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US$ Weaker, Market Awaits Speeches by Bernanke and President Bush

The US$ was weaker overnight against the euro and sterling, while stronger versus the yen.  These moves come ahead of Federal Reserve Chairman Ben Bernanke’s speech on the housing market scheduled for 10:00 a.m. EST and a speech by President George W. Bush on solutions to help mortgage borrowers at 11:10 a.m.  Expectations of the Fed Chairman’s speech are mixed, with some hoping that he will indicate the Fed will lower the Fed funds rate at their next meeting.  What is more likely, however, is for the Chairman to reiterate that the Fed will do all it can to prevent the crisis from developing further without indicating any course of policy for the Federal Reserve’s meeting.  At the same time, Bernanke might focus on the Fed’s outlook for growth, which has been downgraded in the recent past.  The changes to the Fed’s forecasts are what will prompt the Fed to lower interest rates, as opposed to being pressured by markets.  Therefore, should the forecasts be revised even lower, due to the current housing crunch, the Fed might get cover to lower rates in September.  Short of that, it is likely to stand firm in the near term and wait for data to be released.  President Bush is scheduled to release a plan to aid mortgage borrowers at 11:10 a.m.  Details of the plan were leaked overnight and, thus far, the markets are greeting it with a warm reception.  Should the plan work, it would go to the root of mortgage borrowers’ problems, creating a long-term solution instead of a temporary one created by the Fed easing borrowing. 

The euro was stronger overnight in advance of the speeches today.  The euro is likely to benefit from expectations the Fed will lower interest rates, as the ECB is seen on hold into the future with the bias toward raising.  Additionally, the European economy will benefit from the containment of the U.S. subprime crisis, which will bolster economic growth. 

The yen was weaker overnight as investors gained an appetite for risky carry trades.  The yen has gained from speculation that the subprime crisis will continue to spread, but with news and hope that the crisis might be contained, the prospect for further gains are limited.  Additionally, Japanese data released overnight shows that the economy is still experiencing deflation.  CPI showed a decline of 0.5% year on year, excluding food and energy.  With this downward pressure on prices, it is difficult to imagine that the Bank of Japan will be able to raise interest rates in the near term.  This will keep the interest rate differential supportive of the carry trade. 

The pound was higher overnight as it continues to benefit from the carry trade because of its high yield.  Barclays announced overnight that it was the bank that utilized the Bank of England’s loan procedure.  It stated that it borrowed 1.4 billion pounds because of a glitch in its system.  This is the second time that Barclays has been forced to borrow at the BOE’s penalty rate because of an error.  As of now, this is welcome news that the subprime crisis has not spread to any banks in the U.K.  This is supportive of sterling into the future. 

US$ Gains on Euro, Sterling as Credit Concerns Continue to Fester

The US$ was better overnight against the euro and sterling as expectations continue to waiver on whether Chairman Bernanke will indicate that the Fed will cut interest rates when he gives his speech on the housing sector tomorrow.  The market is completely pricing in an interest rate cut in September; however, this may be too optimistic.  The Bernanke Fed has relied heavily on forecasts, and, though they have recently downgraded their forecasts for U.S. economic growth, there are no expectations of an impending recession.  In addition, Bernanke has exhibited a preference toward using means other than the Fed funds rate to ease the current credit crisis.  Yesterday, Senator Charles Schumer, chairman of the Senate Banking Committee, released a letter that Chairman Bernanke wrote following their meeting last week.  In it, Bernanke indicated that the Fed is “prepared to act as needed to mitigate the adverse effects on the economy.”  That helped markets to rebound from the previous day’s declines.  The US$’s fate is still largely following movements in U.S. equity markets, which are currently indicated lower.  Today, the U.S. released its second revision of 1^st quarter GDP, expected to show an increase to 4.1% over the previous estimate of 3.4%.  The number actually showed that GDP for the second quarter rose 4.0%.  Along with this release, the U.S. released its core personal consumption expenditure, which is the Fed’s preferred measure of inflation.  This measure showed that inflation rose 1.3%, compared to expectations of 1.4%.  Though these are backward looking indicators, showing the economic situation in the second quarter, the high level of growth suggests that unless the situation deteriorated significantly, the economy is not as bad as current market sentiment would indicate. 

