USD gaps lower after S&P US downgrade; Finds some support

All the weekend preparatory efforts by the G7 authorities over the weekend, in the wake of the S&P downgrade of US debt, seemed to work because the Aisan open was a relatively calm affair with the US dollar gapping lower across the board, but not aggressively so, with the USD index only losing some 0.7% from Friday’s close at the extreme.

Asian equities bore the brunt of risk aversion with the Nikkei losing 1.3% by lunch, down 2.18% on the day, the Hang Seng down 4.0%+ and the Shanghai Composite down almost 5% at one stage. S&P announced that the US downgrade would have no immediate impact for Asia-Pacific ratings though a disruption in developed financial markets could change the picture with sovereigns that have weaker external positions (require external funding) possibly coming under pressure.

Inevitably during this volatile, uncertain start economic data releases took a backseat and an almost clear data calendar was ignored. Of note, Australia’s job advertisements declined rapidly in July, falling 0.7% m/m after a 3.8% rise in June suggesting the run in to Thursday’s unemployment report is with softer sentiment.

The rest of the day is a quiet one on the data front (but not elsewhere!) with Europe kicking off with Swiss unemployment rate, Norway’s credit growth and EU Sentix investor confidence. No releases are due in the US session but tomorrow’s FOMC meeting becomes more poignant – will Mr. Bernanke be forced into talking about the next wave of stimulus?

To recap the end result of the weekend deliberations by the G7 authorities, there was an announcement that there would be a commitment to do “all that is necessary” to ensure liquidity and the functioning of financial markets, including taking coordinated action where necessary. The ECB announced it would “actively implement” its bond buying program, signaling that it will likely buy Spanish and Italian bonds to prevent financial market contagion, though markets focused on the issue that the text of its statement did not contain any explicit reference to this activity and pressured the EUR from its early highs.

Meanwhile, Japanese finance minister Noda was non-committal when asked if the G7 had discussed solo or joint intervention in the teleconference, adding that confidence in the dollar had not waivered and they will continue to watch currency markets. IMF chief Lagarde welcomed the coordinated approach, saying it would contribute to maintaining confidence and spurring global growth.

Economic Data Highlights

• US Jul. Change in Non-farm Payrolls out at 117k vs. 85k expected and revised 46k prior
• US Jul. Unemployment Rate out at 9.1% vs. 9.2% expected and 9.2% prior
• CA Jul. Ivey PMI out at 46.8 vs. 61.0 expected and 59.9 prior
• US Jun. Consumer Credit out at $15.5b vs. $5.0b expected and revised $5.08b prior
• US Aug. IBD/TIPP Economic Optimism out at 35.8 vs. 42.0 expected and 41.4 prior
• UK Jul. Lloyds Employment Confidence out at -53 vs. -50 prior
• JP Jul. Bank Lending out at -0.5% y/y vs. -0.6% prior
• JP Jun. Current Account Balance out at +¥527.0b vs. ¥652.8b expected and ¥590.7b prior
• JP Jun. Trade Balance (BOP) out at ¥131.5b vs. ¥113.1b expected and -¥772.7b prior
• NZ Jul. QV House Prices out at -0.4% y/y vs. -0.9% prior
• AU Jul. ANZ Job Advertisements out at -0.7% m/m vs. revised +3.8% prior
• JP Jul. Economy Watchers Survey: Current out at 52.6 vs. 50.0 expected and 49.6 prior
• JP Jul. Economy Watchers Survey: Outlook out at 48.5 vs. 49.0 prior

Upcoming Economic Calendar Highlights
(All Times GMT)

• Swiss Unemployment Rate (0545)
• Norway Credit Indicator Growth (0800)
• EU Sentix Investor Confidence (0830)