Whole lot of nothing going on. Yesterday’s sell off in USD was rumored to have been driven by stops being triggered and in these thin markets seem to make the most sense. The S&P500 closed basically flat, trapped in week range. And without equities giving markets direction, currencies are forces to stay range bound. Risky assets gained slightly despite Shanghai trading lower (down -2.8%).. European equity markets are currently higher and US index futures are pointing to a slightly higher open. Overall, we expect risk correlated trades to gain against the USD and JPY, since the recent trend is for risk aversion trading to fade in light of no news negative information. The JPY has been broadly stronger this week, as worries over the US fiscal and monetary polices came back into focus, sending participants back into the risk aversion trade. However, last night economic data prompted modest weakness in the JPY and highlighted real potential troubles in the underlying economy. While Japan is anxiously waiting this weekend for the lower house election (and potential Democratic opposition landslide win), the Japanese economic data didn’t look encouraging. The national core CPI jumped to -2.2% y/y in July (vs. June -1.7%). However, the big story was in consumption and labor markets data. Real spending posted a fall of -2.0% y/y in July, well short of the market expectation of -0.3%, while unemployment spiked to an all-time high of 5.7%, exceeded the market expectation for July for 5.5%. The lethal combination of soft labor markets, trepid consumption and deflation, is a puzzle, which Japanese officials have never been able to figure out. The two x-factors to JPY pricing are this week’s elections and upcoming expected corporate repatriation. While much of the LDP upset (DPJ victory, which were helped by today’s figures) has already been priced in, you can never be fully prepared for a change of power of this scale and perhaps eventual effect on Japan’s massive debt to GDP ratio. In regard to repatriation, recent changes in tax exemptions on dividends could prompt corporations to take advantage of the changes in legislation. Outside the risk aversion trade, both factors could push the JPY in either direction. Overall, we believe the JPY to be overpriced and expect continued appreciation in the USDJPY to 95 in 3-months. Today in the UK, the Q2 GDP was slightly better than expected printing at -0.7% q/q vs. -0.8% (-5.5% vs. 5.6% y/y). This figure combined with signals that output has stabilized has been encouraging to risk seekers, who are bidding up risk correlated currencies. In the US session, the figures are expected to be on the positive side and help risk sentiment stay positive for the close of the week.

Today's Key Issues (time in GMT):

07:30 SEK PPI, % m/m Jul -0.8 (1.1) prior
07:30 SEK Retail sales, % m/m (y/y) Jul -0.4 (2.2) prior
08:30 GBP Q2 GDP - second estimate, % q/q (y/y) Q2 -0.8 (-5.6) exp
09:00 EUR Consumer confidence, index Aug -22 exp, -23 prior
09:00 EUR Industrial confidence, index Aug -28 exp, -30 prior
09:30 CHF KoF leading indicator Aug -0.6 exp, -0.99 prior
12:30 USD Personal income, % m/m (y/y) Jul 0.1 (-2.5) exp, -1.3 (-3.4) prior
12:30 USD Personal spending, % m/m (y/y) Jul 0.2 (-1.9) exp, 0.4 (-2.2) prior
12:30 USD Core PCE price index, % m/m (y/y) Jul 0.1 (1.3) exp, 0.2 (1.5) prior
12:30 USD PCE price index, % m/m (y/y) Jul 0.0 (-0.8) exp, 0.5 (-0.4) prior
13:55 USD U. Michigan consumer sentiment Aug-F 64.8 exp, 63.2 prior
 

The Risk Today:

EurUsd A brief move into the 1.4210 / 40 area just before the US open yesterday was met with a strong bid pushing the pair once again to the top end of the range at 1.4360 and in this case, actually a little higher to 1.4380. Short term things are looking slightly more bullish and the chances of testing the 1.4445 level look increasingly likely as the pair makes slightly higher highs and higher lows in the last few days. A good confirmation of this would be the next low to be held at 1.4277 support and if that occurs the range traders will likely withdraw from shorting thereafter until the 1.4445 level.

GbpUsd The prior support breakdown at 1.6272 is now serving as a resistance in the 1.6272 / 90 region and the pair is trading sideways around the level. A minor support level at 1.6190 level was confirmed yeserday so expect that to be the first level to break with 1.6078 thereafter. To the upside there is strong resistance at 1.6381 and a short sweet spot at 1.6435.

UsdJpy At last the 9 month uptrend channel was tested with the pair catching a strong bid at 93.22 and rallying straight back to the resistance at 93.86 / 94.00. In the process USD JPY has been popping in and out of its two week downtrend so the action is getting a little messy to say the least. Short term the trend is still down with medium term up and long term down.

UsdChf A second visit to 1.0707 shortly after the US open was met with some solid selling and established as a worthy resistance level as it was many weeks back. The pair has dropped back into the two week downtrend, triggered a heap of stops at 1.5556 ans subsequently supported by the powers that be and back to 1.0618. So, we are now back to rangebound action between the 1.5556 major support and 1.0632 until further notice.