The euro was lower overnight, as the US$ continues to benefit from the market paring risk, while it loses when the market assumes riskier positions.  News from Europe has been slow this week, leaving the market to focus on revolving issues from the U.S. credit crisis.  Next week, attention will turn to the ECB, which is expected to keep interest rates steady.  The commentary following the meeting will be particularly important to see the ECB’s outlook for the economy moving forward.  Their bias remains to increase interest rates; however, that depends on the fallout from the U.S. slowdown. 

The yen gained overnight as investors again turned to selling risky carry trades.  Overnight, an Australian hedge fund filed for bankruptcy, stoking concerns already in the market.  The hedge fund, Basis Yield Alpha Fund, stated that the U.S. home loan defaults had significantly depreciated the value of its holdings.  As these concerns continue to come to light, the yen is likely to remain very fickle.  The 0.50% yield on the yen continues to keep it attractive to add to carry trades, while the revolving concerns continue to cause investors to flee from them. 

Sterling fell overnight after the Bank of England stated that it lent GBP 1.6 billion in emergency funds at its penalty rate of 6.75%.  This stokes concerns that a credit crunch is spreading to the U.K., which would keep the BOE from raising interest rates further.  The pound also fell as investors pared carry trades, which they aggressively added to yesterday.  Sterling’s recent roller coaster ride follows the recent ups and downs in equity markets, and investors’ willingness to hold riskier assets.  The market is very skittish right now, which will undermine significant bets on a higher pound.  When markets settle down and fears are calmed, sterling should resume its rise against the US$.

Yen Loses Ground as Equities Point Higher

The US$ was relatively flat overnight as the market continues to move almost exclusively with moves in equity markets.  When equity markets fall, as they did yesterday, the market is paring back its risk.  This has tended to help the US$ against most currencies as investors unwind risky carry trades, which pushes the US$ higher against the euro and sterling, while lower versus the yen.  With no major economic releases on tap for today, the market should continue to trade off of these movements.  Yesterday, the release of the Fed’s minutes showed the thought process behind the Fed’s decision to keep interest rates steady at the meeting in early August.  While they stressed that they were concerned that inflation would not continue to moderate, they also stressed a concern that the housing sector would be a larger drag on growth than previously thought.  The market will look towards Fed Chairman Bernanke’s comments on Friday for an indication of the current thought process behind the Fed.  The market is fully pricing in one interest rate cut at the Fed’s meeting in September, with around a 30% chance of a cut by 50 basis points.  Should Chairman Bernanke confirm this in his speech on Friday, the US$ will likely fall. 

The euro rose slightly overnight despite a report released overnight showing business confidence slipped.  This is no surprise given current market conditions, in which increased volatility has created trepidation within the market.  The comments by Trichet suggest that the ECB will not raise rates in September, which should not come as any surprise given the liquidity they injected over the past weeks.  However, this does not appear, by any means, to be the end of the ECB’s tightening cycle, which should continue to support the euro. 

The yen was extremely volatile overnight, rising against the US$ as Asian stocks initially declined before falling as European shares rose.  The yen gains as risk aversion sparks investors to dump carry trades, while it falls when investors re-enter these trades.  With thin liquidity in the marketplace right now, the potential exists for volatility to increase substantially.  Comments overnight suggested that there is still substantial political pressure for the BOJ to keep interest rates at 0.50% in the near term.  This should keep investors at least interested in the carry trade, should volatility calm down. 

Sterling gained overnight as investors went back into the carry trade.  After losing ground throughout yesterday as equity market losses spurred risk aversion, sterling staged an impressive recovery overnight.  There remains significant interest in holding sterling, particularly as the U.S. may embark on an interest rate-cutting mode while the BOE is at the very least holding rates steady.  This should continue to support sterling in the coming months. 

