Market Review

Update Sept. 8:

CAD and GBP outperformed while JPY and CHF lagged. The market focused on a successful Portuguese 3-year note auction and a rate hike from the Bank of Canada.

Portugal showed the ability to raise funds in the open market and without ECB support, so that sparked a rally in the euro and international stock markets. The overall reaction was curious given that debt markets in Greece and Ireland were struggling.

There was no mystery to the reason for the Canadian dollar’s outperformance. The Bank of Canada hiked rates to 1.00% from 0.75%, leading to a 100 pip rally in USD/CAD that was sustained throughout the session with only minor pullbacks. The market wasn’t entirely expecting the rate hike and even those who did think a hike was likely didn’t think the Bank of Canada would maintain such a ‘wait-and-see’ attitude. Although the BoC acknowledged slower growth and “unusual uncertainty”, officials were more upbeat than expected, given the woes the U.S. appears to be facing.

Minneapolis Fed President Narayana Kocherlakota said he expects the U.S. economy to grow at a 2.5% rate in the second half of 2010 and 3% in 2011. The consensus estimate of GDP growth, according to economists surveyed by Bloomberg is 2.55% in the second half and 3.1% in 2011, so Kocherlakota’s estimates are roughly in-line. The Fed has noted that the outlook is “unusually uncertain” and that is reflected in the breadth of estimates. For the second half, they range from 0.65% to 4.7% and from 1.4% to 4.2% in 2011. Some notable forecasters, like Goldman Sachs and The Conference Board are near the bottom end of those ranges.

Looking ahead, the Australian employment data and U.S. initial jobless claims will be the dominant data in the day ahead. The Bank of England should be a non-event with no change in rates or asset purchases expected. The BoE does not release a statement when it doesn’t take action.
 

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In The News

The U.S. dollar and yen are again on the back foot on Wednesday as the risk-aversion on Tuesday pulled back, allowing investors to return to riskier currencies.

The euro was one of the laggards throughout the Asia-Pacific session and much of the European session until stronger than expected demand at a Portuguese bond auction gave the currency a lift.

Portugal raised €661 million in 2013 bonds and €378 million in 2021 bonds, and although the yields were somewhat higher than at recent sales, the results were taken as good news as it quelled fears that the regional government was having difficulty finding investors to buy it debt, a factor which has weighed on the euro for the last several months.
 

Over in Japan, the yen has completely ignored calls from Ichiro Ozawa, challenger to Prime Minister Naoto Kan for leadership of the Democratic Party of Japan, for the government to sell more bonds as a means of weaken the yen.
 

Also ignored were additional comments from Finance Minister Yoshihiko Noda, once again promising “bold action” on FX to weaken the Japanese yen.
 

USD/JPY is nearly flat on the day, but the yen has pulled back against major currencies.
 

The pound sterling is making a solid comeback despite some inline industrial production and manufacturing data in the region.
 

Industrial production advanced an annual 1.9% in July, just short of calls for a 2.0% pickup, while manufacturing production was up 4.9% spot on with expectations.
 

After selling off very sharply in the last several days, GBP/USD is benefitting from a much needed technical rebound.
 

The Australian dollar is the day’s top performer, boosted by the clearer political picture in the region, following Tuesday’s election results.
 

As traders set their sights on the North American session, focus will likely lie on the Bank of Canada’s interest rate decision, as well as the Federal Reserve’s Beige Book Economic Report later in the day.