I'm not sure excatly why, but economic data releases tend to run in an every other week cycle. The week ahead is one of the "quiet" weeks. Data from the week just ending were mixed, but on balance markets reacted more strongly to the improving U.S. data than the weaker releases. The yield on the 10-yr note ended Friday at 1.80% +15bps from a week earlier and well above its 1.39% lows of the year. The EURUSD closed the week about steady.
We were hearing over the week that trading had been dominated by large reserve-related flows. We suspect that some key central banks might have been actively positioning themselves rather than passively adjusting the mix of their foreign currency reserves. We have recently been blaming a lot of the price choppiness on algo trading programs, and have not given enough credit to the outright forex speculation of large (mostly Asian) central banks. The week ahead is not completely devoid of data with Key U.S. housing data and FOMC minutes are due on Wednesday and August flash August PMI data set for Thursday. Furthermore, we also expect traders to start to trickle back into the markets for the fall trading season. We will still be wary of large "reserve managers" that could be in again trying to take advantage of thinned conditions.
Looking beyond next week, I expect to return to "headline roulette". The U.S. Republican Party Presidential convention is scheduled for August 27-30 in Tampa, Florida. Market-moving headlines could come from that meeting. Also, markets have been waiting all of August for the Kansas City Fed Symposium in Jackson Hole, Wyoming at the end of the month. Many, incorrectly in my opinion, are expecting Fed Chairman Bernanke to announce a new round of easing (QE3) in a major speech on August 31. With the U.S. economy showing some nascent signs of improvement, there is not a lot more that the central bank will be prepared to do.
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