Australian Dollar and Japanese Yen Rise as Data Supports

Key Overnight Developments

• Australian Dollar Advances on Strong Employment Data
• Rising Business Confidence Reinforces Yen Uptrend

Critical Levels

The U.S. Dollar is currently mixed in the Asia session, rising narrowly versus most rivals, but falling notably versus the Australian Dollar. Today’s highlight was the release of better-than-expected Australian employment data, and that is lifting the Aussie versus all of its rivals. Also advancing is the Japanese Yen, as positive business confidence reinforced the already-established uptrend in the currency. The Euro is showing little movement, with the currency continuing to consolidate after Tuesday’s big losses. We remain short EURUSD.

Asia Session Highlights

New Zealand Manufacturing Activity increased 3.1% in the second quarter, led by a 14% surge in the meat and dairy industry. Excluding the volatile meat and dairy industry, however, sales fell. Also of concern is that fact that Manufacturing Activity Volume for the quarter, a figure which excludes price changes, also fell, by 1.8%, to the lowest level in a decade. The volume figure is similar to what is inputted into real GDP calculations.

Confidence grew among Japanese firms in the third quarter, as the BSI Large Company (All Industry) confidence gauge increased to 7.1 from 4.0 in the second quarter. Manufacturers specifically grew more optimistic, with the BSI Large Manufacturer figure rising to 13.3 from 10.0. A number above zero signals that there are more optimists than pessimists. Confidence has recently been on the upswing after a long period of doldrums: after crossing below zero in late-2007, the BSI all industry figure stayed negative until the second quarter of 2010.

Australian Employment increased 30.9K in August, notably above the 25K that was expected, as well as the 25K in July. Importantly, all of the increase in employment came from full time jobs— those increased 53.1K, while part time employment actually decreased by 22.1K. These figures are in contrast to July when full time employment decreased, while part time employment increased. The unemployment rate ticked lower to 5.1% from the 5.3% in July, and below the 5.2% that was expected.

The Australian Dollar is currently getting a boost from the better-than-expected employment data, as a stronger economy is seen as positive for interest rate expectations. That being said, markets are maintaining a fairly conservative view with regard to interest rate hikes out of the Reserve Bank of Australia. Overnight index swaps suggest that the central bank will raise rates by 25 basis points over the next twelve months, up from 10 basis points before the employment data. Taking a look at trading action, the Aussie-Dollar broke above the 0.92 area, which was posing near-term resistance, but the break is not decisive at the moment. We will see if Thursday’s broader risk trends reinforce the bullish move in the Aussie, or serve to bring the commodity currency back down.

Euro Session: What to Expect

An interest rate decision from the Bank of England headlines the economic calendar in European hours, but the outcome may not prove market-moving with policymakers unlikely to offer anything that has not been priced in for some time already. Expectations call for both key elements of monetary policy – benchmark borrowing costs and the QE asset purchase target – to remain unchanged at 0.5 percent and £200 billion, respectively. The central bank has argued for some time that the upswing in prices since the beginning of 2010 owes to temporary factors, with inflation set to fall 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, a likely nod toward worries aboutthe forthcoming headwinds from the government’s austerity program. Indeed, a Credit Suisse gauge of priced in rate hike expectations reveals traders are betting on no changes in benchmark borrowing costs at least until the second half of 2011, a view in place since early August.

The final revision of German Consumer Price Index figures is set to show the annual inflation rate slowed to 1 percent in August. The outcome reinforces expectations of a static European Central Bank for the time being. The wide disparity in expected economic performance within the currency bloc over the coming years makes setting a single monetary policy difficult to say the least.Indeed, while German growth is expected to outperform the regional average by over a percentage point on average through 2011, growth in relatively large member states like Italy and Spain (to say nothing of Greece) is expect to underperform, making it all but impossible to set rates such as to both encourage growth and control inflation region-wide. Luckily for Jean-Claude Trichet and company, the ECB’s stated mandate is to ensure “price stability”. With inflation clearly manageable at a level well below 2 percent target level, a wait-and-see approach looks overwhelmingly like the path of least resistancefor the foreseeable future.

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