Market Drivers for August 21, 2013
Comm dollars once again weakest as NZD tests 7900 AUD 9000
UK PSNB bit better, FX very quiet ahead of FOMC minutes
Nikkei 0.21% Europe 0.13%
Oil $104.50/bbl
Gold $1367/oz.

Europe and Asia:
AUD Westpac Leading Index 0.0% vs. 0.2%
NZD Credit Card Spending 1.4% vs. 0.8%
GBP Public Sector Net Borrowing -1.6B vs. -3.7B

North America:
USD Existing Home Sales 10:00
USD FOMC Minutes 14:00

It been a very quiet night of trade in FX with commodity dollars once again seeing the brunt of selling while European currencies remained stationary ahead of the FOMC minutes to be release later today.

Both Aussie and kiwi came under more pressure in Asia session trade with the former testing support at 9000 and the latter dropping through the 7900 figure before rebounding slightly in during European dealing. There was little in the way of news from the Asia Pacific region with the downdraft in AUD/USD and NZD/USD driven more by momentum rather than any fresh fundamental factors.

USD/JPY seesawed a bit first running up to a high of 97.68 after BOJ governor Kuroda reassured the markets that any dampening of demand planned by the upcoming hike in the national sales tax would be offset by more accommodative monetary policy. However, the pair then tumble to 97.12 on risk aversion flows after NIkkei sold off on news that the leak at the Fukushima nuclear plant was raised to level 3 severity. Stocks then rebounded taking USD/JPY back to 97.50.

The sales tax issue is clearly dogging Japanese policymakers and financial markets and the latest speculation is that Prime Minister Abe may now institute a gradual rate hike rather than instant increase to 8%. There is no doubt that any hike the in the sales tax would dampen demand in what remains a very fragile consumer environment and it is clear that Mr.Abe is loathe to act so soon. However his government remains under pressure to address the gaping budget deficit that’s why the gradualist solution may be the most palatable for now.

With no major news in the European session, the focus in FX will be squarely on the FOMC minutes with markets looking for any clues as to the timing of the taper. One key factor that many analysts will examine will be the question of interest rates. FOMC cited higher mortgage rates as a potential risk in their July statement. In addition several members have stated that the QE in the MBS market appears to have had more impact than in the US Treasury market. Therefore, even if the Fed does taper, it may only do so in USTs rather than in the MBS sector.

If the Fed does pursue such a policy it will viewed as mildly dovish with US dollar likely selling off in the aftermath of the release. With EUR/USD still holding near the 1.3400 level and cable within striking distance of 1.5700 and dovish hint from the FOMC minutes could push the pairs to 1.3500 and 1.5750 respectively as the day progresses.

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