Dollar Weaker Ahead of FOMC Minutes

After a standoff that lasted for several days EUR/JPY finally cleared the psychologically important 150 barrier in early European trade today but could not hold that level as profit taking immediately pushed the pair to 149.60.

EUR/JPY, however, continues to be well bid in the near term as interest rate speculation and rumors of additional exotic options barriers provide support for further forays above the 150 level. With little fundamental news to change market's point of view EUR/JPY may retest these highs, although as we pointed out last week the pair is grossly overbought and uptrend in EUR/JPY is far closer to the end than to the beginning.

Given the likelihood that BOJ will keep rates steady for the rest of the calendar year, it's difficult to forecast the specific piece of news that could trigger a reversal in the pair. One possible facto, however, could be a more rapid appreciation of the Chinese yuan. The USD/CNY NDF once again hit record lows in overnight session trading at 7.9606. With US Congress back in session after the Labor day holiday, pressure on the Chinese to revalue the yuan further will increase considerably.

Fearful of retaliatory trade tariffs from the US, the Chinese authorizes are likely to acquiesce to further strengthening of their currency. Therefore, the yen which acts a de-facto proxy for the yuan amongst the free-floating currencies could strengthen as well once most market players return to their desks after the end of summer holidays.

In overnight news Japanese economic data printed essentially in line with the jobless rate dropping to 4.1% and job to applicant ratio climbing to 1.09. Overall household spending was slightly weaker than expected at -1.3% vs. -0.8% projected but some analysts pointed to the downward statistical bias in the report as possible reason to take it with a grain of salt. Overall, the employment reports continue to paint a steady picture of progress in the Japanese economy which should eventually translate into healthier spending as long held deflationary attitudes begin to dissipate.

In the Euro-zone the sole report of note - German GFK Consumer confidence - produced a surprising read to the upside printing at 8.6 versus 8.5 expected. The news bodes well for the moribund EZ retail sector which has been in multi-year long slump due to the reluctance of EZ consumers to increase spending even modestly. As the EZ recovery takes root, the better growth and employment prospects may be finally having a positive impact on EZ consumer psychology and may in turn help boost growth in the coming quarter.

In US today the focus remains firmly on the FOMC minutes. With recent spate of hawkish rhetoric from voting and voting members alike, the hope of the dollar bulls is that minutes will offer the possibility of additional Fed rate hikes before the end of the year. Should no such evidence materialize, the dollar could see further weakness as the day progresses.