Inflation and Empire Fed Slump, Fed in Focus

The dollar continued to march higher despite surprisingly low inflation and a soft regional manufacturing index. The Canadian dollar was the top performer for the second day and the euro once again lagged. Comments from the RBAs Debelle and the Feds Kocherlakota will be highlights of the Asia-Pacific session. Latest Premium Insights will be updated tonight.

The Treasury market is backing away from QE3, at least in the near term, as 10-year yields climbed above 1.80%. Bill Gross talked down bonds yesterday and Goldman Sachs said QE3 is now unlikely before year-end.

Anti-QE sentiment helped push USD/JPY above 79.00 for the first time in a month. The gains were scaled back to 78.60 after a round of soft economic data but the climb later resumed.

The data included the CPI at 1.4% y/y compared to 1.6% expected. The Empire Fed also hit an 11-month low at -5.85, falling well short of the +7 consensus. Industrial production was slightly above expectations but downward revisions wiped out the gain.

The Australian dollar lifted back above 1.05 after Chinese state radio carried comments attributed to Premier Wen. He said falling consumer inflation gives the government more room to intervene. The comments also helped USD/CAD to a three-month low.

Overall, markets remain quiet and the WSJ reported that average stock market trading volumes in August are the lowest in more than 5 years. The S&P 500 closed nearly unchanged for the sixth straight day.

Comments from the Feds Kocherlakota at 2200 GMT may get more attention than usual due to the lack of Fedspeak before the Jackson Hall symposium at the end of the month. Pianalto and Lockhart have joined Willliams and Rosengren in the dovish camp. Hint that Kocherlakota would support QE3 bring September back into play.

New Zealand job advertisements will also be released at 2200 GMT. At 0100 GMT, Australia consumer inflation expectations will be released.

The session wraps up with comments from the RBAs Debelle at 0545 GMT.

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-AB