Dollar's Latest Upticks Look Vulnerable

The US dollar is posting modest across the board gains as the week winds down, but the latest upticks look vulnerable in the North American session.  The euro has held above yesterday's lows.  Sterling made a marginal new low but is finding bids ahead of support near $1.6950.  The dollar's upside momentum appears to be faltering ahead of JPY102.00 and CHF0.9050.    The Australian dollar, which was turned back from $0.9480 yesterday is finding support near $0.9400 today.  For its part, the US dollar is recovering from testing the CAD1.0700 area and has approached a band of resistance that begins near CAD1.0780 and extends to CAD1.08.

Global bonds are mixed.  Asia and Pacific bond yields are higher, while European bonds yields are lower, led by the periphery.  US 10-year Treasury yields are trying to re-establish a foothold above 2.50%.  Equity markets are mixed as well.  

The 1% rise in the Shanghai Composite and the Nikkei helped lift the tone in Asia, but European bourses are lower.  The Dow Jones Stoxx 600 is off 0.2%.  It has been dragged lower by consumer discretionary and energy sectors, while financials are the strongest followed by telecom.   MSCI Emerging market equity index is off fractionally and remains near the year's high set yesterday.  

There have been four pieces of economic news: Japan's CPI, UK, GDP, German IFO and euro area money supply and credit.

Japan's latest CPI data elicited a ho-hum market response.  Headline CPI rose 3.6% in June, off slightly from the 3.7% in May.  The core, which excludes fresh food, eased to 3.3% from 3.4%. Both declined slightly less than the market expected.  On the other hand, excluding both food and energy, consumer prices rose 2.3% compared with a 2.2% pace in May.  

The key from a policy making point of view is the core rate adjusted for the retail sales tax increase.  BOJ estimates suggest the tax increase adds about 2% to the core rate.  The adjustment would bring the rate to 1.3%, around where it appears to have stalled as BOJ Governor Kuroda warned.  This is also evident in the Tokyo CPI report that is reported with less of a lag.  In July, Tokyo CPI slowed to 2.8% from 3.0% and to 2.7% at the core level.

The UK is the first of the G7 countries to report Q2 GDP.  The 0.8% quarter-over-quarter expansion matches expectations and the Q1 pace.  As widely anticipated, this means that the UK economy is now slightly larger than it was prior to the Great Financial Crisis.  Growth was led by the 1% expansion in the service sector, which is now almost 3% larger than it was on the eve of the crisis.  Industrial output rose 0.4% in the quarter, while the preliminary estimate shows construction slipped by 0.5%.

Recall that yesterday that IMF revised higher UK growth this year to 3.2%. In essence, that means that it is assuming now slowing in the UK economy in H2.  As recent data has shown some loss of momentum, the IMF's forecast could err on the optimistic side.

The German IFO was consistent with recent survey data suggesting some loss of momentum here as well.  All three components, climate, current assessment and expectations eased, and by more than expected.  Recently, the current assessment held up better than the expectations component, as if those surveyed were saying that this was the best conditions would get and would deteriorate going forward.

Now the current assessment has begun falling faster.  In July, it fell to 112.9 from 114.8.  This is the lowest since January.   The expectations component is still falling, and at 103.4, it is the lowest since last July.  Recall that earlier this week, the Bundesbank warned in its monthly report that the German economy may have stalled in Q2.  Yesterday's flash PMI reading provided a modicum of hope that growth returned in Q3.

Separately, the ECB will likely recognize that money supply and credit moved in the right direction in June.  M3 money supply expanded at a 1.5% year-over-year pace, up from 1.0% in May and better than the 1.2% the consensus expected.  It was enough to lift the 3-month year-over-year pace to 1.1% from 0.9%.  

The credit contraction eased to -1.7% from -1.8% in May.  This reflects a slight improvement in lending to households and a smaller reduction in lending to businesses.

There are two  developments in the emerging markets that are noteworthy today.  First, contrary to expectations, the Russia hiked its one-week auction rate by 50 bp to 7.5%.  This has failed to stabilize the ruble or the Russian bond market as the sanction regime is likely to tighten further.  There are now claims that  artillery fire may be coming from Russian territory.  Other reports suggest that Russia is sending or preparing to send heavier weapons to the insurgents in east Ukraine. 

Second,  Turkey is requiring that banks convert their euro-denominated reserves to dollars as of August 1.  The ostensible reason is the response to the ECB’s decision to cut its deposit rate to minus 10 bp.  The sums involved are modest in terms of the larger foreign exchange market, but may be significant in terms of the Turkish lira and euro trade.  Turkish banks hold about 12.7 bln euros (~$17 bln).   The euro is sitting just above the TRY2.81 level, the week’s low, which is also the low for the year. 

In the US today, June durable goods orders will be reported.  A recovery from the 1.0% decline in May is expected.  Recall that shipment of durable goods feeds into GDP calculations.  It is expected to rebound to 1.3% from 0.4% in May.