More Carry Trade Unwinding, Market Anticipating Bernanke on Friday

The US$ was unchanged overnight against the euro and sterling, while it fell against the yen as investors continue to fluctuate between unwinding the carry trade and entering back into it.  The markets overall remain very skittish, particularly ahead of Federal Reserve Chairman Ben Bernanke’s speech on the housing sector Friday.  His speech will show the market what the Fed’s expectations for the current crisis are and should provide an indication of Fed policy into the future.  As of now, the market is mixed about whether or not the Fed needs to cut interest rates in September, though futures contracts are pricing it in.  The move would be seen by some as more of a bailout than fulfilling the Fed’s obligation to maintain stable growth, while others believe that the risks to the economy for not cutting interest rates greatly outweigh the risks to cutting.  Today, the Conference Board releases its measure of consumer confidence at 10:00 a.m.  The number is expected to decline from the 6-year high of 112.6 seen last month to a measure of 104.0 this month.  Later in the day, the Fed releases its minutes from the August 7^th meeting.  This occurred before the credit crisis fully emerged in the market, when the Fed stated that their “predominant policy concern” remains the risk of inflation.  This view has clearly changed over the past three weeks, so the extent to which the market will use these minutes is questionable. 

The euro was flat overnight after suffering slightly yesterday from comments by Trichet.  Trichet seemed to back away from his previously hawkish statements on raising rates in September.  Though the market used this as an opportunity to sell euros, it was hardly a surprise as the ECB’s strong stance of injecting liquidity during the crisis was indicative of a change in view.  Despite this, the crisis for Europe should remain contained, while the U.S. will continue to suffer the fallout.  This means that rates in Europe will likely eventually move higher, even if they do not do so in September.  This should support the euro into the future.

The yen gained again overnight as investors squared carry trades.  The yen will likely remain heavy as stocks come under pressure today.  Current equity futures show the Dow Jones is poised to lower 60 points, while the S&P should open lower by 8 points.  The correlation between equity market movements and the yen continues to be over 90%, as losses in stocks create gains in the yen. 

Sterling is under pressure as carry trades unwind and is supported when they become in vogue.   Overnight, reports entered the market that Barclays, a major U.K. bank, had significant exposure to subprime mortgages.  While this was immediately denied by Barclays, it continues to point to the global nature of the mortgage crisis.  In addition, it is the second indication that the U.K. might be affected.  These factors will likely leave sterling trading in a range as the carry trade moves in and out of favor.

Market Calm, Awaiting Bernanke at End of Week

The US$ was largely unchanged from Friday ahead of a busy week in the United States.  Today, at 10:00 a.m., the Department of Commerce will release the figure for existing home sales in July.  The number is expected to decline to 5.70 million from 5.75 million, a decline of 0.9%.  The number follows a new home sales number on Friday that rose to 870,000, compared to expectations of 820,000.  This will be watched closely as investors attempt to gauge the housing slowdown.  Tomorrow, the Fed minutes will be released.  These will likely be less important than other events as it represents the Federal Reserve meeting prior to the credit crisis, when the Fed was still stressing the risk of inflation.  That rhetoric has virtually disappeared as the Fed attempts to calm concerns and prevent an economic downturn.  The week ends ahead of the long weekend with a speech on Friday by Federal Reserve Chairman Ben Bernanke.  The market currently is expecting the Fed to lower interest rates at their September meeting, though this may prove to be too optimistic.  Should Chairman Bernanke indicate that the Fed will lower rates, this is likely to continue to depress the US$. 

