Dollar Holds Its Own

Talking Points
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·          JPY CPI figures more muted than expected

·          JPY unemployment rises to 4.2%

·          KOF at record highs

·          US GDP and PCE data key driver for North American session

Both the euro and the yen languished in very tight ranges during Asia and early <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Europe tonight unaided by mediocre economic data which either met or slightly missed market expectations.  In Japan, various inflationary gauges upon which so many yen bulls had pinned their hopes, printed a bit below forecast forestalling any urgent need by BOJ to ratchet up monetary policy anytime soon. National CPI figures increased by 1.0% on a year over year basis but slipped -0.1% on a month over month comparison. This was actually the first monthly decline in 12 months and suggests that at present  there is no risk of material price increases in Japan. That sentiment was echoed by Chief Cabinet Secretary Abe who noted that while traces of deflation still remain within the system.  <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

After a small dip following the inflation reports, the yen caught a bid once more on the back of strong employment results. Although the unemployment rate in Japan actually rose to 4.2% from 4.0% the month prior, the data reflected the fact that more people have re-entered the workforce  and is a positive sign of underlying economic strength. The more important job to applicant ratio rose to 1.08 the highest level in this decade.

In Euro-zone the only report of merit, the M3 money supply figures showed a slight deceleration in growth to 8.5% from 8.9% the month. The news weighed on the EUR/USD as traders speculated that the slowdown in the growth of the money supply would remove the need for  ECB to raise rates twice in the month of August.

In Switzerland, the KOF index of leading economic indicators  once again set a new high printing at 2.61 versus 2.55 expected. Swiss economy continues to generate stellar results even as the Swiss franc wallows near yearly lows against both the euro and the pound. Although the Swissie is hobbled by its ultra low interest rates,  recent pace of growth in the Swiss economy indicates that the countrys GDP may expand at nearly twice the rate initially projected by the SNB.  Therefore, the central bank may be compelled to implement a more aggressive monetary policy than the current 25 basis points rate hike per quarter that the market expects. If the SNB increases rates by 50 basis points at the September meeting, the franc may finally strengthen,  reflecting the countrys impressive economic results. 

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