Running with the current theme, less than convincing economic activity from the US heightened investor fear overnight in yet another sign the US economy is struggling to get back on the straight and narrow. US existing home sales slumped 27.2 percent in July to an annualised pace of 3.83 Million. Housing’s where it all started and this latest string of bad economic data is reigniting fears of a double dip recession. Not helping the cause was further turmoil across the Atlantic with rating agency S&P downgrading Ireland’s debt rating by one notch to double-A-minus.

Global markets kicked off the month of July with a bounce as investors were encouraged by strong earnings by European banks. Better-than-expected economic news gave US investors a boost in confidence in an otherwise cloudy outlook. European stocks surged with the Frances CAC posting 3 percent gains and the German DAX not far behind finishing the day up 2.3 percent. US markets took the positive lead and ran with it with a helping hand from better than expected construction and manufacturing data.

The ISM manufacturing index which is a gauge of the overall health of the manufacturing sector beat estimates recording a level of 55.6 in July against the expected 54.6. Construction spending in the US surpassed estimates to record 0.1 percent growth in June, against the expected contraction of 0.4 percent. The upbeat mood came at the expense of the seemingly redundant greenback which continued to head on a downward trajectory against major counterparts.

Sterling was a standout winner on the day climbing to highs of US$1.5910 – at the time of writing sterling is buying US$1.5890. The Euro also remained well bid, rising to highs just shy of US$1.32. The Euro is currently buying 1.3172 - in sight of 200 MA which suggest bullish momentum.

The Aussie dollar rode the coat tails of the surge in investor confidence making a convincing break of 91 US cents to highs of 91.45 US cents. At the time of writing the Aussie is buying 91.2 US cents ahead of the much anticipated RBA interest rate decision at 14.30 AEST.
Today’s interest rate decision will almost certainly see the RBA hold rates steady at 4.5 percent, with last weeks Consumer Price Index showing the chances of an election month interest rate hike substantially decreased, given a moderation of inflation pressure in the second quarter.

However it will be the finer points that will be the primary driver for the Aussie today with investors looking for clues into the RBA bias for the direction of rates toward year-end and into 2011. Domestic currency drivers today also include building approvals and retail sales for the month of June. Retail sales expected to see a modest improvement to rise 0.4 percent in June from a previous 0.2 percent.
 

Caution persisted in global market activity overnight, however the usual flight to the low yielding greenback was nowhere to be seen. US equities finished in the red as investors weighed mixed earnings with less than positive comments from a fed official not helping the cause. Fed president of St. Louis James Bullard stated “The U.S. is closer to a Japanese-style outcome today than at any time in recent history.” This of course refers to the long term deflationary state of the Japanese economy. Perhaps a good barometer of risk at the moment is Japanese Yen activity which continued to hold the upper hand against the US dollar.  In times of adversity the Japanese Yen is seen as the ultimate currency safety-play. Recent times have seen Japanese officials warn against excessive strength of the Japanese Yen as an expensive Yen against major counterparts makes exports become less price-competitive against competing economies, thus hampering an export fuelled recovery.
Euro activity also remained the preferred option against the greenback briefly breaking 1.31 the figure. Stronger economic confidence data and a decline of unemployment in Germany helped the Euro remain well supported. At the time of writing the Euro is buying around the short term support levels of 1.3070.
Following on from a strong day domestically, the Aussie remained well supported rising to overnight highs of 90.4 US cents. We also have some rumors around the traps that the Aussie could become the beneficiary of some month-end portfolio rebalancing.
Barring an good day across local and Asian equities, the Aussie appears to be under pressure around these levels is struggling to hold on to short term support around 90 US cents. Local economic news today includes private sector credit for June which is expected to show private sector borrowing increased to 3.1 percent annually from a previous 2.7 percent. At the time of writing the Aussie is buying 89.9 US cents.

Following on from yesterday’s post CPI slide, the Aussie dollar continued a slow downward trajectory overnight falling to lows of 89 US cents however remaining fairly buoyant considering the less than convincing feedback from the States. Yesterday Consumer Price Index showed the chances of an election month interest rate hike substantially decreased with inflationary pressures moderating in the second quarter. CPI rose 0.6 percent in the Q2 against estimates of 1.0 percent growth. In annual terms consumer prices increased to 3.1 percent against the expected 3.4 percent. The telling point here was the underlying rate of inflation which has increased 0.5 percent to reflect a yearly rate of 2.7. Given the RBA's target for inflation between 2-3 percent, yesterday’s CPI suggest the RBA will sit on their hands when the bank reconvenes next Tuesday. This morning we are seeing signs the Aussie is regaining composure with the local unit paring loses against major counterparts. At the time of writing the Aussie is buying 89.35 US cents.