The euro was unchanged overnight ahead of a speech by ECB President Jean Claude Trichet.  This will be the first major speech by Trichet since evidence emerged that the credit crisis has spread to German banks.  The market is looking for Trichet to indicate whether the ECB will raise rates on September 6^th as previously suggested.  Should Trichet suggest that the Bank will raise rates, it will tell the market that he believes the worst of Europe’s exposure to U.S. subprime fallout is over.  This would create further demand for euros against the US$ and likely also help to stabilize global equity markets.  The speech is set to start at 9:00 a.m. EST.

The yen continues to be a measure of the overall risk appetite in the marketplace, moving in high correlation with global equity markets.  As risk appetite increases, investors move back into the carry trade, which takes advantage of low interest rates in Japan.  This, in turn, will cause the yen to weaken.  However, as concerns expand and risk appetite is depressed, investors liquidate these positions, causing the yen to gain.  These moves have recently been sharp as volatility continues to increase.  Look for the trend of following equity markets to continue in the near term, until some stability can be realized in the marketplace. 

Sterling was unchanged overnight as the U.K. was in holiday.  The pound continues to be supported by the carry trade and expectations that interest rates will increase in the U.K. despite the recent credit crunch.  The U.K. has been largely isolated from fallout in the U.S. subprime market, helping to keep expectations that the Bank of England might raise rates further.  As this develops with the BOE meeting on September 6^th, sterling should retain a largely bid tone. 

Market Awaits Housing Data, US$ Weaker

The US$ was mixed overnight ahead of housing data released in the U.S. today.  The Commerce Department's release of new home sales data for July at 10:00 a.m. is expected to decline to a seven year low.  New home sales are expected to increase 820K, down 1.7% from the month before (834K).  The myriad of problems affecting the U.S. housing market is expected to continue to weigh on global equity markets and the US$.  At 8:30 a.m. this morning, durable goods was released.  The number was expected to show an increase of 1.0% for July, down from 1.3% the month prior.  Excluding transportation, the number is expected to show an increase of 0.6%, up from a decline of 1.0%.  The numbers rose 5.9% and 3.7% excluding transportation.  Due to the extreme volatility of these numbers, it is likely that the market will instead focus on the home sales data later in the day.  Over the past weeks, as the U.S. subprime fallout has spread globally and investor appetite for risk has diminished, the US$ has benefited slightly from risk aversion.  It is likely, however, that as more data is released which shows the extent to which the U.S. economy alone is suffering, the US$ will return to its down track.  Overnight, news released suggested that Chinese banks are also over-exposed to the U.S. subprime market.  The Bank of China admitted it holds more than $9.6 billion in securities backed by U.S. subprime loans.  The Industrial and Commercial Bank of China (ICBC) stated that it held $1.23 billion.  These holdings are small in comparison to the other holdings these banks have; however, this is the first real test of the Asian banking system since the Asian financial crisis of 1997. 

The euro is higher in anticipation of weak data from the U.S.  Additionally, a Federal Reserve report yesterday showed that central banks sold more U.S. Treasury securities over the past week since 1998.  Continued diversification of global central banks away from the US$ and toward the euro has pushed the US$ lower throughout the past year and a half.  This provides actual evidence that real demand for US$ is diminishing on a broad scale, creating downward pressure on the value of the currency.  As the second most common currency on reserve, the euro stands poised to benefit the most. 

The yen is higher overnight as global equity markets fell slightly amid concerns that data will show the U.S. housing sector is in the worst shape in seven years.  Investors reentered the carry trade yesterday; however, these trades remain very liquid as investors will flee trades at the first sign of unwinding.  This keeps the yen extremely volatile and closely correlated to movements in equity markets. 

The British pound was slightly higher against the US$.  It remains a favored play in the carry trade and suffered last week against the US$ from its significant unwinding.  Into the future, sterling should remain firm against the US$, barring a significant future unwinding of the carry.  The U.K. has remained largely unaffected by the subprime crisis in the U.S., creating the potential that rates could still move higher.  This would keep interest in sterling, supporting it into the future.

