More News, but Broad FX Consolidation Continues

The US dollar enjoys a mostly firmer bias today, though the Japanese yen and New Zealand dollar are exceptions for different reason. Yet the general consolidative phase is continuing, despite a fair amount of news. While global equities are weaker and there is talk of risk-off, bonds are also lower. 

The dollar's firmer tone coincides with a 10-year Treasury yield just above 2.60% from below 2.50% at the start of the week.  Broadly speaking, it appears that upper end of the near-term range is in place for the euro, sterling and the Australian dollar, and a floor for US rates has been found.

There are five highlights of the news stream to note today ahead of the US durable goods report.  First, while leaving rates steady (2.5%) and complaining about the over-valued currency, the Reserve Bank of New Zealand statement was more hawkish than expected.  Rates are still on hold until next year, but a clear tightening bias was underscored and this has seen the New Zealand dollar rise over 1% against the US dollar and is at four year highs against the Australian dollar.  

The Australian dollar for its part is little changed against the US dollar, but the risks of a rate cut in early August have increased.  Upon review, when adjusting for the impact of last year's carbon tax, yesterday's Q2 inflation report, seems even more benign than it did initially.  This is reflected in the OIS  that has seen more than 2/3 of a cut priced in, up from around half previously.   

Second, late yesterday China appears to announce several small stimulus measures.  These included a tax cut for small businesses, some support for small exporters, and some increased expenditures for railroads.  This did little for equities.  The Shanghai Composite lost 0.6%, led by losses in technology, following news of a new share offering by BOE Technology.  Construction companies fared considerably better on the railway story.  

Third, for third consecutive week, Japanese investors sold foreign bonds, according to the latest MOF data.  The JPY549.3 bln of foreign bonds purchases follows the JPY1.1 trillion purchases of the prior week.  Japanese investors sold a small amount of foreign shares.  For their part, foreign investors have continued to buy Japanese shares and bought even more Japanese bonds (JPY349 bln stocks, JPY790 bln bonds.  

The dollar is trading with a slight heavier bias against the yen, but the general consolidative tone remains intact and except for a brief exception on Tuesday, remains within the range set on Monday.  The dollar is approaching the lower end of a triangle or flag pattern being carved out, which comes in near JPY99.30 today.  Last week's low was set near JPY98.90, which appears to represent the downside risk if the trend low goes.  

Fourth, the UK reported Q2 GDP in line with expectations.  The 0.6% quarterly increase follows a 0.3% expansion in Q1.  The preliminary breakdown shows services rose 0.6% (0.5% in Q1), while industrial output rose 0.6% (0.3% Q1) and construction rose 0.9% (-1.8% in Q1).  While the data is  relief, the fact of the matter, and one that the ONS draws attention to, is that the UK economy is still about 3.3% smaller than it was at the Q1 08 peak.  

For the fourth day, sterling tested and failed to rise above $1.5400.  This still represents a 6 cents rally off the July 9 lows.  The pullback has been nearly a cent and some short term players threw took profits.  While some upside consolidation is likely in North America today, it probably take a break of $1.5200 now to confirm that an important high is in place. 

Fifth, euro area data was mixed.  On one hand, the German IFO survey showed increased optimism with assessment of the business climate improving to its highest level since March and Q2 Spanish unemployment to 5.98 mln in Q2 form 6.2 mln in Q1. 

On the other hand, money supply and lending data was horrible.   M3 slowed to 2.3% year-over-year pace, the weakest since January 2012.  Private sector lending fell 1.6%; considerably worse than the already soft expectation for a 1.1% decline.  These poor figures contrast with the improving economic data, as seen in yesterday's flash PMI and other high frequency data.    It raises the question about how the ECB can respond to this.  Note that its recent changes in the collateral rules to help facilitate lending to small and medium sized businesses do not take effect until Sept-Oct due to implementation issues.  

The euro pullback back the better part of a cent from yesterday's highs, but remains near $1.3200.  As was the case for sterling, the euro's softer tone does not yet mean a significant high is in place.  Technical factors still seem to be supportive.  A break of $1.3130-50 is needed to give greater confidence that the advance is over.  

The US reports weekly initial jobless claims and June durable goods orders.  The latter will offer economists a last minute opportunity to adjust Q2 GDP forecasts ahead of next week's release.  The headline is likely to be bolstered by the rise in Boeing orders, but the key (for GDP purposes) is shipments excluding aircraft and defense.  

Generally speaking, the recent string of US data has had a softer bias, with the notable exception of yesterday's flash Markit PMI and new home sales.  Otherwise, retail sales, existing home sales, mortgage applications, and housing starts and permits have disappointed.  

The Dollar Index appears to have been building a base this week near 81.90.  To lift the tone, as opposed to stop the decline, the Dollar Index needs to move above 82.60, and ideally, 83.00, with the latter seemingly too far away for this week.