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Talking Points

• Canadian Dollar Outperforms as ISM Disappointment Rekindles QE3 Hopes
• RBA Leaves Rates Unchanged as Expected, Yielding Muted Aussie Response
• New Zealand Dollar Lags as Commodity Export Prices Drop for Fifth Month
• Japanese Yen Broadly Sold as Risk-On Mood Diminishes Safe-Haven Demand
• UK Construction PMI, Eurozone PPI May Boost Global Stimulus Expectations

The Canadian Dollar outperformed in overnight trade as stocks advanced, pulling sentiment-linked currencies higher. The newswires attributed the advance to expectations that the Federal Reserve may be more likely to introduce additional stimulus measures after ISM data showed that US manufacturing activity unexpectedly shrank in June. Comments from former Fed Vice Chairman Alan Blinder helped stoke bets on further easing. Blinder said the recent string of poor economic data are “strengthening the positions of the doves on the Fed” in an interview with Bloomberg News. Separately, an editorial in the China Securities Journal said the “time was ripe” for the PBoC to cut rates further.

The Australian Dollar was little changed after the RBA left interest rates unchanged at 3.5 percent while leaving the door open for further easing in the months ahead, effectively reinforcing status quo market expectations. RBA Governor Glenn Stevens said a “subdued international outlook” warranted “material easing in monetary policy” despite expectations that Australian economic growth and inflation will remain broadly close to trend over the coming one to two years. The Japanese Yen sold off as the pickup in equities sapped demand for the go-to regional haven currency. The New Zealand Dollar lagged after global prices for the country’s commodity exports fell for a fifth consecutive month, according to ANZ.

Looking ahead, the pickup in risk appetite may prove limited as S&P 500 stock index futures point lower ahead of the opening bell on Wall Street, although global stimulus expectations may get a further boost as Eurozone PPI figures reveal the slowest pace of wholesale inflation in over two years. The outcome could reinforce forecasts calling for the European Central Bank to cut its headline lending rate to a record-low 0.75 percent later this week. An unexpected drop below the 50 “boom-bust” threshold in UK Construction PMI seems to be yielding similar results, with the Bank of England expected to boost asset purchases by another £50 billion on Thursday.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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