Carry Trade Revived Overnight

The US$ diverged in direction overnight, gaining against the yen, while falling against most other currencies as the “carry trade” came back to full fruition. With investor worries about the spread of a global credit contagion being contained, many traders appear to be reentering riskier positions. These credit worries were alleviated overnight after Countrywide Financial Corp., the largest mortgage underwriter in the US, announced that it received a $2 billion cash infusion from Bank of America. With credit woes easing and the credit crunch striking the market last week seemingly ebbing investors appear to be refocusing on yield influenced carry trades. With this yield play as the market’s renewed focus, the US$ has again fallen out of favor, as many analysts believe that the US will be forced to lower rates aggressively throughout the remainder of this year. This has led some analysts to believe that the Fed Funds rate could be cut as much as 50 basis points at the September 18^th meeting. With lower US rates as backdrop, the US$ will likely continue to come under pressure as signs of further US economic weakness weigh on the greenback.

The euro appears to be gaining traction against the US$ yet again as the market has adopted the view that the ECB will not refrain from additional rate hikes this year. The ECB indicated yesterday that the Bank would not alter its stance reiterated by Jean Claude Trichet earlier this month pledging “strong vigilance” on inflation. There was some speculation that the recent credit woes in the market could keep the ECB sidelined from further rate hikes this year. However, strong economic growth in the Eurozone continues to have the ECB concerned about inflation, and will keep the Bank in a rate hiking posture. Overnight data was released showing that the German economy continues to expand, gaining 0.3%, from last quarter. With yesterday’s comments from the ECB the market has again begun to price in the likelihood of two rate hikes from the ECB this year, further strengthening the appeal of the euro.

The yen fell overnight as investors reenter the “carry trade” following the decision by the Bank of Japan to hold rates steady at 0.5%. With global credit markets appearing to settle down, investors are again entering “riskier” positions financed with yen. Yen weakness was further reinforced after the Bank of Japan announced that it was holding rates steady at 0.5%. With yen rates the lowest amongst G8 nations, investors continue to favor the Japanese currency as a preferred borrowing vehicle. However, the days of low Japanese interest rates could finally be numbered as comments from the Bank of Japan overnight suggest. BOJ chief Fukui stated this morning that one member of the Bank’s governing council voted for a rate hike. This voice of dissention coupled with growing global Central Bank concern about the continued aggressive use of the yen as a financing currency will like force the BOJ to push rates higher at its next meeting.

The pound surged overnight as investors again buy sterling as the counter to yen financed “carry trade” positions. With UK interest rates some 5.0% higher than those in Japan sterling remains a favored depository currency. Also helping the pound higher is the view that the Bank of England will continue to push interest rates higher through the remainder of this year. As the UK economy has remainder rather insulated from the global credit crunch and both consumer spending and manufacturing output expands, the BOE has made it clear that it will act aggressively to curb signs of mounting inflation pressures. This hawkish stance by the BOE has led many investors to contrast the UK rate outlook with that of the US, buoying the pound. 

Global Equity Market Rebound Spurs Declines in Yen

The US$ diverged yet gain in direction overnight, gaining against the yen and Swiss Franc while falling against the pound and euro. With market’s seeming to stabilize over the past several days following last week’s meltdown in credit markets, investor appetite for risk seems to be tepidly reemerging. Equity markets recovered globally overnight, with US equities also poised to open stronger this morning. This has led investors to reenter positions funded with low yielding currencies. The market’s attention remains focused on the Federal Reserve and interest rate policy as the summer winds down. Last week the Fed cut the discount rate 50 basis points to 5.75% in an effort to assist financial institutions financing needs amidst a market liquidity crunch. This action came only ten days after the FOMC policy meeting, where Bernanke and the US Central Bank stated that their major concern remains inflation pressures. As the credit crisis mounted, several Fed officials stated that they believed that there was no need for Central Bank action in markets. These comments resonated especially from St. Louis Fed President William Poole. Poole stated that he believed it was not necessary for the US Fed to act, as there was no emergency. Two days later the US Fed reversed policy 180 degrees and entered the market flooding the system with cash and cutting rates. This inconsistent call from Poole has led many politicians and Wall Street experts to call for his resignation. With an uncertain message coming from the Fed, many analysts are speculating what the next action from Bernanke will be. The Fed meets on September 18 and is widely expected to cut rates 25 basis points. However, with the current credit crunch far from contained, there is an outside chance the Bank will slash the Fed Funds rate 50 basis points. Any such action will further erode market confidence in the message the Fed projects and will likely weigh on the US$. Also weighing on the US$ was the release of data this morning showing that Mortgage applications fell 5.5%, pointing to further weakness in the housing market. There is no other data slated for release today.

