FX Treads Cautiously

At 4:30 AM UK July core PPI m/m (exp 0.2%, prev 0.2%)
UK July core PPI y/y (exp 2.2%, prev 2.1%)
At 8:30 AM US July Retail Sales (exp 0.2%, prev –0.9%)
US July Retail Sales x-autos (exp 0.4%, prev –0.4%)
At 10:00 AM US June Business Inventories (exp 0.4%, prev 0.5%)

The currency market kicks off the week on a quiet tone, with the major pairs confined to a narrow range in early Tokyo trading. Global central banks stepped in last week to calm fears of an imminent credit crunch, thereby alleviating some of the volatility experienced by the markets. The heightened risk aversion has continued to benefit the yen as trader wariness has prompted heavy unwinding in the carry trades. The inverse relationship between equities and the yen is expected to remain and will likely keep the Japanese currency locked in choppy, volatile trading against the majors as traders closely monitor developments in the money markets.

The coming week will also see several key reports from the US including July retail sales, business inventories, PPI, trade balance, CPI, NY Fed manufacturing survey, TICS, capacity utilization, industrial production, housing starts, Philadelphia Fed survey, and the University of Michigan sentiment survey. Traders will closely scrutinize the US inflation reports for any hints of easing pressure that would enable the Fed to cut rates over the coming months. Further, it is possible that the Fed will again inject money into the economy as well as engage in a currency swap with the ECB to alleviate European banks’ demands to meet short-term loan obligations. Markets will likely become less volatile this week in the event that either action will materialize.