ECB Dollar Lending Sparks Euro Rally, RBI Preview

Hopes for further action to end the European debt crisis sparked a rally in risk after the central banks coordinated to relieve dollar funding strains. EUR, CHF and CAD were the top performers; USD and JPY lagged. The interest rate decision from India's central bank is the lone event of the Asia-Pacific session.

The ECB will work with other central banks to deliver three-month USD loans ensure European banks have access to dollar-funding through the remainder of the year. The euro shot more than 150 pips in the daily high of 1.3935 after the announcement and then settled in a range around 1.3688, where it ended the day.

US economic news was mixed. On the positive side, industrial production rose 0.2% versus the 0.1% expected. On the negative side, initial jobless claims grew to 428K versus the 411K expected. The Philly and Empire State manufacturing surveys were both slightly weaker than expected.

August CPI hurt expectations for QE3 after inflation climbed 0.4% in the month compared to the 0.2% expected. Core inflation was in line at +0.2%.

The S&P 500 gained 1.7% to 1209. Gold fell $36 to 1790. Silver fell 64-cents to $39.89. WTI crude gained 33-cents to $89.24.

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USDJPY was especially volatile early in the US session on a rumour that Japan checked rates. This dollar rallied 50 pips on intervention fears before falling back to its previous level. The pair closed the day virtually unchanged at 76.71.

RBI Decision

The event to watch in the Asia-Pacific session is the decision from the Reserve Bank of India. The Bloomberg survey shows 14 of 17 economists expecting a rate hike. It would be the twelfth hike since January 2010. Inflation remained above 9% in the most-recent report but growth slowed to 7.7% in Q2 the slowest in 21 months. The bank rate is 6.0% and the repo rate 8.0%. A hike alone would not hurt risk appetite but if its accompanied by hawkish rhetoric, risk assets may decline. The worst-case scenario for risk may be no hike combined with worries about a domestic/global slowdown. This could also boost gold.