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Equities finished yesterday in a far less exuberant mood than when they began the trading session, as investor confidence was sapped after House Speaker Boehner showed his support for President Obama’s planned military response to Syria.   Stocks crumbled throughout the afternoon, and the USD was generally well bid, as anxious traders looked to shed some exposure to high-beta asset classes with tensions surrounding the situation in Syria ratcheting up another notch.   The DXY continued its strengthening trend from late August, hitting a high of 82.50, while the 10-year US treasury yield eased back under 2.9% on the flight-to-safety trade after an earlier sell-off in fixed income caused yields to spike.

The summer lull is surely over, with the beginning of September not disappointing in terms of volatility and the potential for market moving catalysts.   The Aussie was one of the best performing currencies yesterday against the USD, however Q2 GDP data followed on the heels of the more optimistic than expected rate statement from the RBA, with traders wondering if the central bank was warranted in dropping its bias towards further monetary easing in the future.   The numbers came in essentially as expected, with growth hitting 0.6% on a q/o/q basis, but a little stronger than forecast when annualized, printing at 2.6%.   The economic growth numbers add credence to the RBA’s rate statement from yesterday, and have sparked further buying interest in the Aussie, pushing AUDUSD up over 1% to trade into the mid-0.91s.

Equity performance and risk appetite throughout the Asian session was given a boost with a better than expected Chinese HSBC Services PMI reading that came in at a 5 month high of 52.8.   The Shanghai Composite managed to edge higher by 0.21%, while the Nikkei finished its session adding another 0.54% to pile onto yesterday’s gains.   The yen was confined to a relatively narrow trading band overnight, and is a little stronger as we head into the NA open on broader USD weakness as USDJPY changes hands in the mid-99s.

European markets are struggling midway through their session, as a mixed bag of economic data and some uncertainty surrounding Italy’s political situation give traders motivation to scale back exposure to high-yielding assets.   Retail Sales for July in the EZ came in slightly below expectations, but this was offset by stronger than expected Services PMI data from both Germany and France.   On the political front, reports that Berlusconi may consider withdrawing support for the current Letta lead government and call for elections later this year have Italian investors skittish; the regional Italian equity index is leading the European sell-off and is down 1.86%, while the yield on the benchmark 10-year bond edges closer to 4.4%.   The EUR has so far shrugged off the developments in Italy, and is essentially unchanged from yesterday against the USD, comfortable trading in the mid-to-high 1.31s.

The economic calendar fails to slow down as we head into the North American open, with trade balance figures for both the US and Canada released earlier this morning.   Expectations were for the trade deficit position of the United States to widen slightly from last month, however the June figure was a big surprise to the upside in terms of exports, so a little give-back is not necessarily a huge surprise.   The official figures showed that the US trade deficit widened by over 13% in July, increasing from the $34.2bn registered in June to the current level of $39.15bn, as imports climbed 1.6% m/o/m driven by the largest month of petroleum-related products since last October.

Things were forecast to be a little more mundane north of the 49th parallel, with the Canadian trade balance remaining fairy steady, a slight narrowing of the deficit to $0.35bn.   In actuality, the trade balance numbers came in with a miss to the downside, with the trade gap deteriorating to just over $0.9bn, as imports increased by 0.6% m/o/m, while exports fell by the same amount.   USDCAD saw some offers lifted on a modest amount of Loonie weakness after the number hit the wires, however the pair is still in the red so far on the session, pivoting close to the 1.05 handle pre-BoC statement.   1.0470 will continue to act as intraday support for the pair, followed up by the 30-day moving average close to 1.0400 should we see the BoC come out more on the hawkish side of things.   Alternatively, the mid-1.05s should continue to see corporate sellers enter the market if the central bank’s outlook is more pessimistic than back in July.

A quick data check as we head into the North American open shows equity futures positioning stocks for a lower open when the opening bell is rung.   Obama just started his speech and press conference in Sweden, and a little nervousness over what he might say in regards to Syria has futures slightly in the red.   Oil futures remain elevated, although displaying a modest offered tone ahead of the opening bell, as front-month WTI changes hands just north of $108/barrel.

With trade balance figures for the Canadian economy out of the way, the big focus for Loonie traders will be the Bank of Canada rate decision and the subsequent statement that accompanies it.   The statement is due out at 10:00am EST, and while no change in the overnight lending rate is expected, traders will be parsing the language of the statement to see if they can glean any clues as to the future path of monetary policy for Canada.   The last statement from Governor Poloz was fairly balanced, perhaps a little more focused on the downside risks to inflation and the persistent slack in the Canadian economy than his predecessor, so investors will be looking to see whether the central bank’s view has changed at all from their outlook in July.   Because of the volatility that can be experienced in USDCAD surrounding the interpretation of central banker’s language, make sure to speak with your dealing teams ahead of the release to determine the best course of action to harness volatility and take advantage of the trading opportunity it can provide.

Further reading:

Stellar Sterling: GBP/USD Conquers 1.56 on another excellent PMI

EUR/USD September 4 –   Little Movement as Eurozone Posts Mixed PMIs