Commodities Surge Ahead of Trichet and King

The risk rebound continued Wednesday on better-than-expected US economic data. The commodity currencies were top performers while CHF and GBP lagged. There are no scheduled economic data releases in Asia-Pacific trading as the market quiets ahead of the ECB and BOE decisions.

The September ISM non-manufacturing index slipped to 53.0 from 53.3 in August but it was better than the 52.7 consensus. One source of worry was a slide in the employment component to 48.7 from 51.6. The ADP private sector employment index painted a different picture as it showed private payrolls up 91K in September versus the +75K consensus.

European bank recapitalization remains the dominant theme. Germanys Merkel introduced the idea of using the EFSF to recapitalize banks while the IMFs Borges said the IMF to buy bonds in Spain and Italy.

EUR/USD trading was choppy for most of the session but made a decisive move higher late in the US session, matching the weekly high at 1.3384 before edging lower at the close. The S&P 500 gained 1.8% to close at 1144.

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The largest moves in markets came in commodities and that spilled over into CAD, AUD and NZD. Oil gained 5.4% after US supplies declined for the 10th consecutive week and that drove a 150 pip fall in USD/CAD.

The pound underperformed ahead of the BOE decision on fear that the central bank could restart asset purchases. At the same time, euro traders are confused heading into Trichets final decision as President. The market has dramatically pared back expectations of easing since last week with current pricing down to a 60% chance of a 25 bps cut.

In the lead-up to the decisions, the fx market is unlikely to experience large swings.