Dollar Starts New Week on Positive Note

The US dollar is trading higher across the board as the North American session is about to begin.  The news stream is light and the main feature has been the disappointing Japanese Q2 GDP.  Both the yen and Nikkei weakened in response.  After soft closes before the weekend, there has been some follow through selling of the euro and sterling, leaving the dollar-bloc little match for the firmer greenback. 

The Japanese economy slowed more than expected in Q2, with a 0.6% quarter-over-quarter pace, down from a revised 0.9% pace in Q1 (initially 1.0%). That puts the annualized rate at 2.6%, not 3.6%, which the consensus expected and down from the revised 3.8% rise in Q1. 

Despite the weakness of the yen, net exports added a 0.2 percentage points to GDP. Domestic demand added 0.5 percentage points. Most disappointing for the Abe government was that capex fell for the sixth consecutive quarter by 0.1% after a 0.3% fall in Q1. Residential investment also fell; its first decline since Q1 12. 

The GDP deflator fell 0.3%, about half the decline the market anticipated. It follows a 1.1% decline in Q1. By this measure, deflationary forces are the mildest in four years. Separately, but consistently with this was news that domestic corporate goods prices rose 2.2% year-over-year in July, matching the 2011 peak, which was the highest since 2008. This appears to be mostly reflecting the weaker yen and higher import costs. 

The Nikkei fell 0.7%, led by sharp losses in the telecom space and financials.  Utilities, basic materials and technology sectors rose.  The JASDAQ was pummelled, losing 3.8%, with over 4% declines in consumer goods, health care, financials and technology.  Gains in oil and gas and basic materials were minor offsets. 

The news stream was light in Europe.  Two items stand out.  First, Switzerland reported stronger than expected June retail sales.  The year-over-rate rose to 2.3% from a revised 1.5% in May (initially 1.8%).  The monthly increased was 0.5% and it follows a 0.3% fall in May (revised from -0.1%).  

Aside from the high frequency economy data, we note that the SNB's Danthine expressed concern that mortgage lending standards may be deteriorating.  Although there is little speculation of when the SNB will relax its ceiling on the franc, the distortions caused by low interest rates is likely to be of increasing concern for the central bank. 

The second news item are reports that the Bundesbank is acknowledging that Greece is going to need more funds next year.  That Greek funding needs to be readdressed is not a fresh idea, as the IMF has been claiming this for some time.  The German government has been denying it.  What is news is that the BBK seems to have gone out of its way to publicize this as next month's election draws near.  Our sense is that even though BBK President Weidmann was one of Merkel's trusted advisers,  the German central bank has become more vocally critical of the lack of reforms in Germany and has long been critical of its European stance. 

European shares are lower, with the Dow Jones Stoxx off about 0.4%, but within Friday's trading range, near the best levels in nearly 3-months.  Core bonds are a bit heavier, though Italian, Spanish and Portuguese bonds are firmer.    Of note, the US-German 2-year interest rate differential, which tracks the euro-dollar exchange rate is near 13 bp, the lowest since late June.  The differential has been halved since July 9 on a combination of lower US rates and higher German rates.  

The euro has slipped below $1.33.  It has finished the North American session above there for the past four sessions.   We had previously identified the $1.3280 area as potentially important support for the new longs.  Sterling, like the euro has slipped to three-day lows.  However, it too does not seem to have much downside momentum.  The Australian dollar made a new high for the move, rising to $0.9221 in Asia before coming off to hit a low near $0.9135 in Europe.   The 20-day moving average comes in near $0.9125 and a break of it now could spur more selling. 

There are no economic reports from the US or Canada today and there are no Fed speeches either.  This has all the makings of a quiet summer session.