The euro continues to remain firm as traders speculate about the direction of global interest rates. With the US Fed likely to cut interest rates significantly next month, the market seems to be resuming its favor of holding Eurozone assets. There is still uncertainty about whether the ECB hikes rates two more times this year, which has eased some of the euro’s recent strength. However, expect a slowing US economy and global credit uncertainties to keep the euro in ranges with an upward bias for the remainder of the summer.

The yen fell overnight as investors again reentered the “carry trade.” With global equity market rising yet again investors are again choosing the yen as a preferred financing vehicle. Further helping the yen move lower is speculation that the Bank of Japan will hold rates steady at tomorrow’s meeting. Earlier this month, prior to the recent credit crisis, the market had speculated that the BOJ would hike rates in an effort to start bringing Japanese rates to more normalized levels relative to other G8 nations. These expectations of a rate cut have now fallen by the waist side, lending further pressure on the yen. Expect ranges to dominate as the currency moves in tandem with investor appetite for risk.

The pound gained overnight as the market continues to reshape its view about the direction of UK interest rates. It is now widely expected that the Bank of England will continue to hike rates as other global central banks remain on hold or adopt an easing bias.  This view was backed by the release of a report showing that British factory orders grew at the quickest pace in twelve months. As economic output expands, consumer spending remains robust and inflation pressures mount the BOE will likely continue to steer rates higher, buoying the pound.

Markets Stable, Risk Aversion Remains at a Premium

The US$ continues to consolidate in recent ranges as the market looks to gauge risk and volatility as the fallout from the recent credit crunch and sub prime mortgage defaults continue to rattle markets.  The market is currently speculating about the course of US interest rates following the Fed’s decision on Friday to lower the discount rate 50 basis points. It is now widely believed that the Fed will cut the Fed Funds rate 25 basis points when the US Central bank meets on September 18^th. However, there is an outside chance that if credit markets again gyrate and show signs of tightness the Fed could lower rates as much as 50 basis points. With volatility still overhanging both credit and equity markets, the market will look to comments from both US Treasury Secretary Paulson and Fed Chief Bernanke, who are both slated to meet with the Senate Banking Committee and discuss the markets’ “ongoing turmoil.” As expectations continue to mount that the Fed will cut rates, look for the US$ to continue to come under pressure. There is no US economic data slated for release today, so expect trade to remain in narrow ranges steered by volatility in equity markets and commentary that should originate from Paulson and Bernanke.

The euro traded in ranges overnight as the Eurozone’s currency is pulled in opposing directions by different events. With expectations mounting that the Fed will cut rates by at least 25 basis points at its September meeting, many traders are shedding short euro positions as yield differentials again come into focus. However, the extent of these euro gains could ultimately be limited, as the prospect for two rate hikes from the ECB for the remainder of this year appears to be waning. The Zew Center for Economic Research released its report of investor and analyst expectations showing a decline to –6.9 from a reading of 10.4 last month. Expectations were for a reading of –1.5. With credit market turbulence worrying many investors, anxiety appears to be taking hold. This anxiety coupled with the large amounts of cash the ECB injected into the monetary system last week has led many analysts to believe that the ECB would refrain from hiking rates at its September meeting.

