Dollar Softer vs Most Majors, Firmer vs Emerging Markets

The US dollar is starting the new week in a mixed fashion.  It is weaker against most of the major currencies, firmer against the emerging markets.  It is as if the flows leaving the EM asset class and the reduction of US exposure is going into Europe.  

Trim Tabs reports almost $20 bln has been pulled out of US-based fixed income mutual funds and ETFs thus far this month on top of the almost $15 bln that was pulled out in July.  

Separately, the Nikkei Shimbun reports that foreign public pension funds are looking to boost exposure to Japanese equities.  France is reportedly setting up a JPY50 bln allotment, while the Middle East is reportedly setting up a JPY70 bln fund.  

The economic data stream is exceptionally light today.  The most important report was Japan's July trade balance.  The deficit swelled to JPY944 bln on a seasonally adjusted basis, up from a revised JPY663 bln (initially JPY599 bln).    Both imports and exports jumped.  Imports rose 19.6% from a year ago, accelerating from 11.8% in June.  This is the strongest since June 2010.  Exports rose 12.2% after a 7.4% pace in June. Of note Japanese exports to China accelerated to 9.5% from 4.8%.  Exports to the US picked up to 18.4% from 14.6%.  Exports to the EU rose to 16.6% from 8.6%.  

The yen is the weakest of the major currencies, losing about 0.4% against the greenback.  Key resistance for the dollar is seen just above JPY98.00.  It corresponds to both a retracement objective of last Thursday's slide and the 20-day moving average.   A break above there would target the JPY98.65 area and likely allow for a challenge of the downtrend that has been in place since early July.  

The New Zealand dollar continues to be impressive resilient to bad news--this time another milk scare.  The resilience appears to be largely a function of economic data that has spurred expectations of that Wellington can raise interest rates long before other high income countries.  Following on the heals of a strong manufacturing PMI last week, New Zealand reported a 581 reading from the service sector, which is the highest in almost a year.  

Separately, Australia reported a second month of falling vehicle sales and the latest polls show Rudd's Labor Party dropping in the polls ahead of the September 7 election.  This injects some uncertainty in the policy outlook and may be constraining the Aussie, which did initially record a new 2 1/2 week high just above $0.9230 before being sold off nearly 3/4 of a cent.  

Sterling was also bid through last week's highs, making it to almost $1.5675.  The $1.57 area is thought to contain option barriers, but the high from mid-June near $1.5750 is the main target.  We note from the CME futures that the net short speculative position actually edge up in the most recent reporting week, and despite sterling's two week advance, there are a substantial number of short contracts that appear vulnerable to additional sterling gains.   

The euro itself has been confined to the pre-weekend trading range, fully recovering from the slippage in the North American session.  Two developments catch our eye today.  First, Norway's Statoil is reportedly selling stakes in two fields to Austria's OMV for $2.5 bln, though there is no sign that this is a factor in the foreign exchange market.  

Second, following a disappointing GDP report last week, that showed the Dutch economy contracting, there is speculation that Moody's may cut its rating (after saying the data was credit negative).  This too does not appear to be much of a factor in the foreign exchange market.  However, Dutch 10-year yields are under pressure, with the benchmark yield rising almost 6 bp, trailing only Italy today in the sell-off in European bonds.  Over the past five session, the 10-year Dutch yield has risen about 23 bp, which is the most in the euro area, and just behind the yield increase posted by the UK over the same period (~27 bp).  

Some observers are playing up the Jackson Hole confab later this week as the key event.  We demur. Two of the most important central bankers, Bernanke and Draghi will not be attending.  Yellen, a once favorite to replace Bernanke will be there, but reportedly does not have a major speaking role, though will moderate a panel.  Summers, who some now see as the lead candidate will also not be attending. Most Fed officials will not be attending.   We note too that the BOE's Carney is also not attending.  

While in the recent past the Jackson Hole gathering was used as part of the Fed's communication and policy guidance, this is not the case this year.  We suggest instead that the FOMC minutes due to be released Wednesday will offer more important insight into the tapering debate.