The dollar traded mixed on Monday although it weakened fairly substantially versus the yen. The most noteworthy event was a speech by Ben Bernanke on Economic Measurement. Whilst he made no direct mention of monetary policy, neither did it seem to be a speech made by a man whic was about to press the button on more QE, given the focus on – almost spiritual matters. It covered bridging the disconnect between aggregate economic measures such as income and GDP which are rising, and the continuing challenging underlying realities which remain for many households. Also covered was the importance of trying to measure well-being or happiness and use such information in policymaking. From a data perspective the coming week’s highlights are Consumer Credit on Tuesday and Thursdays Jobless Claims and Trade Balance – however given the august holiday volumes may be low. If employment figures can keep up their recent form then they will not only support risk appetite but also probably the dollar.

   The euro traded mixed on Monday after markets slowed-down as a result of steadily decreasing participation due to the advent of the summer holiday. Spain remained in focus after PM Mariano Rajoy’s comments on Friday suggested the country might ask for a full bailout however no further major news was released. It also emerged German opposition alone which had help back the ECB from initiating a new bond-buying programme. There was some tit-for-tat with Italian PM Mario Monti saying that Italy’s high borrowing costs were enabling Germany’s to remain at record lows; the euro remained robust throughout. On the data front, the Euro-zone Sentix Investor Sentiment survey (Aug) showed a -30.3 fall vs -31.0 drop expected although still lower than the -29.6 previous, and still reflective of uncertainty. This week’s economic calendar includes quite a lot of German data – which will probably only impact if there is a major upset. Other than that, Wednesday’s ECB Monthly Report could be the most important release as it may give further guidance on the ECB policy.

   The pound weakened on Monday after the outlook for the U.K worsened following a run of poor data, with the latest release continuing to paint an ever gloomier picture of the economy after it showed a large slump in house-prices. The dollar meanwhile benefited from an improved outlook vis-a-vis the pound after the surprise lift in hiring shown by the Non-Farm Payrolls on Friday. Against the euro, sterling folded as speculation intensified of more direct ECB action although German opposition remained a major impediment. Safe-haven flows also fell as risk appetite rebounded on a generally better outlook globally, although the improved sentiment has been build on weak foundations. As far as the outlook for the rest of the week goes, the major releases to watch will be June Industrial Production – which is expected to fall substantially, and the BOE Inflation Report on Wednesday which could be highly influential if it is seen as ‘priming’ the markets for more QE.

   The yen recovered on Monday although trading remained muted and volumes slipped on limited holiday participation. On the data front the Leading Index showed a rise although it was not as much as had been hoped for. The index rose to 92.6 in June, when it had been expected to rise to 92.9 from a previous print of 95.2. The Coincident Index meanwhile rose to 93.8 in June vs 93.9 expected and 95.8 previous. Both data-sets were encouraging despite under-shooting their targets and may have contributed to yen strength as they may have lessened ever-so-slightly the stimulus requirement. However, there is still a strong expectation that the BOJ will deliver at the Rate Decision meeting on Thursday as deflation seems to have returned. Instead of straight-out QE it may produce a variation using reshuffling of maturities, or something similar which is unlikely to impact the yen substantially.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst