Will US Consumer Rescue The Dollar?

Nikkei fails to have much follow through helping USD/JPY to hold 97.00
EU calendar very quiet as trading flat
Nikkei -0.75% Europe -0.18%
Oil $107/bbl
Gold $1362/oz.

Europe and Asia:
EUR EZ CPI – 1.1%

North America:
USD Housing Starts 8:30
USD Building Permits 8:30
USD U. of Michigan Confidence 9:55

In contrast to yesterday’s wild volatility It’s been a very quiet night of trade in the currency market on the final trading day of the week with USD/JPY bouncing bit off the lows while euro and cable remained steady.

There was absolutely no data out of Asia today and the most exciting event to occur was a fat finger error on the Shanghai exchange which spiked the index by 5% before quickly retracing the gains. A prop desk of Everbright Securities admitted to a glitch in their arbitrage operations and was trying to unwind and cancel the morning trades.

Meanwhile in Japan the Nikkei declined modestly, but failed to follow the US indices significantly lower and that price action helped to stabilize USD/JPY which rebounded to 97.50 in late Asian and early European dealing.

In Europe both the EUR/USD and GBP/USD remained comatose after yesterday’s wild price action that saw both pairs plunge and then recover strongly to fresh highs on the close of US session. Yesterday’s volatility was likely caused by dearth of liquidity in the midst of the high season for summer holidays on both sides of the Atlantic.

However, the moves in FX may also reflect market uncertainty regarding both the prospect of taper by the Fed and the state of the US economy overall. Although latest US data has been relatively upbeat especially on the jobs front, consumption has been muted and downright weak at the lower end of the income scale.

The slew of misses by US retailers such as Wal-Mart, Mcdonald’s and even Macy’s suggests that the termination of the payroll tax cut and the creeping gasoline prices are taking their toll on the US consumer. That puts the question of sustained US economic growth in doubt and may keep the Fed stationary for a while longer.

Today’s U of M Consumer sentiment report will be the economic event of the North American session and could help guide investor sentiment for the rest of the day. The market expects to see a mild improvement to 85.6 from 85.1 prior, but if the data misses and dips back towards the 80 level the pressure on USD/JPY will likely resume especially if US Treasury yields continue to reverse off their highs as bond markets begin to doubt the taper.