BOJ Mizuno Sparks Thin Yen Rally On Continued Tightening

US Dollar 
Markets were relatively mixed on the day as the lack of dollar data kept traders asleep at their desks.  For the North American session, traders were privy to only the monthly budget statement and MBA mortgage applications, placing increased focus on the speech on international economy by Treasury Secretary Paulson.  With the monthly budget statement widening to a $64.6 billion shortfall against the $51.3 billion seen in the previous month, dollar bears were counting on a dip in MBA mortgage applications as well, but were sadly disappointed.  Mortgage applications for the week of September 8th rose 3.2 percent compared to a more stabilized 1.8 percent increase seen in the previous month.  Although the figure does not signify another recovery is on the way by any means, it at least keeps the bears at bay as rising applications may be reflective of higher confidence in the months to come.  However, taking the cake was Paulson’s speech on the international economy in Washington.  Given ahead of the upcoming G7 meeting and Paulson’s visit to China, the speech mainly focused on references to the current debate facing China.  Although seemingly accepting of the country’s competitive placing due to globalization, the Treasury Secretary, like his predecessor, urged for certain economic reforms including the increased flexibility of the domestic currency, the yuan, and inclusion of increased foreign investment.  The latter, as noted, would help to close any detriment to the overall competitive advantage the Chinese economy currently offers the world.  Subsequently, Paulson noted that protectionist measures rarely work and would indeed jeopardize a strengthened relationship, one which he is currently pursuing to remedy in his two and a half year term.  Although the topic has not been cited as a top priority at the upcoming G7 meeting, the comments are likely to feed further debate and speculation ahead of the weekend.

Euro 
Similar to the US, the Eurozone schedule of data remained thin at best with the only indications coming from consumer prices in the region’s largest economies.  German consumer prices were in line with expectations, dipping ever so slightly by 0.1 percent in the monthly figure.  The dip caused the annualized comparison to rise only slightly by 1.7 percent, slightly lower than the previous 1.9 percent seen in July.  French consumer prices were also released in line rising by 1.9 percent on the annualized figure.  Still hovering over the pair seems to be earlier comments from a Directorate member Hildebrand that suggested a peak in the Swiss business cycle, sparking some concerns ahead of tomorrow’s interest rate hike announcement.  Already pricing in the likelihood of an another 25 basis point rate hike to the provided band, traders previously looking for further rate hikes may now be concerned.  With growth expected to slow in the next two years, inflationary pressures are likely to abate, giving the hawkish bias less evidence to work with.  In the grander scheme of things, this is likely to adversely affect Eurozone hike proponents as the two economies are noted trade partners.  As a result, tomorrow’s decision is likely to set the future tone even as futures traders are betting on at least two more rate hikes by the European Central Bank.  Still on the side of ECB President Trichet seems to be rising inflationary pressures.  Currently, consumer prices are running at an above 2.5 percent rate, enough for the widely accepted hawk to tighten monetary policy.

British Pound 
Pound prospects took a slight hit on the session as employment data was less than exemplary in the second largest economy in the Euro region.  Expecting an addition of 4,000 positions, the consensus was blown away as the labor sector lost 3,900 positions and the previous figure was revised lower, declining by 1,000 positions.  In addition, average earnings were slightly lower than the consensus, and showing a dip against the previous figure excluding the bonus component.  Although overall keeping the unemployment rate constant at 5.5 percent, the figures are somewhat disconcerting as traders have already started to price in another round of tightening before the year end.  Based mostly on the rebound in consumer retail spending and a stabilization in housing prices, sentiment is growing that central bankers will conclude the year with one more rate hike of 25 basis points as inflation still reigns over the consumer.  The day’s data throws a wrench in the thought, at least in the interim, as consumers with fewer wage and earnings are likely to spend less on unnecessary items.  Subsequently, this places increasing emphasis on tomorrow’s retail sales figures.  Expected to rebound from last month’s torrid figures, the consensus is anticipating a rise of 4.1 percent annually.  Should the survey report within consensus, short sterling contracts would receive a boost as sentiment would confirm sustained consumer strength.

Japanese Yen
Figures were widely in line with expectations as industrial production numbers were consistent with June’s figures, rising 5.1 percent on the annualized comparison.  Disappointing, however, were the Tokyo condominium sales figures for August, declining 40.5 percent on lower demand and a lower than expected capacity utilization figure, printing a 105.5 versus prior 106.2.  But it wasn’t economic data that led Yen bulls on the day, rather comments from Bank of Japan board member Mizuno that spurred a reversal of the dollar gains from the last three sessions.  Made in an interview in the overnight, comments from Mizuno purported the commitment by policy makers that interest rates will gradually rise in the world’s second largest economy.  Although good for yen currency markets, the comments come at a time that coincides with an upcoming G7 meeting this weekend.  Recent speculation has it that the yen and yuan will be at least touched upon in the meetings.  The comments could also be considered additionally suspicious as fundamental economic data in the region remains overall pessimistic.  Both retail sales and consumer confidence, mainstays of the economy, had declined.  As a result, the notion is keeping some participants particularly interested in this weekend’s rhetoric, if any, with most of the market likely expecting to see no move till the very end of the year.