By DailyFX – Fed Chairman Ben Bernanke is holding currencies hostage ahead of his speech at Jackson Hole tomorrow and… … the symposium over the weekend.

Whatever gains were made yesterday have been given back today. The most
recent data on the housing market tells us that prices are falling and
foreclosures are rising. The labor market is also showing signs of
buckling with jobless claims increasing by the largest amount since
April. The help wanted index released by the Conference Board also sunk
to a 49 year low. With interest rates on mortgages rising, lenders
being more stringent and more inventories expected to flood the markets
over the next 6 to 12 months, there are not many positive things that
Bernanke can say about the housing market. Yet the topic that everyone
is talking about today is whether Bernanke will focus on the financial
or economic crisis. If he is focused exclusively on the financial
crisis, then one could argue that the credit markets have stabilized
which means that the Fed may not feel the urgency to lower interest
rates. If they are worried about the economic crisis on the other hand,
then a rate cut is certainly warranted because even though Q2 GDP was
the strongest in over a year, growth in the third and fourth quarter
will not be as pretty. In his last few years as Fed Chairman, Greenspan
has been more reactive than proactive and it appears that Bernanke has
been doing the same. We however continue to believe that a rate cut is
necessary because eventually the weakness in the labor market will lead
to softer consumer spending. The Fed will probably make an internal
decision about what to do with interest rates, but given the amount of
time still left until the next monetary policy meeting, they do have the
luxury of waiting for more up to date economic data as well as watching
how traders behave when they return from their summer holidays. The Fed
will not be the only central bank representing at Jackson Hole,
officials from the Bank of England and Bank of Japan will also be in
attendance. Originally ECB President Trichet was supposed to attend the
symposium, but he cancelled today due to “personal reasons. Some
people are speculating that he has decided to not attend so that he
could stay in Brussels to monitor market movements. Although we could
see more volatility in the currency and stock market tomorrow, dont
expect Bernanke to provide much more clarity on the September rate
decision. Nearly every other central bank including the Bank of Canada,
European Central Bank and Bank of England will be meeting before the
Fed, which means that the markets focus should quickly shift to what
other central banks are doing.

ECB: Still Keeping the Market Guessing

With less than 2 weeks to go before the next European Central Bank
meeting, Trichet is still keeping the markets guessing. Whose to blame
him however since the ECB may not be sure about whether they want to
raise interest rates either. The credit markets have stabilized
slightly, but demand for 3 month loans hit a record high yesterday which
means that banks are still seeking liquidity. Economic data has been
mixed. Even though confidence among businesses and consumers are
falling, retail PMI rose for the first time in 4 months as the German
unemployment rate dipped to a 14 year low. The futures market is
pricing in a 40 percent chance of an interest rate hike, but 70 percent
of analysts polled expect rates to remain unchanged. We expect the ECB
to leave rates unchanged, but remain hawkish to avoid triggering another
dramatic move in the financial markets.

British Pound: Are UK Banks in Trouble?

The Bank of England announced that they loaned $3.2 billion to an
undisclosed bank at their penalty rate of 6.75 percent. The emergency
loan facility is usually tapped only when banks have funding problems,
but earlier this month, Barclays PLC borrowed 630 million because a loan
from HSBC was delayed. Therefore the market is taking this in stride
because it could once again be related to a settlement issue instead
rather than a major liquidity problem. The British pound is still lower
however partly because of the loan but also because the CBI industrial
trends survey fell to a 9 month low in the month of August. This
suggests that retail sales in general may be weakening.

Bank of Japan Rate Hike May Not Come Until Year End at the Earliest

Todays sell-off in the Yen crosses is nothing more than a correction
of yesterdays rally. Carry trades are stuck in range as the recent
recoveries have been rather baseless. Japanese economic data remains
weak as retail sales continue to drop in the month of July. Tonight, we
have additional data including consumer prices, unemployment, overall
household spending, PMI, and industrial production. Although the labor
market will remain tight, it will be sometime before Japan is able to
escape deflation. Last week, Bank of Japan Governor Fukui said that the
central bank still plans on increasing interest rates, but comments from
BoJ member Mizuno this morning suggest that a rate hike may not come
until the end of the year at the earliest because Mizuno said that a Fed
rate cut could change his stance. The newly installed Cabinet also does
not seem to favor a hike. Finance Minister Nukaga said that Japan has
yet top overcome deflation and as a result, he wants the BoJ to make
policy consistent with the current economy.

Canadian Dollar Traders Cautious Ahead of GDP

The Australian and New Zealand dollars have pulled back today after
weaker than expected economic data and renewed flight to safety into US
dollars. The Canadian dollar on the other hand rebounded on stronger
current account numbers and a sharp increase in raw material prices.
The rally in the loonie however has been limited by the possibility of
softer GDP numbers tomorrow. Australia has retail sales and trade
balance due for release tonight. Spending could remain positive as the
trade deficit improves.

DailyFX Research Team
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: research@dailyfx.com

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