Fed Chatter Favours Summers, Aussie Inflation Up Next

The US economy continues to appear on uneven footing after a weak Richmond Fed. The US dollar was the laggard for the second day in a row while CAD was the leader on upbeat retail sales. Top tier data in the upcoming session includes Australian CPI and the private Chinese PMI.

The US dollar attempted to stage a rally after Monday's steep fall but it was unable to find a solid footing. Gains slowly evaporated in Europe and Asia then a soft Richmond Fed gave traders another reason to get out of dollars. The manufacturing indicator fell to -11 compared to +9 expected as new orders collapsed.

One factor that could help the dollar in the day ahead is a late-breaking Washington Post report saying that Larry Summers is the leading candidate to take over from Bernanke according to “conversations with plugged-in sources both inside and outside the process”. They say opinions have hardened in the past 72 hours. As a general rule, anyone but Yellen will be viewed as US dollar positive although Summers is also seen on the dovish side of the spectrum so the impact might be limited.

A decision could come any time between now and October but Obama may wish to limit uncertainty by making an early announcement.

The Canadian dollar broke some significant technical levels after the strongest retail sales report in three years. Sales rose 1.9% compared to 0.4% expected. The strength was broad based but the caveat is that the numbers are from May, so they're dated. After the release, USD/CAD fell through the 55-day moving average, the July lows, the 61.8% retracement of the June-July rally and 1.03. The pair also closed below all those levels.

The Australian dollar was hesitant to break 0.9300 ahead of CPI numbers at 0230 GMT. The Aug 6 RBA decision is close with the OIS market pricing a 65% chance of a cut but this data point will loom large in the debate. Any miss in the headline CPI or the trimmed mean (both expected at 0.5% q/q) will lead to a significant move in AUD/USD.

Fifteen minutes later, the focus shifts to China and the HSBC flash manufacturing PMI. This is one of the few privately gathered data points and a key barometer. The consensus is for a 48.2 reading -- the same as June.