Dollar Slips, though Emerging Markets Trade Heavily

The US dollar is beginning the new week on a soft note, as China threatens not to accept the invitation for trade talks in Washington if the US imposes new tariffs on $200 bln of its goods, which the Wall Street Journal reports could come as early as today.   Meanwhile, the MSCI Emerging Markets Index is giving back half of the 2.5% rally seen in the second half of last week.  

The Turkish lira is leading the emerging market currencies lower with a 1.6% decline after a 1.4% decline at the end of last week.  At today's best level (~TRY6.3850), the dollar had retraced a move more than 61.8% of the decline seen in response to the unexpectedly large rate hike last week.  Turkey is said to be considering new measures to support domestic banks in the face of rising bad loans.  

The dollar jumped higher against the Indian rupee, which is the second weakest of the emerging market currencies today.  The government's plan to support the currency did not seem convincing to investors.  The Indian government will maintain its budget deficit target (3.3%) and is considering a curb on imports.  The South African rand had strengthened for six consecutive sessions before weakening 1% ahead of the weekend.  It is extended those loses today, with the dollar resurfacing above ZAR15.00.  

Japanese markets were closed for a holiday today and the week's highlights include the BOJ meeting and the LDP conference in which Abe will most likely be elected for a third term as party head.   The MSCI Asia Pacific Index excluding Japan fell 1% today as nearly all the region's markets were lower but Australian (+0.3%).  Chinese mainland and H-shares fell over 1%, as did India's markets.   Foreign investors bought $126 mln of South Korean shares, but this did not prevent the Kospi from falling 0.66%.  The US is seeking an emergency UN Security Council meeting to discuss the violations of the embargo on North Korea.  

European stocks are mixed but trying to turn higher near midday.  Technology, utilities, and financials are moving higher, while information technology, materials, and healthcare are drags.  Italian stocks are leading the way, up about 0.7%, helped by a 1.4% gain in bank shares.  The news stream from Italy continues to support the recovery of the bond market.  The 10-year yield is off nine basis points today to return toward last week's low yield of 2.85%.  The premium over Germany is now near 243 bp, the lowest in six weeks.  

One press report suggested near year's deficit target of 1.6% of GDP could be honored by the government.  Another report indicated that the government is considering a tax break for investors who hold government bonds to maturity.  Meanwhile,  personal tax reform may need to wait until the economy is stronger.  Lastly, a poll showed that support for the government had edged up to 62%, the most since the election.  

The narrowing of Italy's premium is often seen as a supportive factor for the euro.  The euro is consolidating in the lower half of its pre-weekend range. Today's range could be marked by two option expirations.  There are roughly 855 mln euros struck at $1.16 and 1.3 bln euros at $1.17.  

Sterling is firm.  After recovering in Asia from the dip below $1.3060 in ahead of the weekend and in early Asia, sterling has poked above $1.3100 in the London morning amid more positive news from the EU on Brexit.  Reports today suggest an effort to find a solution to the Irish border.  Apparently, the EC may be more sympathetic to the idea that the border inspectors are from the UK rather than having to be from the EU.  Separately, UK's Gove and Fox appeared to endorse May's plan, while Johnson continues to resist.   Sterling meets resistance in front of $1.3120, though last week's high was nearer $1.3145.  

The strongest of the majors is the Swedish krona.  It is recouping about 3/4 of what it lost before the weekend.  Official comments have not dissuaded expectations that the Riksbank will hike rates either later this year (seems unlikely to us) or early next year (which seems more probable).  The krona bears are vulnerable to a short squeeze.  The Norwegian krone is bid too today, and the dollar is flirting with support near NOK8.20.  Norges Bank is expected to lift rates 25 bp later this week. 

The dollar is flat against the yen.  It has been confined to about 15 pips on either side of JPY112.00.  There is a $1.1 bln option there that expires tomorrow.   The Swiss franc is firm against the dollar and euro.   The dollar's pre-weekend low of CHF0.9635 was the weakest the greenback has been in five months.  The euro's recent low (below CHF1.12) is the lowest the euro has been since July 2017.  The SNB meets later this week, and it will likely lean against the franc's weakness in its commentary.  

The week in North America begins slowly.  The Empire State manufacturing index is among the first reads into the new month but tends not to be a market-mover.  It is possible that White House makes an announcement about the tariffs on China today.  Canada reports its international transactions (July) and existing home sales (August).  The US dollar faces initial resistance near CAD1.3050 and support by CAD1.2975.

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