European Majors Steady, Commodity Currencies Weakened

While European majors remain generally firm, commodity currencies are notably lower against since the week started. Asian equities are weighed down mildly by concern over the territorial dispute between China and Japan. China stocks dipped to a two- week low on concern that the dispute could worsen its economic slowdown.

Nikkei also weakened as Fitch warned that the dispute could hit Japan's auto and technology manufacturers. Canadian dollar was also weighed down by the sharp pullback in crude oil and the aussie has some pressured from RBA minutes. Some volatility would likely be seen in European session as UK CPPI and German ZEW will be featured.

Ever since the ECB announced the OMT program, the markets are waiting Spain to declare whether and when it will seek a sovereign bailout. But we heard nothing solid so far. ECB Governing Council member Coene warned that if markets see that Spain won't seek bailout, "spreads will rise again" before long and Spain would be "somewhat forced to come back on its decision and submit to the conditionality program." And Coene had made it clear that ECB won't buy Spanish bonds if it doesn't ask for assistance.

In addition, Coene denied any ideas that Germany would leave the Eurozone. He said that Germans “know perfectly well that the euro has been a blessing for them, because it has kept the currency somewhat undervalued." And he noted that deposit rate cut to below zero is still "one of the possibilities."

The RBA released the minutes for the September meeting. While the central bank left the cash rate unchanged at 3.5%, the minutes showed that policymakers are willing to lower interest rates if the economic condition deteriorates further. According to the minutes, “the current assessment of the inflation outlook continued to provide scope to adjust policy in response to any significant deterioration in the outlook for growth." Meanwhile, strength in AUD has also affected economic growth. As indicated in the minutes, “members discussed the possibility that the high level of the exchange rate was weighing more heavily on the economy than might be expected."

Looking ahead, UK CPI is expected to slow slightly to 2.5% yoy in August with core CPI slowed to 2.1% yoy. RPI is also expected to drop to 3.1% yoy. German ZEW economic sentiment will be a major focus and is expected to improve to -20 in September but there are odds for an upside surprise. From US, current account balance, TIC capital flows and NAHB Housing market index will be released.