European Majors Boosted By Merkel's Comments, But Limited By Near Term

European majors staged a strong rebound overnight, together with rally in equities, after German Chancellor Merkel voiced her support to ECB's effort on fighting the debt crisis. Merkel stated that policymakers "feel committed to do everything" they can "in order to maintain the common currency". She also affirmed that Draghi's decisions have "made it clear that the ECB is counting on political action in the form of conditionality as the precondition for a positive development of the euro". These comments indicated that Germany has moved away from the opposition position over the ECB's purchases of Spanish and Italian bonds and further affirm the chance that ECB will be acting soon.

Spanish bond yields slipped as the debt-ridden country will soon receive emergency funding for bailing out Bankia. So far, Spain hasn't requested mobilization of the initial EUR 30b payment for its banks from the EUR 100b bailout program. Also, it's reported again that Spain is going to seek a sovereign bailout at a meeting of finance ministers next month. And as Spain requests for aid, ECB would restart bond purchase as part of an overall package. Spanish 10 year yield dipped to settle at one month low at 6.524% yesterday.

Technically, which European majors were strong, they're all limited by near term resistance at the point of writing. EUR/USD is held below 1.2445 while GBP/USD is held below 1.5767. USD/CHF is way above 0.9656 support. EUR/AUD is kept below 1.1855 and EUR/CAD is kept below 1.2283. Strength was seen in European yen cross with EUR/JPY took out 97.81. But that's more due to weakness of the Japanese yen. So, there rebound could be, just rebound and carry not much technical implications.

In US, Philadelphia Fed Plosser said that he's very dubious" on the impact of additional bond purchases as "there are diminishing returns to these actions". And he doubted if that would help unemployment drop faster. Minneapolis Fed Kocherlakota said the FOMC's pledge to keep rates low through late 2014 is too "far out". He said earlier this week that with unemployment at the current high level, allowing inflation to breach the 2% target "could well be part of an appropriate policy." Dallas Fed Fisher said earlier this week that he doesn't see " any virtue to further quantitative easing". These comments were in sharp contrast to Boston Fed Rosengren's push for a sizeable QE earlier this month.

US 10 year treasury yield jumped further to close at 1.836% yesterday on receding speculation that Fed will announce something significant regarding QE in near term. It should be noted again that it's way above the intraday historical low of 1.394% made on July 24, i.e., less than a month ago. The development will continue to pressure the Japanese yen. Even though USD/JPY took a breath yesterday as buying turned to European yen crosses, it should be just a matter of time when USD/JPY's rally resume to 80 psychological level.

On the data front, New Zealand PPI unexpectedly rose in Q2 with PPI input up 0.6% qoq while PPI output rose 0.3% qoq. German PPI and Eurozone current account and trade balance will be released in European session. Canadian CPI will be the major focus in US session and is expected to rise slightly to 1.6% yoy in July, with core CPI unchanged at 2.0% yoy. U of Michigan sentiment and US leading indicators will also be released.