The yen gained overnight as investor concerns still linger about the fallout from sub prime lending and the ensuing credit crunch, lending some traders to square recently initiated “carry trade” positions. As risk aversion overtakes the market, look for the yen to firm. As bad news enters the market, traders will remove “carry trade” risk form their books, trying to sure their balance sheets with as much cash and government debt as possible. Look for volatility in the yen to continue as investors tepidly reenter “carry trades” when equity markets appear to be stabilizing, only to quickly vacate these positions at the first sign of reemerging risk.

The pound fell this morning after the Bank of England announced that it had injected 314 million pounds into overnight money markets as it looked to stabilize credit following reports of steep losses at two UK hedge funds. Odey Asset Management and Solent Capital Partners, both UK based, reported that they might be forced to liquidate assets after they were unable to borrow overnight following the announcement of steep losses at both funds. This news led the pound to sell off as it reignited investor fears of a global credit contagion, showing that the UK market, immune last week, could now come under significant turmoil from credit swings. Look for the pound to come under further pressure if additional UK institutions announce similar financial woes.

Global Equity Markets Recover Somewhat, US$ Steadies

The Fed’s action on Friday seems to have had the desired effect of calming market jitters, while helping U.S. equity market higher. The recent credit crunch in the market spurred by a surge in defaults in sub prime lending appeared to be igniting a credit market contagion last week. After injecting liquidity into the cash money markets throughout most of last week, the Fed steeped in and slashed the discount rate 50 basis points Friday morning to 5.75% from 6.25%. The discount rate is the rate at which banks are able to obtain financing from the Fed to meet reserve requirements. This cut had the desired action of propping markets, however, it led to US$ declines as interest rate differentials narrowed further amongst the G8 nations. Traders will continue to be focused on credit markets this week, looking to see if the situation of the past several weeks has stabilized. Beyond this week the market will remain focused on Fed policy. Given the cut in the discount rate on Friday, the market continues to guess whether the Fed will slash the Fed Funds rate at its September meeting. While it all but certain the Bank will cut rates 25 basis points, discussion of 50 basis point cut has emerged. The US releases several pieces of data this week, which could help prompt the market decide the extent of Fed rate cuts next month. Leading Indicators are slated fro release at 10:00 a.m. today, expected to gain 0.4%. However, there is no other major data to be released until Friday, when Durable Goods Orders and New Home Sales are on the docket. With the summer winding to a close, expect markets to quiet as trading volumes ease.

The euro firmed against the US$ modestly overnight, as the market focused on the Fed’s surprise cut in the discount rate on Friday. Lower interest rates in the US have made the appeal of some US assets less desirable. Lehman Brothers advised its clients to resume buying Eurozone assets, as a higher rate environment should generate returns. Investors will remain focused on Central Bank policy to help steer the direction of the euro against the US$. With it all but certain the Fed will steer rates lower, ECB policy action remains much more of an uncertainty. With the ECB injecting significant liquidity into money markets over the past two weeks, it is uncertain whether the Central Bank will hike rates two more times this year, as many analyst had forecast. The market will be paying very close attention to the ECB policy meeting in September to help determine the currency’s direction.

The yen fell overnight as gains globally in equity markets helped prompted traders to resume the carry trade, albeit cautiously. With the yen acting as a proxy for market risk, Friday’s perceived normalization of credit and equity markets, led the yen lower. Earlier in the week as investors were forced to liquidate positions funded with yen borrowing, Japan’s currency surged. With most of this “carry trade” risk erased from the market, traders now seem to be carefully reentering the trade. Look for ranges to steer the direction of yen, with trader memories of last week’s carnage still fresh, investors will likely be unwilling to aggressively resume the yen financed position.

The pound gained overnight as interest rate differentials between the US and UK again takes center stage. With the Fed lowering the discount rate on Friday, investors again refocused on high UK interest rates. With a robust mortgage market, strong consumer spending and signs of inflation pressures mounting, the Bank f England will very likely keep hiking rates through this year. These higher rates continue to attract investors to the pound and will likely drive the UK currency higher.