The Australian Dollar dropped over 1 percent against its US counterpart after Consumer Price Index figures disappointed in the second quarter, crushing interest rate hike expectations. German CPI is in focus ahead.

Key Overnight Developments

• Australian Dollar Crumbles as Consumer Prices Disappoint
• New Zealand Business Confidence Drops on RBNZ Rate Hike

Critical Levels



The Euro was little changed in overnight trade while the British Pound inched slightly lower, down 0.1 percent against the US Dollar. We remain flat EURUSD and GBPUSD.

Asia Session Highlights



The Australian Dollar shot lower after Consumer Price Index figures disappointed in the second quarter, crushing interest rate hike expectations. Prices rose 0.6 percent in the three months through June, putting the annual inflation rate at 3.1 percent. Economists were expecting a print at 3.4 percent ahead of the release. A Credit Suisse gauge of priced-in monetary policy expectations dropped 15 basis points from yesterday, erasing bets on another rate hike at least over the next 12 months. The Aussie dropped over 1 percent against its US counterpart, losing its grip on the 0.90 figure.

New Zealand Business Confidence dropped the most since October 2008 in July according to a report from the National Bank of New Zealand (NBNZ), with only 27.9 percent of the firms polled for the survey expecting business conditions to improve from here, the lowest level in a year. The outcome may owe to higher borrowing costs and an appreciation of the currency – a hefty burden on New Zealand’s export-centric economy – following the first interest rate hike in three years last month. The central bank is widely expected to add another 25bps to benchmark borrowing costs at tomorrow’s monetary policy meeting.

Euro Session: What to Expect





Germany’s Consumer Price Index is expected to add 0.3 percent in July, putting the annual inflation rate at 1.2 percent, reversing the drop to 0.9 percent in June. On balance, the outcome may not prove especially market-moving considering its limited implications for monetary policy. Indeed, price growth remains comfortably below the central bank’s 2 percent target level and monetary conditions have actually turned more restrictive in recent weeks, meaning Jean-Claude Trichet and company are surely in no hurry tighten.

Although the money supply expanded for the first time in eight months in June, that outcome did not take into account July’s expiry of the ECB’s 12-month repo – a lending facility allowing European banks to secure access to the central bank’s funds for a year – which amounted to large liquidity drain and put upward pressure on short-term borrowing costs. Indeed, European 2-year yields overtook those of the US for the first time in three months at the beginning of this month and now trade at a 25bps premium, meaning Euro Zone monetary conditions are at their most restrictive since mid-February.

With borrowing costs set to push higher still as governments issue debt to finance their gaping deficits and economic growth likely to slow amid a lurch toward austerity, the path of least resistance for the ECB points toward (at least) a static posture, with the possibility of greater easing seemingly far greater than that of tightening.

Turning to risk sentiment, the landscape seems unclear with US equity index futures effectively flat in late Asian trade, putting the onus another batch of earnings reports with 24 S&P 500 companies including Boeing, Coca-Cola and ConocoPhilips set to announce second-quarter results late into the session.

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