FOREX ASIA UPDATE - USD

The US dollar fell sharply overnight on the back of softer-than-expected US consumer confidence and Chicago PMI data, with EURUSD trading up to a high of 1.2783 from a low of 1.2679, while USDJPY traded down to a low of 116.62 from 117.93.

In response to the economic data, 2 and 10-year Treasury yields slumped by 6 and 7 bp respectively, and are now down by around 15 bp over the past week, helping to explain the soft USD.

Interestingly the implied yield on the Dec-07 Eurodollar contract is almost back at its September lows, but March is still well of the September lows, implying that that the market thinks the Fed will take its time before starting the rate cutting cycle, but then cut quickly.

The Conference Board consumer confidence index for October fell to 105.4, less than consensus of 108.0 from an upward revised 105.9 in September. Meanwhile, the volatile Chicago PMI for October fell by more than expected to 53.5 in October against consensus of 58.0 and from 62.1 in September.

The market has been sensitised to any suggestion that the softening in the housing market may affect the broader economy and as such the downward surprise in consumer sentiment is a negative development for the USD.

However, the index is relatively unchanged from the previous month and we would be wary of calling for further near-term USD strength at current levels, and indeed we expect the USD to trade back to the high end of its recent trading range.

Todays Data - manufacturing ISM for October is due at 1500 GMT, with the market expecting little change from the 52.9 reading in September.