Fed Keeps Options on the Table, Ireland Downgraded

The FOMC minutes weighed on the dollars as the Fed took an incremental step toward QE3. NZD, AUD and EUR were the worst performers but the euro rebounded after officials talked down the possibility of Greek default. The upcoming session will be busy with the release of several key Chinese indicators.

The euro recovered from a three-month low after Luxembourg Fin Min Frieden said selective default on Greek debt is not an option envisioned by euro-region finance ministers. EUR/USD fell as low as 1.3837 but they rebounded back above 1.40. The euro fell again after Moody's cut Ireland's ratings by one notch to Ba1 from Baa3 and kept a negative outlook and now looks as if it will close around 1.3960.

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In the US, the Fed gave stocks boost as the FOMC minutes indicated some members are in favour of further stimulus (QE) if "growth remained too slow to meaningfully reduce the unemployment rate in the medium run." The S&P 500 fell 5 points to 1314.

The US trade deficit hit the highest in nearly three years. It hit $50.2 billion, well above the consensus $44 billion. The report points to a downgrade for Q2 growth estimates but some of the underlying metric were better than the headline suggested.

Asia-Pacific Preview

China is the focus on the upcoming session. A data slate will be released at 0200 GMT, including retail sales (exp: +17.0% y/y), industrial production (exp: 13.1% y/y) and second quarter GDP (exp: 9.5% y/y). Comments from Chinese Premier Wen on Tuesday have been parsed in differing ways. He said fighting inflation continues to be the top priority but he also warned against over-tightening because of the lagging effects of monetary policy. Some say the comments are hawkish but others (us included) note this is really the first signal of uneasiness about tightening from top Chinese leaders and are interpreting it as a sign that they don't plan to tighten for the remainder of the year. Chinese stocks certainly interpreted it this way as they climbed following the comments. Wen's comments may have also been a warning that GDP will be lower than expected. Given this, we see an upside bias in the market for commodity currencies; IE strong numbers would mean better growth/demand and weak numbers would mean no further tightening, and gov't efforts to stimulate growth. Either way, you could make a case to buy AUD, NZD or CAD.