0.1% m/m in August, housing sector credit remained firm with 0.6% increase on the month and up 7.4% from a year earlier. As referred to by RBA economist Richards yesterday, the housing sector still looks to be an issue which might spur the RBA into action at the next meeting.

There was also further bullish news for the AUD during the morning when it was revealed that a planned sale of index-linked bonds was to be increased from the original A$1 bln to A$4-5 bln due to robust demand, a portion of it by international investors. The AUD managed to touch just above the 0.88 mark by lunchtime, a new 2009 high.

The President of the Philly Fed Charles Plosser, while not being a voting member on the FOMC, maintained his traditional hawkish stance in comments this morning. He prompted some early USDJPY buying when he said that, while the dollar is currently weak, it was not as weak as sometimes portrayed. Plosser's biggest concern remained inflation, though not in the near-term. He did not think that now was the time to exit accommodative policies but cautioned that the Fed would need to be prepared for 50bp or 75bp rate hikes in the future.

While month-end factors are likely to be the biggest influence on activity in the markets, tonight's release of the ADP employment report may provide additional fireworks. Surveys suggest the market is looking for a continued improvement in the numbers, with losses somewhere in the region of 200k versus 298k last time. Other data releases include US personal consumption and Chicago PMI data. In Canada we will see industrial and raw material prices together with July's GDP.

Saxo Bank

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