USD and JPY wilt as ranges

MAJOR HEADLINES – PREVIOUS SESSION

• New Zealand Q2 NZIER Business Opinion Survey rose to -25 from -65 in Q1
• Australia Jun. AiG Performance of Construction Index fell to 42.6 vs. 46.9 in May
• Australia RBA left Cash Target Unchanged at 3.00% as expected
• Norway May Industrial Production fell -7.8% YoY vs. -4.0% in Apr.
• UK May Industrial Production fell -0.6% MoM vs. +0.2% expected
• UK May Manufacturing Production fell -0.5% MoM vs. +0.2% expected
• Germany May Factory Orders rose 4.4% MoM vs. 0.5% expected, but were still off -29.4% YoY vs. -31.2% expected
• Canada May Building Permits rose 14.8% MoM vs. +0.8% expected

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THEMES TO WATCH – UPCOMING SESSION

• Canada Jun. Ivey Purchasing Managers Index (1400)
• US Weekly API Crude Oil and Product Inventories (2030)
• US ABC Weekly Consumer Confidence (2100)
• UK Jun. Nationwide Consumer Confidence (2301)
• UK Jun. NIESR GDP Estimate (2301)
• Japan May Machine Orders (2350)
• Japan May Current Account Total (2350)
• Australia Jul. Westpac Consumer Confidence (0100)
• Australia May Home Loans (0130)

Market Comments:

Another day brings yet another disappointment for the trend-seekers in the FX market, as risk appetite across markets recovered exactly as the US S&P500 touched its 200-day moving average. The reversal creates all of the usual technical arguments for a continuation in the direction of risk appetite for at least a day or two - for example, EURUSD higher - but it feels like this market has lost all trust in any kind of technical signal now that this utter trendlessness has settled in during the summer doldrums. In fact, the strength of the reversal may have been more of a sign of the frustration in the market that the break didn't hold than any sort of real sentiment signal. There was hardly any catalyst, in any case, besides the slavish following of the equity market action.

Australia's RBA left rates unchanged at 3.00% for the third consecutive meeting as was widely expected, though we felt there was at least some chance for a rate cut. The RBA justified maintaining its policy at current levels due to signs of a stabilizing global economy and stronger conditions domestically. Somewhat dovishly, the bank suggested that further rate cuts late in the year were a possibility if conditions warranted and because inflation was . In our view, conditions will warrant, so this sets up an RBA cut sometime in the fall most likely, once the green shoots fantasies and recovery mirage are fast receding in the rear-view mirror. We remain bearish for the medium term on the Aussie, but admit that we may need to get on the other side of these summer doldrums before we see any convincing break lower for the currency.

GBP faltered versus most of the rest of the majors on rather dour production figures and perhaps also from PM Brown's warnings on the economy of late. The UK was one of the quickest and most aggressive to respond to the crisis last year once the grim state of the economy and financial system became painfully evident. Is the stimulus already wearing off in the British economy? In the US, despite many claims of improving conditions, the idea of a second stimulus is now being circulated. It is clear that the economy has no chance of recovering on its own and will continue to stumble from bailout to bailout for now.

The Californian budget situation in the US is enormously important issue for the US economy due to the potential that California is simply the canary in the coal mine (or the Big Bird in the coal mine as the case may be, considering that the Californian economy would be the world's tenth largest). There are 49 other states, after all, each with their own pressures. California is worst hit because its finances were already a mess before the property market collapsed and sucked away huge revenue streams from property taxes. Much of the government in the US operates on the state (or even more local) level, and states can't print money - so it's either 1) go the Feds with hat in hand, 2) introduce or 3) default. The third option is not an option. So even while the Fed is trying to stimulate, governments at the local level are like 50 Herbert Hoovers, as the Nobel laureate Krugman puts it.

SEK has weakened further today on a story that Swedish banks in Latvia are refusing to roll over their loans in the country , further jeopardizing the Latvian economy and the attempted bailout by the . EURSEK is trading back above the key 11.00 level as of this writing. This SEK-negative news comes on top of the recent surprise rate cut. But with rates now as low as they can go in Sweden and the EuroZone also neck-deep in CEE issues, is there room for much more upside in EURSEK? This is a tough call: on the one hand, the interest rate differentials say no, but the key will be the degree to which the market judges further CEE risk as more Swedish negative than EUR negative now that SEK is already at very competitive levels. Traditionally we could expect a spike in SEK weakness on broad risk aversion, but we're wondering if that correlation will hold in the next cycle.

A brief footnote: we're very curious to see this week's ABC Consumer Confidence number out of the US this evening. The weekly ABC numbers correctly predicted the terrible and surprising monthly Conference Board confidence number the last time around. Improving consumer confidence is an absolute must for any recovery prospect in the US economy.

Chart: EURSEK
EURSEK flies above the 11.00 handle on the latest trouble in the Baltics. The pair has a recent history of breaking to new highs, but then not being able to hold them. So first we watch the 10.9675 level for support and then the 11.15 area as the next important resistance. The structural support remains the key 200-day moving average.