Currency Markets Search for Direction, Pound May Look Past BOE Minutes

Key Overnight Developments

• Australian Leading Index of Future Growth Has Peaked, Says Westpac
• Dollar, Yen Rise as Currency Markets Break From Asian Stock Performance

Critical Levels

The Euro and the British Pound tracked lower in Asian trade, down 0.4 and 0.5 percent respectively against the US Dollar (see below). We remain flat EURUSD and GBPUSD.

Asia Session Highlights

Australia’s Westpac Leading Index stalled in June, printing unchanged from the previous month. The outcome amounts to an increase of 1.9 percent in the second quarter, the smallest since the metric returned to growth in the three months through September 2009. The annual growth rate slowed to 6.7 percent, the lowest in six months, albeit still high relative to the trend average at 3 percent. Westpac chief economist Bill Evans said “The growth rate of the index is still high but it has clearly peaked,” reinforcing expectations that renewed rate hikes are off the central bank’s radar for the foreseeable future.

Currency markets exhibited all the symptoms of risk aversion in overnight trade, with the US Dollar and the Japanese Yen tracking higher against all of their major counterparts. Curiously, stocks actually rose in Asian trade, following Wall Street’s advance on better-than expected US industrial production figures. The outcome may simply owe to a corrective rebound considering the “risk on / risk off” dynamic played out generally as expected in US trade and no new catalysts emerged overnight, hinting the price action in Asian shares was mostly reactive, allowing currency markets to briefly decouple having already had a chance to price in the US data.

Euro Session: What to Expect

The Bank of England is set to release minutes fromAugusts’ monetary policy meeting, but traders are unlikely to see anything that has not been priced in already after last week’s publication of the quarterly inflation report. Indeed, a report published yesterday showed core CPI inflation unexpectedly fell below 3 percent to the lowest in eight months in July, reinforcing the central bank’s sanguine view on price growth and pointing to a static policy posture for the time being.

The BOE has argued that the recent upswing in inflation since the beginning of this year owes to temporary factors that will fade over time, with the annual price growth rate falling back below 2 percent by 2012. Given such a prolonged time frame, Mervyn King and company are surely going nowhere fast despite a promise to shift policy “in either direction” as needed. In fact, a Credit Suisse gauge of priced in rate hike expectations hints traders are betting on no changes in benchmark borrowing costs for the next 12 months.

Turning to sentiment, the outlook seems clouded with US stock index futures little changed heading into European trade after consolidating in choppy ranges through the overnight session. Portugal – one of the poster-children of the EU debt crisis – is set to auction off 1.35 billion euros in government bonds, but yesterday’s successful offerings from Spain and Ireland hint the event is likely to prove orderly with little market-moving potential.

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