In contrast the Fed is much more cautious of the US' economic prospects and the central tendency projection for the unemployment rate was raised to 9.8%-10.1% from 9.2%-9.6%, but the GDP forecast was raised slightly. The release of the June FOMC meeting minutes also revealed the FOMC discussed changes to the asset purchase program, even the possibility of including adjustable-rate mortgages.

These discussions on expanding the range of asset purchases is another sign that the Fed is not content with the current results of their credit-easing efforts. As Chart 1 shows, yields on both government securities and mortgages are still above levels where the Fed first began purchases in Q1.

The Fed's commitment to asset purchases underscores the need to contain rises in yields, and perhaps more importantly manage expectations of lending conditions. Loan surveys globally have shown that credit conditions are now easier, but much of improvement is attributable to explicit or implicit government support.

The prospect of a major U.S. financial institution and lender to small business filing for Chapter 11 is a reminder that the flow of credit to the real economy could suffer further disruption.


G10 FX

USD: Equities advance

The dollar remained under pressure overnight as better-than-expected results from a major US financial were released, further buoying risk appetite.
Yesterday, stronger economic data in the form of better Empire Manufacturing, industrial production and CPI data, had been the main drivers of dollar weakness.
We expect to see USD supported in the near-term as we expect to see a return to risk aversion once the market gets over the fudgey earnings.
Purchases under the ECB's covered-bond program accelerated, with a total of EUR 585 mln bond purchases now settled, out of a maximum of EUR 60 bn.

Although ECB members have been quiet of late, Executive Board member Tumpel-Gugerell will hold a news conference tomorrow on the subject of the interbank payment settlement system.

We continue to see the euro struggling in the immediate future and maintain our 3m EURUSD forecast of 1.30.

Commenting on the BoE's QE program, MPC member Barker said it was still too early to expect the scheme to have led to an improvement in bank lending, but that the impact should come through more strongly next year.

She added that there was a "tentative risk" that the scheme would drive up inflation but that such a scenario was a "long way away".

June employment data was better than expected with the jobless claims change coming in at 23.8k versus market consensus of 41.3k. The claimant count rate was also better at 4.8% versus 5.0% expected. Nevertheless, the headline unemployment rate came in higher than expected at 7.6% (cons. 7.4%, prev. 7.2%).

We remain short sterling as concerns over BoE policy persist.

NZD: Outlook cut

New Zealand's long-term sovereign credt rating outlook was cut to negative from stable by Fitch. The ratings agency cited concerns over the country's economic outlook and debt levels.

The Q2 CPI showed some strength, climbing from 0.3% q/q in Q1 to 0.6% q/q in Q2, and beating both market expectations of 0.5% q/q and the RBNZ's own 0.4% q/q June MPS projection.

The annualised reading also surprised to the upside, coming in at 1.9% y/y against expectations of 1.8%.

We do see downside risks to AUDNZD presently on the back of stronger NZ data, concern over deteriorating Australian-Chinese relations and given that the authorities in NZ are playing down scope for official action to curb NZD gains. Finance Minister English said he would prefer a weaker NZD to help external imbalances, but he also said that the government is not contemplating FX intervention to driver a weaker NZ dollar. Further, AUD will suffer once the market realizes that China's growth is not as they are leading us to believe.

AUD: RBA sells the aussie

In figures released overnight, the RBA announced it had set a new monthly record by selling AUD 1.94bn in the spot FX market as part of its "reserve management" activities during the month of June.