Dollar Maintains Post FOMC Minutes Weakness

The dollar was sold off sharply overnight as FOMC minutes revived speculation of QE3 and remained weak in Asia today. The Fed released another round of dovish minutes for the FOMC meeting in August. As the minutes indicated that many members believed that more monetary easing measures should be implemented soon unless upcoming economic data showed "a substantial and sustainable strengthening" in economic recovery.

Further monetary easing has now become a matter of "when," instead of a matter of "if." Policymakers considered discussed a variety of easing measures, ranging from language guidance to balance sheet expansion. As the meeting was held before release of the July employment report, we believe the next trigger point would be the September report, together with the Beige book and Fed Chairman Ben Bernanke's Jackson Hole address on August 31.

After meeting with Greek prime minister Samaras, Luxembourg prime minister Juncker expressed that he's "totally opposed to the exit of Greece from the euro area." But he emphasized that the extension of fiscal adjustment period "will depend on the finding of the Troika mission." He said that Greece is suffering from "a kind of credibility crisis" and he urged Samara's fiscal efforts to be "credible," "identifiable" and "as strong as possible." German Chancellor Merkel and French President Hollande will hold talks in Berlin to "discuss flexibility in return for assurances and the two want to have a common line before the arrival of the Greek prime minister."

Rating agency Standard and Poor's said that a full bailout of Spain would not hurt its credit ratings. S&P said that "should Spain decide to request a full bailout, this would, in our view, constitute an official acknowledgement that the government is facing ongoing risks to financing itself in the capital markets at sustainable rates." But it noted "the potentially advantageous terms Spain could receive under a full bailout could enhance the chances of success of Spain's already ambitious and politically challenging fiscal and economic reform agenda."

From China, the conference board leading indicator rose 0.7% in July. But HSBC flash PMI manufacturing deteriorated again to 47.8 in August. The data showed that China's manufacturers are still struggling with global headwinds and raised some prospects for additional stimulus. The PBOC's injection of a total of RMB 220B through reverse repos to the public (RMB 150B using 7-day contracts at 3.4% and a further RMB70B billion using 14-day contracts at 3.6%) has led many to push back their forecasts of rate cut or RRR reduction by the government.

Yet, recent data suggested the world's second largest economy has not benefited much from previous easing implemented by the government. Since our last China Watch, both the FDI and the PMI data missed expectations, suggesting the government should step measures to stimulate the economic growth, ensuring it would meet the target of +7.5% this year.

Looking ahead, eurozone PMIs will be a major focus in European session. And focus in US session will mainly be on jobless claims and new home sales.