USD Softens In Asia As Investors See No Fundamental Reason For Today's USD Rebound

- Forex: The USD softened slightly in Asia, with the USD index dropping -0.21% between 17:00 ET and 23:13 ET. The consensus seems to be that today's strong USD rebound had little to do with fundamentals, with most of today's price action being dictated by short covering, highlighting the speculative nature of markets. As would be expected, the sharp drop in EUR/USD has led to renewed chatter of central banks buying EUR/USD over coming sessions. Traders continue to focus on the close correlation between EUR/JPY and EUR/USD, dismissing any suggestion that the USD was bought today as a safe haven (when EUR/JPY drops on any increase in risk aversion, EUR/USD tends to follow). The rebound in Asian stock markets boosted the high yielding AUD, GBP and NZD. Main focus for the antipodean currencies remains Australian Q3 inflation data, slated for release during tomorrow's session. The CAD managed to recover some lost ground against the USD after the commodity-rich currency was sold during the U.S. session on global growth concerns. Between 17:00 ET and 23:13 ET: EUR/USD +0.13%, GBP/USD +0.14%, USD/CHF -0.11%, NZD/AUD +0.17%, EUR/JPY +0.06%, AUD/CHF +0.20%, AUD/USD +0.32%, NZD/USD +0.45%

- The Chicago Fed's Evans said that the Fed couldn't go soft on inflation, adding that outside of housing the U.S. economy is "moving forward". He said that risks remain that housing prices "could weaken a good deal more than we expect," and said that such a development could drag on consumer spending. "If in fact the more likely scenario unfolds, in which conditions improve and risks recede, then policy should be prepared to respond to any developments that threaten the inflation outlook," Evans said.

- Bank of Japan Executive Director Inaba said that the central bank needs to prevent another Japanese economic bubble, adding that long lasting easy money was one of the causes of the 80s bubble. Today's comments sounded similarly hawkish to those he made on April 10, when he said that short-term rates that are left too low could push up long-term rates.

- The HKD hit its upper limit of 7.75 per USD for the first time since the trading band was set in May 2005, as speculators continue to attack the peg (betting on rising Hong Kong inflation or a faster Yuan appreciation). Back in June Hong Kong admitted that it "seriously" considered scrapping the city's currency link five years ago. Analysts agree that June's commentary will make the peg's defense from future challenges harder, a major reason why USD/HKD moved from 7.83 at the end of June to 7.75 today. The market perception had always been the HKMA is a fairly hard-nosed player and sticks to its principles, raising the possibility of intervention over coming sessions.

- Equities: Asian stock markets tracked Wall Street's rebound, with technology shares leading the charge after Apple's blowout Q4 results. At 23:03 ET the Nikkei is higher by +0.34%, with Toyota rising sharply on earnings speculation. Australia's ASX index is higher by +0.97% as financials rebound. Investors bought Aussie retailers after a solid set of results from Woolworths. South Korea's Kospi is trading higher by more than +0.75%, while Chinese equities are higher by more than +0.25%.

- Commodities: Crude oil lost -0.30% between 18:00 ET and 23:09 ET, last quoted at $85.79/bbl, as investors continue to take profits on global slowdown concerns. Spot gold benefited from the USD pullback in Asia, trading higher by +0.22%, last quoted at $761.50/oz. Shanghai copper is higher by more than 0.75%, tracking the rebound in equities.

(by Eben Esterhuizen and Gavin Pearce)