Market Comments:

The strong pound and stronger kiwi stole the headlines in Asia and Europe as obsession over the prospects of interest rate moves continues to roil currency markets - more on this below. Elsewhere, the USD was relatively firm on soft equities ahead of the US open. Last night, the weekly US ABC confidence number fell back to the lowest level since July as the average person is apparently not sensing the recovery supposedly at hand. Again, that index will only improve once the employment situation improves.
Most markets have pressed the pause button at the moment, it seems: bond yields have gone nowhere for more than a week, equities have been in a holding pattern for a week despite all of the attention on corporate earnings, and the very USD-sensitive gold price has done nothing for two weeks after the big follow up move through 1025 per ounce earlier this month. The lack of momentum raises the technical risk of a consolidation, though we're hard pressed to find a catalyst for such a development.
Mervyn King states his caseThe pound rushed through the big 0.9080 support level in EURGBP this morning after the Bank of England's Mervyn King wrote in a newspaper article that it "would be wise to take account" that interest rates will rise. This performance, in addition to the broad front of European officialdom that are clearly on the warpath over the strong Euro, served to push sterling stronger across the board. Also, in today's news, the Bank of England voted unanimously to keep the asset purchase plan unchanged at it last meeting, adding to positive sentiment for the pound, or at least helping to raise concern among the crowd of GBP bears.
Late yesterday, King was out suggesting that Banks that are "too big to fail" should be split up, rather than focusing excessively on capital reserves. Any split could be organized along the kinds of activity that banks engage in - for example, risk-taking vs. deposit-taking. Mr. King clearly expressed distaste with the entire bailout, even if he deemed it necessary, and said that the bailout "has created possibly the biggest moral hazard in history". All in all, Mr. King's performance was very powerful and serves as a direct challenge to recent rhetoric from Chancellor Darling's statements that capital requirements are the most important medicine and that splitting up banks' activities wouldn't "deal with the problem." As well, it perhaps reminds the market that the UK is more likely to show dynamism in coming up with a new way of dealing with the situation relative to the slower moving nations on the continent, who must also deal with the ponderousness of coordinating with an "international" central bank.
Bollard and the KiwiBollard commented that the kiwi's strength does not preclude interest rate rises (we seem to recall a stern threat that the bank could decide to lower rates if it wanted too when it felt the kiwi was already strengthening too rapidly some months ago, but apparently, the bank has given up on this kind of showmanship), though the very strong reaction in the market was a bit unjustified considering that Bollard also pointed out that the market had already priced in a good deal of tightening already. At current levels around 0.7500, NZDUSD looks extremely overbought if we are about to see a further correction in equities. The RBNZ's next rate setting meeting is set for next Thursday (Wednesday evening European time).
Looking aheadToday we have the US energy inventory data. The US inventories are still very well stocked, even if the recent fall in gasoline inventories was noteworthy. Oil prices have come off two dollars from the recent go at 80.00 and will need to come off further to build any stronger dollar argument. More important for oil may be the market's opinion of the data out of China tonight, with China set to release Q3 GDP figures, inflation data, Retail Sales, and Industrial Production figures.
The massive Chinese spending and credit stimulus got the Chinese growth trajectory back on track earlier this year, but the success was apparently so resounding that they have been withdrawing credit stimulus rather quickly in recent months on fears that the stimulus was heading in inappropriate directions, like rank speculation in equities. The spending stimulus most certainly continues and has no doubt been the key drive of growth, considering the continued weakness in China's export markets. It will be very interesting to see how China deals with its attempt at a transition to stronger domestic consumption. The answer will not come tonight.
Also up later today, we have the Fed's Beige Book and in Asia we have a look at Japan's Merchandise Trade Balance, which has been on a rapidly improving trajectory after actually showing a deficit earlier this year.
Chart: USDJPYUSDJPY survived an important test of support recently and appears ready for further gains if it can break above recent resistance at 91.33 after yesterday's hammer-like reversal. The Bank of Japan's Nishimura was out in the Asian session warning of continued risks to the country's economy and the need to keep monetary policy accommodative, (as if anyone in the world was still in doubt - forward expectations for the Bank of Japan are and have been virtually nil.). New highs in bond yields are likely needed to get more than a basic consolidatory rally going here. To the downside, a break of 90.00 again, would have the bears growling.

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