US Dollar Softer, but Going Nowhere Quickly

The US dollar is trading heavier today, but mostly within recent ranges. Sterling is an exception. July retail sales were twice as strong as the consensus expected. This continues the string of data suggesting the UK economy may be accelerating after posting 0.6% Q2 GDP. Sterling's recovery from 5-day lows set yesterday was extended to reach it best level since mid-June, just below $1.56.

Global bond markets are little changed, even UK gilts, but equities are heavy. The losses in the US yesterday and disappointing news from one of the US tech bellwethers, may have weighed on sentiment in any event, but Japan's Finance Minister Aso denied the reports that a corporate tax cut was being discussed. This spurred the unwinding of yesterday's tax cut speculation gains. The 2.1% drop in the Nikkei was led by telecoms, consumer services and financials. The MSCI Asia-Pacific Index was off by about 0.7%, though India and Korean markets were closed. Italian markets are also closed, but the other European bourses are off around 0.5%. Basic materials are the weakest sector, down about 1%, with financials faring best, down 0.2%, near midday in London.

There are three main developments today to note, ahead of the slew of US economic data. First, the corporate tax cut talk was squashed in Japan, and by noting that it would not be effective at this stage, Finance Minister Aso kept the door open to future discussions. Japan's corporate tax schedule is among the highest in the OECD.  At same time, he noted that Q2 GDP supported the implementation of the retail sales tax.  Together the statements indicate that one should look for either a supplemental budget or modifying the implementation to blunt the impact.  

Separately, weekly MOF portfolio flows show a continuation of the recent pattern.  Japanese investors bought foreign bonds for the sixth consecutive week.  Foreign investors sold Japanese stocks for the third consecutive week.  This is a reversal of the trends seen in the first six months of the year.  

Second, July UK retail sales rose 1.1%.  It is the strongest gain since January 2011.  While it may have been flattered by the weather as the ONS says, the real take away is that strength of the UK recent data is negating or blunting the BOE's forward guidance.  The market was already skeptical, given the extent and subjectivity of the conditionality and now the data, which the retail sales is only the latest piece, pushes in the same direction.  The UK economy may be accelerating, with inflation already elevated. 

Sterling has been flirting with its 200-day moving average (~$1.5525) over the past week or so, but has yet to close above it.  Today looks like the day.   Assuming $1.5600 can be surmounted, the June highs near $1.5750 come into view, which also corresponds with the 200-week moving average.  

Third,  the dollar-bloc is leading the move today, with the Aussie seemingly being pulled up by the Kiwi.  Rising consumer confidence and a jump in the July manufacturing PMI (59.7 vs a revised 55.2--from 54.7) to a 9-year high has propelled the New Zealand dollar three-week highs.   The market is pricing in the RNBZ to be the first central bank from the high income countries to raise rates.  Just above $0.8100, the New Zealand dollar tested the July highs and additional resistance is seen near $0.8130 before a stiffer cap near $0.8200.   For its part, the Australian dollar remains capped below the high seen at the start of the week near $0.9220. 

The US economic calendar is packed.  Weekly initial jobless claims cover the non-farm payroll survey week.  Recall that the four-week average is at new cyclical lows.  The July CPI report is unlikely to change anyone's view on US inflation and note Bullard's comments yesterday, showing continued concern that inflation is not moving back to the Fed's target.  The Empire State and the Philly Fed survey (out a little later in the North American morning) are the first reads for August data.  As if the Fates want to keep the investors guessing about the tapering, the surveys are likely to be mixed (improvement in the Empire but not in Philly).   The June TIC data may draw some attention, but the July industrial output report is more important.  Gains in output will likely be led by mining, and maybe utilities.  There are question marks over manufacturing given the reduction in auto output and the shorter work week.