Currency activity across the board was fairly subdued overnight considering the turnaround in investor sentiment which saw the S&P 500 lose 0.7 percent on the day. Less than convincing economic data was in focus with US Durable goods orders recording a surprise drop of 1.0 percent in June against the expected 1.0 percent rise. After a slew of positive earnings, DOW component Boeing released Q2 earnings which came in below expectations, raising fresh concerns we may be in for more earnings negativity. We also saw The Fed’s Beige book which is the views of analyst, market experts and economist in 12 Federal Reserve districts show economic activity is improving in 10 of the 12 districts, albeit at a slower pace.
 

The balance of risk moved to the side of caution overnight, with the greenback gaining the upper hand against major counterparts, albeit to a small degree. US Markets kicked off in good stead assisted by better-than-expected earnings results from UBS and DuPont. A lull in Consumer Confidence data released by the conference board quickly offset the positivity derived from the earnings reports – with confidence slipping to 50.4 in July from a previous 54.3. Analysts had expected a more subdued fall to 51.
We also saw disappointing manufacturing data from the US with the Richmond Fed manufacturing index fell to a level of 16 from a previous 23. The S&P/Case-Shiller Home Price index surpassed estimates rising 4.6 percent in May from a previous 3.8 percent. US stocks finished mixed with the DOW making an unconvincing 0.12 percent rise on the day and broader S&P Index close 0.1 percent in the red.

After rising to highs of 90.7 US cents the Aussie followed US equities lower, albeit remaining buoyant above 90 US cents ahead of key CPI this morning. Interest rate speculation will once again be a primary driver of the Aussie dollar today, with the Consumer Price Index is likely to sway opinion on what the RBA will do when they reconvene in August. Consumer prices are expected to have risen 1 percent in Q2 to represent annual growth of 3.4 percent from a previous 2.9 percent.  With the RBA's target for inflation between 2-3 percent, any significant move north will likely increase the chances of a hike in August. We know the RBA have attributed headline inflation being above target due to recent tobacco tax hikes amongst other factors - the RBA however expects underlying inflation to moderate in year-end terms. It’s this underlying or core inflation data which the RBA will be watching closely. The consensus amongst economists suggests a quarterly underlying inflation reading of 0.8 percent or greater will likely increase the chances of the RBA increasing interest rates when the bank reconvenes in August. At the time of writing the Aussie is buying 90.2 US cents.
 

Following on from Friday, sentiment remained upbeat in off shore trade overnight assisted by a surge in US new homes sales and positive earnings outlook from Fed-ex. US stocks rallied with the S&P 500 finishing up 1.12 percent on the day assisted by a surge in new home sales which outstripped consensus. Home sales grew 23.6 percent in June against the expected 5 percent.
The balance of risk fell to the higher yielding assets with copper rising to ten week highs which came at the expense of the greenback which continued a downward trajectory against major counterparts.

The Euro also remained well supported in the wake of the European bank stress test. This was the first real opportunity provided to investors to take a fully informed view. The common consensus amongst analysts appears to be ‘they've look under the hood but haven't really conducted the full service’. Despite continued criticism regarding the credibility of the tests; gains on European equities and the Euro suggests the very notion of transparency is acting as a supporting factor. Out of 91 banks under the microscope, 7 failed the minimum funds requirement of at least 6 percent of tier 1 capital. At the time of writing the Euro is buying US$1.2989 after briefly touching the US$1.30 level earlier in the session – however unable to convincingly break US$1.30.

There was only one direction for the Aussie to head pushing through the 90 US cent mark to highs of 90.35 US cents to represent 11 week highs. For the Aussie to hold 90 US cents and above we need to see a solid day in local and Asian equities.  Although we don’t anticipate any major selling we could be looking at the an Aussie slipping through 90 US cents in domestic trade – the next major local catalyst for Aussie upside comes tomorrow with the CPI data due for release.

Wednesday’s Consumer Price Index is likely to sway opinion on what the RBA will do when they reconvene in August. Consumer prices are expected to have risen 1 percent in Q2 to represent annual growth of 3.4 percent from a previous 2.9 percent.  With the RBA's target for inflation between 2-3 percent, any significant move north will likely increase the chances of a hike in August.  However, we know the RBA have attributed headline inflation being above target due to recent tobacco tax hikes amongst other factors - the RBA however expects core inflation to moderate in year-end terms. Core inflation will be the telling point given the RBA expects if we take away the volatile items the headline figure shows, we're going to see inflation within target, albeit towards the upper echelons of target.  The RBA is likely to react given inflationary pressures in underlying CPI come in stronger than expected.