Dollar Consolidating the Weekly Losses

The US dollar is mostly little changed against the major currencies; consolidating the recent losses that have taken it to multi-week lows. The two notable exceptions today are the Australian dollar and Norwegian krone. 

The Aussie's short covering gains have been extended by the better Chinese data and the failure of the monetary policy statement to offer any forward guidance(which would have been expected to be dovish). Technically the Australian dollar is poised for additional gains next week that could carry it up another 1.0-1.5 cents.

The Norwegian krone is the best performing of the majors today, gaining roughly 0.8% against the dollar. The krone gains reflect the diminished chances of a rate cut as early as next month, for which expectations had been creeping higher following the weak July PMI and employment data recently. 

July inflation was expected to has eased. Norway surprised to day with a substantial uptick in price pressures. Headline CPI was expected to have fallen 0.2% and instead rose 0.4%. This lifted the year-over-year rate to 3% from 2.1%. The Norges Bank target is 2.5%. Even the underlying rate, which excludes energy and taxes rose 1.8% year-over-year from 1.4%

The theme that has been emerging, but found greater traction in recent days, has been one of reflation in Europe and the stabilization of the Chinese economy.  This has taken attention away from the tapering story in the US, which following comments from officials this week, especially Chicago Fed Evans, who is a voting member of the FOMC, remains very much in play for next month.  

This theme has been especially borne out by the stronger Germany orders data, industrial production and exports, a series of UK data, including today's improvement in the trade balance and the recent string of Chinese data, including today's industrial production report, showing the world's second largest economy is doing better than feared.    This has helped spur a short-covering rally among the major currencies, and helped spark some new interest some of the emerging market currencies.  

The UK reported that the June trade deficit fell to GBP8.1 bln from a revised GBP8.7 (initially GBP8.5 bln) shortfall in May.  This was solely a function of the reduced non-EU trade deficit from GBP4.1 bln to GBP2.6 bln.   The ONS indicated that the data is unlikely to have an impact on the revisions to Q2 GDP that will be announced on August 23.    Given the forward guidance, the market's attention will focus on next week's CPI and employment reports.  

Many investors seem to be of two minds about Chinese data.  Many are skeptical of the veracity, both methodologically and substantively.  Yet at the same time, investors watch the data closely and try to glean insight from even small changes in high frequency data.  Today's data is not an exception.  Chinese officials have indicated a desire for the economy not to weaken much further, and sure enough, the data shows that.  In particular, industrial production rose 9.7% year-over-year from the 8.9% pace in June and for which the market expected no change.  Retail sales and fixed investment were essentially unchanged from June and in  line with expectations.  

Consumer inflation was as expected, with CPI rising 2.7%, the same as in June.  To the extent China has an inflation problem, it is largely a function of its food economy.  Food prices ticked up to 5.0% form 4.9%, while non-food prices were unchanged, up 1.6% from a year ago.  Deflationary pressures are still evident at the producer level, which is seen as a function of the excess capacity that plagues many industries (officially 19).   Producer prices are 2.3% lower than a year ago after a -2.7% in June.  

Separately, official efforts to rein lending and the shadow banking are yielding results.  China reported that new yuan loans totaled CNY700 bln, down from CNY860 bln in June.  This reflects the slowing of credit by the traditional banking sector.  Aggregate social financing also slowed from CNY1.04 trillion in June to CNY809 bln in July.  The gap between the two reflects the activity of the shadow banking sector and that gap has been falling since peaking near CNY1.49 trillion in March.  

The yuan itself is largely steady today after edging to a new mutli-year high yesterday.  The PBOC has set a higher fix for the yuan each day this week, but the net result is a 0.12% gain on the week in the face of a generally soft US dollar.  

In the North American session, there are two reports that will attract attention before the summer weekend kicks in. First, the US reports wholesale inventories for June.  The report tends not to be a market mover, but will be important for economists trying to anticipate the revisions to Q2 GDP. Recall that the 1.7% preliminary estimate to Q2 GDP was stronger than expected, in good part because due to inventories.  Also note that the smaller than expected US trade deficit reported earlier this week pointed to an modest (~0.2-0.3%) upward revision to GDP.  

Second, Canada reports July employment figures and the consensus expects a 10k increase.   The Canadian dollar has fully recovered from the weakness seen earlier this week and the US dollar looks poised to test the July lows near CAD1.0250.