Dollar Remains Heavy

The US dollar remains soft, near yesterday's lows.  The main developments today include somewhat higher than expected German state reports.  They follow on the heels of the relatively firm M3 and private lending figures and suggest that market talk of a 50 bp rate cut by the ECB is over the top.  As noted previously, the ECB is likely to focus more on liquidity provisions, which may include a 12-month refi operation, renewed buying of covered bonds and some adjustment to the rate corridor.  A 25 bp rate cut may also be delivered, and this would seem primarily as a way to help avoid Draghi having to cut rates at his first meeting in Nov at the helm. 

With the Greek parliament approving the new property tax, it is increasingly likely that Greece will get the next tranche of aide from the EU/IMF.  Finland is likely to approve EFSF reforms today, even though the collateral for Greek 2.0 has not yet been worked out.  Still, there does seem to be renewed hope that European officials will take some bold steps.  The rub is that those bolder measures are unlikely before Nov.  The risk is that many will confuse the calendar effect (month/quarter/fiscal half year and year end) with an important shift in sentiment. 

Sterling is under-performing.  Another couple of MPC members have spoken this week and the risks of new asset purchases as early as next month appear to be increasing.   The BOE's Financial Policy Committee report covering the market strains caused by the euro zone crisis is undermining UK banks' ability to strengthen their balance sheets, which also can be read to support additional BOE action.  This may be a factor in helping the UK gilts outperform today. 

Japanese official talk seems to be more focused on non-intervention measures to help businesses cope with a stronger yen.  The more non-intervention steps are discussed (in public space) the more comfortable the speculative community will feel sitting with long yen exposure.    Despite the SNB successfully blocking hot flows into the Swiss franc, the yen has not strengthened so much as remained in a relatively tight range near its highs.  The US dollar seems to have been the better safe haven play. 

Chinese officials continue to allow the yuan to appreciate.  The yuan and yen are among the only currencies to have appreciated against the US dollar this quarter.    Indeed, the yuan's appreciation (about 1.2%) contrasts with the 7.4-7.5% losses of the Korean won and Indian rupee, the nearly 5% loss f the the Taiwanese dollar, and the 3.0-3.5% loss of the Indonesian rupiah, Singapore dollar and Malaysian ringgit.  

While yuan appreciation is too slow for many US politicians, one won't hear much complaint from China's Asian trading partners.  The yuan's currency appreciation and wage increases promise to shift the competitive balance and likely the division of labor in Asia.