Plummeting oil prices continue to stoke USD rally. AUD bounces a bit on relief that RBA only cut 25 bps.

• Australia Jul. Building Approvals fell -2.3% vs. +0.5% expected, but Jun. data revised up from -0.7% to +2.2%
• Australia RBA lowered its cash target 25 bps to 7.00% as widely expected
• Switzerland Aug. CPI out at -0.3% vs. -0.1% expected
• Switzerland Q2 GDP out at 0.4% QoQ vs. 0.2% expected

• Norway Aug. PMI (0700)
• EuroZone Jul. PPI (0900)
• US Aug. ISM Manufacturing and Prices Paid (1400)
• US Jul. Construction Spending (1400)
• US Weekly ABC Consumer Confidence (2100)
• UK Aug. Nationwide Consumer Confidence (2301)
• Australia Aug. AiG Performance of Services Index (2330)
• Australia Q2 GDP (0130)

Market Comments

Yesterday, USDJPY dropped through a key support area, including the 55-day moving average, but then rallied strongly later in the day as the Japanese Prime Minister Fukuda resigned, citing political gridlock problems. The strong JPY has been the only chink in the USD's increasingly formidable armor of late, and we would look at the next couple of session as key in deciding whether USDJPY can maintain that 108.00 area support or whether the JPY can punch through and continue and reign supreme. We may look to equity markets as the decisive factor.

Elsewhere, EURUSD tested a new low overnight, and GBPUSD sliced easily through the 1.8000 handle overnight. The initial test lower by EURUSD was rejected late in the Asian session, and as with USDJPY above, the next couple of sessions will be decisive for whether we establish support back above 1.4575 or whether the crumbling simply continues unabated towards 1.4000. The odds of the latter unfolding are a bit higher after initial impressions of Hurricane Gustav damage thankfully showed far less damage than all of the hysterical press coverage was yammering on about and oil dropped as much as 8 dollars overnight to below 111 dollars - the lowest price since April. Again, these commodity moves are also JPY and CHF supportive. (more on EURCHF below).

We mentioned interest rate differentials not supporting further USD strength for the short term yesterday. This brings up an interesting possibility: is the FX market finally decoupling from the whole interest differential theme that has so driven it for last two years+? We'll look more into this possibility in the coming days/weeks as it will take time to determine whether the divergence can persist. We've been trained so well over the last couple of years to obsess over these differentials after they've provided so many good signals, but cycles always changed and historically, differentials have not always been a primary driver of currency levels.

AUD rallied a bit from low levels as the market priced out the small minority looking for a bigger cut to the Cash Target overnight, which was only trimmed 25 bps to bring the rate to 7.00%. The guidance was as one would expect from a central bank that has launched an easing campaign of unknown duration. "Weighing up the available domestic and international information, the board judged that there was now scope for monetary policy to become less restrictive". Boring, but clear! If equities and commodities remain under pressure, AUD will likely continue to underperform broadly. One way to buy AUD, however, is vs. the NZD now that this first cut to the RBA rate is out of the way. The AUDNZD cross has seen a chunky consolidation from its highs, and could be ready for a renewed attempt higher after building a base in the 1.2200 area. Watch out for the Aussie data out tonight if trading AUD.

The GBP continues to feel the pain after yesterday's worse than expected Mortgage Approvals number for July showed approvals running at a mere 33K for the month of July, vs. 130K at the peak of the market in late 2006. As UK public finances are in ruins, the only meaningful thing it exports - financial services - are in steep decline, and the asset bubble driven economy is imploding, there seems to be little standing in the way of a further drop in GBP. GBPUSD to 1.7000 or lower may come sooner rather than later...

Chart: EURCHF
EURCHF is heavy, but hasn't picked up much downside momentum despite breaking the rather important 1.6100 level yesterday. The pair should be trading far lower in this global environment of falling carry trades and imploding asset markets. On that note, we must also think about investors all over Europe financing endless risky asset plays in CHF over the last 5 years. Asset markets, particularly in real estate, are blowing up all over central and eastern Europe, where this kind of financing was most popular. The implosion in these currencies should help provide fuel for a CHF rally. EURCHF will look even more interesting if 1.6000 fails in coming days.