The BOJ in its emergency meeting announced an expansion of its loan program – a bit of monetary easing. However, the moves were less than expected by the market and traders bought the Yen after having sold it off late last week and to start Sunday’s trading. Currencies sensitive to risk sentiment and global growth faltered, with the US Dollar and Swiss Franc gaining. US stocks slid increasing risk aversion in the NY session.

Trading wasn’t as volatile as it was yesterday, with Yen pairs consolidating, while overall higher yielding currencies like the Canadian and Australian Dollars weaker. The Swiss Franc gained on the US Dollar and Euro. US data for durable goods orders and new home sales was weaker thane expected, meaning risk aversion should be the theme of the day during NY trading.

The week starts with the EUR/USD pair staying below the 1.2730 following Friday’s comments from ECB official Axel Weber and overnight data on manufacturing and services. We highlight the concerns facing the Euro. The Yen gained on the greenback, as it seems less likely that the BOJ will intervene in markets. The Aussie fell to open the week following an election in which no party won a majority, but then rallied on merger and acquisition news.

Financial and Economic News and Comments

US & Canada

• Nevada had the highest unemployment rate among the states, 14.3% in July, the highest since records began in 1976, compared with 12.3% in July 2009, a Labor Department report showed. The states with the next highest jobless rates were Michigan, 13.1%, California, 12.3%, and Rhode Island, 11.9%. North Dakota continued to have the lowest unemployment rate, 3.6%, followed by South Dakota, 4.4%, and Nebraska, 4.7%. Meanwhile, New York’s jobless rate was unchanged at 8.2% in July.
• Canada’s consumer prices rose 0.5% m/m in July, the third rise in four months and the most since November 2009, reflecting a new sales tax in two provinces, after a 0.1% m/m decline in June, according to CPI data from Statistics Canada. The consumer-price inflation rate accelerated to 1.8% y/y from June’s 1.0% y/y. Bank of Canada core consumer prices declined 0.1% m/m for a second month in July. The BOC core CPI rate, which excludes the tax changes, unexpectedly slowed to 1.6% y/y from June’s 1.7% y/y. The July numbers were fractionally lower than market expectations, prompting traders to reduce bets on BOC interest-rate increases.

Europe

• European Central Bank Governing Council member Axel Weber, with his rather dovish and cautious comments, suggested that the ECB should help banks through end-of-year liquidity tensions before considering an exit from emergency lending measures in Q1 2011. “Most of these discussions about the continuation of the exit I think will be focused on the first quarter,” Weber said in an interview with Bloomberg Television, emphasizing that “it’s clear that we need to re-embark on a normalization procedure.” He also stated that “since inflation risks continue to be low over the policy-relevant medium term, this does not suggest a policy tightening yet” and “rates remain appropriate.”

Asia-Pacific

• Japan’s convenience store sales grew 0.5% y/y on a same-store basis to ¥670.1 billion ($7.8 billion) in July, the first year-on-year gain since May 2009, led by strong sales of summer-season items such as cold drinks and ice cream, after a 1.5% y/y decline in June, figures from the Japan Franchise Association showed.

FX Strategy Update

The Dollar fell sharply against the Yen and Swiss Franc on weak data from Japan and the US which pressured US yields and made the Dollar less desirable. The Euro was weaker vs. the Swiss Franc as worries emerge over Ireland’s upcoming debt auction and what that could mean for sovereign debt fears. However, the Euro did gain on the Dollar, likely as part of a correction to the sharp gains in favor of the greenback last week.

In today’s news we saw the Euro-zone release a weaker reading on industrial production, which knocked the outlook for growth there, but at the same time in the US, weekly jobless claims surprised markets to the upside, climbing to a 5 month high (though not far off from where we were last week).

In addition to the unemployment rate increasing in Australia (to 5.3% from 5.1%), and the Japanese Prime Minister calling the recent rise of the Yen against the greenback “rough”, and the finance minister saying that he would consider “appropriate action” on the yen, there has been a lot to drive currency markets following yesterday’s sharp sell-off in global equity markets on the back of concerns about China and the US.

The weaker Euro-zone data, which showed industrial production declined 0.1% instead of rising 0.7% as forecast, hurt sentiment during European trading, causing the Euro (and Pound) to slide against the greenback. In addition the Greek economy contracted another 1.5% in the 2nd quarter compared to the first. It had declined 0.8% in the 1st quarter.

The USD/JPY pair, after hitting a 15-year low in yesterday’s trading below the 85 level, rebounded overnight on the comments from government officials, slumped a bit in European trading, but then accelerated again in favor of the Dollar, testing and moving above the 200-period SMA in the 1 hour charts. US equities which opened lower following the weekly jobless claims data were paring their losses in early NY morning trading.

The unemployment rate for June unexpectedly rose to 5.3% from 5.2%. That is a seven-month high for the jobless rate. A second report showed that factory output – industrial production – was down 1.5% for the month. Economists had expected a small gain. Consumer prices continued to show negative annual rates. For the country the consumer price index excluding food declined 1% from a year before.

In one positive report household spending did rise 0.5% in June compared to a year ago, following a 0.7% year-over-year decline in May. Expectations had a drop of 0.9% y/y figure. That means consumers were more willing to spend, but if the economy weakens then consumers may cut back spending again.

Japan’s economy is expected to show growth slowing to an annual rate of 1.9% in the 2nd quarter, following a sharp 5% rise in the 1st quarter.

The data will increase worries about a slowdown and put pressure on the government for solutions. Recently the Prime Minister has talked more about consolidating Japan’s fiscal deficit than stimulative economic growth. There will be increased pressure on the Bank of Japan as well, perhaps in the form of proposals to buy long-term governmetn bonds and target infaltion of 2 to 3 percent.

The Dollar strengthened versus its main rivals as investors positioned themselves ahead of US earnings and a Greek bond auction. While the Yen recovered its losses following its Sunday election, the Pound faltered in its attempt to regain its overnight losses as S&P reiterated its negative outlook of the country’s credit rating. The Euro and Canadian Dollar were weaker against the greenback even at the mid-point of NY trading.

With stocks sliding around the world on fears of a double dip recession amidst the belt tightening message of the G20 and a sharp drop in consumer confidence in the US, safe haven currencies like the Yen and Dollar gained against riskier currencies like the Pound and commodity currencies like the the Canadian and Australian Dollars.