Position adjustments drove the euro sharply lower ahead of the North American trading session. Some traders blamed the sell-off on selling by the Swiss National Bank but with EUR/CHF stuck in a 15 pip trading range for the past week, we donâ€™t believe that the SNB is behind the move. USD/CHF weakened around the same time, which means that if the SNB was in EUR/CHF it was to buy and not sell the currency pair. Yet what is clear is that the position adjustments are unique to the EUR/USD because other major currencies held steady as the euro broke down.
The positive sentiment that we saw at the start of the month is beginning to fade with stocks stalling and currencies rolling over. However this phase of U.S. dollar strength can be attributed to both risk aversion and adjustments to expectations for Quantitative Easing. A number of U.S. economic reports are scheduled for release this morning. According to the first round of data, consumer price growth stalled in July. Headline CPI has held steady for 3 out of the past 4 months and if we exclude the change in food and energy prices, CPI still grew a mere 0.1%. With annualized consumer price growth slowing from 1.7% to 1.4%, inflation is not a concern for the central bank. Based on CPI alone, the Fed could ease if they wanted to but as we wrote in yesterdayâ€™s note, there is no immediate risk and therefore no immediate need for another round of Quantitative Easing. Manufacturing activity on the other hand was a big disappointment. The Empire State Manufacturing survey dropped from 7.39 to -5.85 in August to its weakest level since October 2011. While this index can be exceptionally volatile, it raises a red flag that may become a bigger problem if a similar pullback in manufacturing is also seen in the Philadelphia or Chicago regions.
The Treasury International Capital flow report and industrial production will be released later this morning. The TIC data is likely to show continued demand for U.S. dollars. In the meantime, we donâ€™t expect this morningâ€™s reports to pose too much threat to the U.S. dollar.