At 4:00 AM Eurozone June Current Account Balance (exp –2.0 bln euros, prev –8.6 bln euros) At 5:00A M Eurozone June Industrial Orders m/m (exp 2.0%, prev 1.7%) Eurozone June Industrial Orders y/y (exp 12.4%, prev 9.1%)
Markets remain on edge amid continued uncertainty stemming from burgeoning fears of a global credit crunch -- leaving traders to ponder the outlook for the US economy. Early in the Tokyo session, the sterling came under pressure against the dollar and yen as rumors of a UK insurer holding substantial subprime positions began circulating the trading desks, pushing the pound to 153.40 versus the yen and toward the 1.98-level against the greenback. We expect further volatility in the coming months as a result of possibly more revelations of subprime holdings deteriorating balance sheets, requiring either substantial write-offs or even bailouts.
Senate Banking Committee Chairman Dodd met with Fed Chairman Bernanke and Treasury Secretary Paulson, saying that Bernanke vowed to use 'all tools available' to stabilize volatility in the financial markets. Paulson expressed that he has the utmost confidence in how Bernanke is handling the current credit crunch. Nevertheless, Dodd stressed that the Fed was an independent agency and should not be pressured into cutting rates.
Meanwhile, Richmond Fed President Lacker said it was premature to gauge the impact of last week's discount rate cut and that his primary concern continues to be inflation. Lacker said that 'financial market volatility does not require a change in the target fed funds rate' and that 'interest rate policy needs to be guided by the outlook for real spending and inflation'. Markets are currently looking for the FOMC to cut rates as early as September.
The economic calendar in the session ahead is light, consisting of reports from the Eurozone. The data include June current account balance and industrial production, both of which are seen improving from May.
Yen Edges Higher
The Japanese currency continues to remain firm against the euro and sterling as heightened risk aversion keeps the yen buoyed. The Bank of Japan kicks off its two-day monetary policy meeting this evening, with the announcement slated for tomorrow. The BoJ is not expected to change rates when it announces its decision, but comments from Governor Fukui will be closely scrutinized for clues on the timing and scope of any potential moves. Given the current economic outlook, it is unlikely the BoJ will tighten until early next year.
Japan's trade surplus for July unexpectedly fell to 671 billion yen, down 21.1% from a year earlier at 764.9 billion yen. The drop in trade surplus was the first in 9-months, raising fears that deteriorating economic conditions in the US will soon erode into Japanese exporters' profits.
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