Dollar Bid, but Sterling and Aussie Hang In

The US dollar is mostly higher against the major and emerging market currencies.  The notable exception are sterling, which has been lifted by a strong construction PMI, and the Australian dollar, which has been buoyed by a less dovish statement after the RBA kept the cash rate at the record low 2.50%.  

The UK construction PMI unexpectedly rose to 59.1 from 57.0 in July.  The consensus had expected a small decline.  This follows the 2 1/2 year high on the manufacturing PMI and more than offsets the slippage in the UK BRC sales (1.8% in August vs July 2.2%).  Sterling was bid to six day highs, but has not managed a clean break of $1.56. 

  

There is some concern that BOE Governor may push back against the increase in the term structure at the end of the two-day MPC meeting that begins tomorrow.  At the same time, there is some speculation that the strength of the recent data will see another member join Weale's dissent.   Euro-sterling is bearing the brunt of sterling's strength. The euro has fallen about 2.4% against sterling in the past five sessions and is now at its lowest level since late-May.  The key support is seen near GBP0.8400.

Australia reported weaker than expected retail sales (July 0.1% vs consensus of 0.4%) and a larger than expected current account deficit (Q2 A$9.4 bln from revised A$8.7 bln in Q1), but was overshadowed by the RBA's statement.  After keeping rates on hold as widely anticipated, the RBA dropped its guidance about scope for lower rates.  The Aussie rallied on the news and is up a bit more than 0.5% today.  It is the strongest of the majors.  The Aussie's recovery that began at the end of last week has seen it rise about 1.75% over the past three sessions.  It tested the 20-day moving average, seen near $0.9050.  It has not closed above that average since August 19, when the recent peak near $0.9235 was put in place. 

The dollar is consolidating its gains against the yen, after convincingly breaking the down trend line drawn off the late-May, early- and -late July highs, and the late August highs.  It had come in near JPY98.80 yesterday.  The pullback in the yen has helped lift Japanese shares, where the Nikkei rose 3% today.  It is the best performing major index over the past five sessions.  Today's gains were led by consumer services, technology and basic materials. 

Japan's data was mixed.  The monetary base is exploding under QE and is up 42% year-over-year and wage earnings rose 0.4% in July.  However, there was weakness below the surface.  Base wages were off 0.4% and the June figure was revised to -0.6% from -0.1% initially.  Base wages are seen as the permanent part of wage income.  The other two components, overtime and bonuses are faring better.  Overtime wages rose 1.9% after the June rate was revised from flat to up 1%.  Special (bonus) payments rose 2.1% the same as in June..   

Higher inflation without higher wages squeezes real income and cannot be helpful for consumption, which the government seems increasingly likely to go ahead with the tax  in April.    Yesterday's capex figures point to an upward revision in Q2 GDP when released next week, but now the word is that Prime Minister Abe wants to wait for the next Tankan report to make a formal announcement.  Yet, some reports suggest he will indicate his inclination at this week's G20 meeting.   We note the BOJ is meeting this week and it is possible that it upgrades its economic assessment. 

For its part, uptick in the euro area manufacturing PMI yesterday failed to lend the euro much support.  It traded inside last Friday's range yesterday and has broken down to new six week lows.  Recall that the euro had rallied from near $1.2755 in early July to $1.3450 in the second half of August on the back 1) portfolio flows and the reflation story and 2) new speculative longs.  In the second half of last week the technical condition had deteriorated.  The break below $1.3180-$1.3200 may be significant if sustained.  The next target is near $1.3100 and then $1.3020. 

The US reports July construction spending and, more importantly, the August ISM.  The consensus calls for some moderation to 54.0 from 55.4 in July.  Tomorrow features the July trade balance, Beige Book and August auto sales.  However, the most important data of the week will be the jobs report on Friday.  The consensus is that about 180k net private sector jobs were created in August, which is roughly the 3-month average.