Dollar awaits Trichet and Bernanke speeches

The U.S. currency tumbled across the board on Thursday after comments from China’s central bank governor, Zhou Xiaochuan, stirred worries that Beijing may start to shift some of its massive dollar holdings into other currencies and assets.  Analysts said that China’s central bank has made similar comments before and the latest remarks were used as an excuse to sell the dollar, which was already undermined on Thursday by a soft University of Michigan consumer sentiment survey.

Bear in mind that Greenspan and Yellen warned recently about the accumulation of USD risk in international portfolios and its potential bearish USD impact.

The yen carry trade remains in focus after BOJ Fukui suggested that the bank would be very cautious over the unwinding of yen carry trades. He added that BOJ staff are currently trying to assess the size of carry trades. There have been some commentators playing down the volume of outstanding yen carry trades, suggesting the foreign demand for outstanding Japanese bank loans comprise only 5%. Over the past year the yen has declined despite Japan’s basic balance showing record inflows. Counterbalancing these long-term inflows there must be money market related outflows.

In addition, Fukui pointed out that there risks in not raising rates and while there would be no need to rush to raise interest rates he pointed out that rates need to be adjusted pre-emptively. However, September machine orders declined by 7.4% mom coming in far lower than the 1.8% consensus estimate. Next Tuesday’s Q3 GDP release will provide important information on whether or not the BOJ might hike rates in December. Money markets have not priced in an early rate hike and the consensus sees growth only increasing by 0.2% following an already moderate 0.2% reading in Q2. Hence, the market seems to be asymmetrically positioned suggesting that the impact of a positive data surprise on the yen might be stronger than weak data releases.

In Europe, today is the second day of the two-day ECB conference on “The Role of Money.” Swiss National Bank board member Philipp Hildebrand is due to speak at 0800GMT on “How useful are monetary and credit aggregates in the conduct of monetary policy?” There is a panel at 1345GMT with Fed Chairman Ben Bernanke, Bank of Japan Deputy Governor Kazumasa Iwata, ECB President Jean-Claude Trichet and People’s Bank of China Governor Zhou Xiaochuan. Trichet also gives the closing address at 1530GMT, in Frankfurt.