Dollar Firm,but may not Go Anywhere Today

The US dollar is trading on the firm side of its recent ranges, but intra-day technicals warn against looking for much follow through in the North American session today. The week's key events still lie ahead and the risk of some disappointment with the jobs data at the end of the week may discourage the dollar bulls from getting too aggressive.

The Reserve Bank of Australia kept rates on hold, as widely expected and left much of the key wording in its statement unchanged, though did expand on its view of the Aussie. No surprise there, despite the slide in the Australian dollar, it remains over-valued. The take away is that the currency does not stand in the way of another rate cut, which we expect next month, barring a significant upside surprise with CPI report later this month. The Australian dollar made new lows for the move yesterday and is posting an inside day today.

The US dollar has stopped just shy of the JPY100 level, which corresponds to a retracement objective. The Nikkei continues to recovery from its 20% drop starting in late May. While the dollar has retracement 61.8% of its decline against the yen, the Nikkei has nearly retraced 50% of its losses (which comes in near 14179). News today was limited to the 36% of its monetary base in June (from 31.6% in May). This is not very surprising and, of course, reflects the BOJ's asset purchases. Increasing the monetary base is not really the issue. Getting it to translate into money supply growth remains the challenge.

At the same time, the weaker yen helps boost corporate earnings and the Japanese shares have enjoyed their best three quarter run in some forty years. Yet, wage income remains weak. Cash earnings, reported earlier today were flat in May on a year-over-year basis. And adding insult to injury, the April figure was revised down to flat from the initial 0.3% rise reported. With stronger wage growth, Abenomics looks increasingly like old-fashioned the old fashion currency devaluation and sop to Japan Inc and we suspect that by perhaps at the fall international meetings, the G7 tolerance for a weaker yen may be at its limit.

Following on the heels of yesterday's stronger than expected manufacturing PMI, the UK reported an uptick in the construction PMI.  The 50.8 reading was a touch below the 51.0 reading the Bloomberg consensus expected, but is still the highest in about a year and the increase in new orders suggests more gains in the offing.  

Sterling is holding yesterday's range against the dollar and just above the pre-weekend low of about $1.5165.  Upticks in North America will likely be contained by offers in the $1.5230-50 area.  Meanwhile, the euro has been repeatedly blocked near GBP0.8600 and it held again today.   This may offer a short-term low risk trade opportunity to sell euros with a stop above there in anticipation of a move toward GBP0.8480-GBP0.8500.  

Against the dollar, the euro initially extended yesterday's gains, but good selling was triggered at its approached the $1.3080 area.  The news stream has been light, but not very encouraging.  The Portuguese finance minister resigned and Portuguese bonds have suffered in the aftermath.  The EU reminds investors Greece has three days to deliver on terms of its aid (key issues revolve around tax collection and health care) and that the Eurogroup will take up the issue next week.  

Separately, Spain reported its fourth consecutive monthly decline in unemployment (2.6% in June).  The improvement seems largely a function of seasonality, but it follows yesterday's manufacturing PMI, which reached 50 for the first time in nearly three years, and feeds the sense that it is enjoying a cyclical recovery.  

Stops are thought to be stacked below the recent low set least week near $1.2985.  The trend line drawn off the early April and mid-May lows comes in near $1.2850.  This area remains our next objective.  

The North American session features factory orders, which are not typically a market mover.  The same is true of the NY state ISM.  Two other events vie for attention.  June auto sales are to be released.  The recovery in the US auto sector has played an important role in the broader US recovery and contrasts to the auto sales in Europe and Japan.  Part of this may be the function of the revival of the asset-backed security market for auto loan paper. 

The other event today is the Fed-speak and here Dudley's speech on the economy trumps Powell's speech on regulation.  Look for Dudley to continue to press the point of market over-reaction to the tapering discussion.  The US 10-year yield is at within 1 bp of its recent low that is 20 bp off the 2.64% peak seen on June 24.  We suspect that there is room for the 10-year to shed another 10 bp in the coming week or so, barring a surprisingly strong jobs report.