Currencies Correct Pre-Weekend Move

The US dollar was unable to sustain its pre-weekend gains despite an employment report that was generally recognized to be sufficient to keep the Federal Reserve on course to raise rates next month. However, the poor price action has not seen follow through dollar selling. A consolidative tone has emerged as the markets await this week's keep developments, and especially the US retail sales and UK labor report. The eurozone reports industrial output and, more importantly, Q2 GDP estimates.

The poor news from China over the weekend; in particular the larger than expected fall in both imports and exports, has seen the dollar-bloc currencies give back more than the pre-weekend gains that we had expected. The Australian and New Zealand dollars are trading around half a cent lower. Initial support in the Aussie is the $0.7330-50. The Kiwi has seen a bigger retracement of its gains. A break of the $0.6550-60 warns of another half cent loss.

News that US rig count increased last week underscores the ample production, whereas the Chinese economic weakness plays up the softness of demand. China's oil imports on volume terms continues to hold up as refiners boost purchases. Oil prices extended their pre-weekend losses, and this help lift the US dollar back toward CAD1.3180 after seeing a low near CAD1.3050 before the weekend.

The euro itself has been confined to almost half of a cent range. The break of $1.0940 would signal a further push back toward $1.0900. However, with the SNB threatening continued intervention, and the dollar bulls a bit frustrated by the lack of favorable price action following the jobs data, the market does not appear to be in an aggressive mood.

Sterling has a somewhat heavier tone, and it has been confined to half a cent range. The market had been leaning the wrong way on the BOE and the adjustment to the signal that there is no urgency for the BOE to raise rates. The $1.5470 level, which it is straddling in late London morning turnover, may act as a pivot. A close below it would likely signal additional near term losses.

After the dollar-bloc, the Japanese yen is the weakest of the majors. The US dollar held support ahead of JPY124.00 and recovered toward JPY124.70. The yen was offered in Tokyo, and some linked it to the smaller than expected current account surplus (JPY558.6 bln vs. consensus forecast for JPY786 bln). However, as European market opened, that the dollar was bought up quickly. US Treasury yields are firmer, and the S&P 500 is called higher. Both are associated with the stronger dollar-yen, but the bulls have been stymied by the JPY125 area.

The Vice-Chair of the Fed Fischer (Bloomberg television) and Lockhart (twice in Atlanta) speak today. They are the first to talk since the jobs data. Lockhart had previously indicated his support for a hike in September. Fischer had most recently commented on the subdued price pressures, but we would not expect him to deviate much from the FOMC statement. It would not be surprising for him to underscore that a rate hike will not be a tightening of monetary policy, but a move from an extremely accommodative stance to a very accommodative stance.

News over the weekend that China's producer prices fell 5.4% from a year ago got the chins wagging. Norway reported a 6.6% decline in producer prices for July today. China's producer price deflation is 3.45 years old. Norway's PPI deflation first emerged last July. Consumer prices eased to 1.8% from a year ago, down from 2.6% in June. This is seen more important than the PPI in driving monetary policy. The next important release is Q2 GDP on August 20. The Norges Bank does not meet until September 24.

Sweden disappointed with a 1.0% drop in industrial output for June, and the May series was revised to -0.3% from -0.1%. However, the fact that the orders data fared considerable better helped the krona outperform Norway's krone. Industrial orders rose 2.5%, and the May series was revised to show a 1.0% gain rather than a 0.2% decline that was initially reported.