The US dollar and sterling have stabilized after being sold off yesterday.
The yen, which had begun recovering from a four-month low, is the strongest of
the major currencies today, gaining around 0.5% against the dollar
(@~JPY113.40).
Global bond yields are softer.
The BOJ stepped up its purchases of three-five year bonds to JPY330 bln from
JPY300 bln, though kept its other purchases unchanged. The market
responded accordingly and took Japanese rates lower. With a backdrop of softer global rates, it may not be a clean test
of the market's reaction function. The price action reinforces the
importance of the 2.40%-2.42% threshold for the US 10-year Treasury
yield.
Most accounts appear to be giving the email's of US President Trump's son
central role to yesterday's dollar slide that saw the euro rise to new highs
for the year. While there could be broad medium term political
implications but perhaps the most important considerations was the obvious
distraction to the economic agenda. At the same time, there are a
couple of other factors at work as well.
The Federal Reserve Board of Governors has four of the seven seats
filled. Brainard's cautious stance must be
taken seriously. At the same time, her
willingness to begin allowing the balance sheet to shrink illustrates a point
we continue to make. A consensus on reducing the balance sheet appears to
have been achieved, while a consensus on
the next rate hike has not crystallized.
Yellen's testimony beginning today is one of the highlights of the
week. However, it may be too much to expect her to break new
ground. Not much new is known since
the mid-June press conference. At most, she will put more flesh on the
bones, and explain to the representatives, who are not economic or financial
experts the trajectory of policy and the nuances of the balance sheet, and Phillip's Curve.
Also, the Senate is making a new
attempt on health care. The new
measure no longer repeals two taxes on high income earners, worth about $230
bln over a decade. The funds can be used to finance other parts of the reform
that will address some of the previous objections. The bill is reportedly
going to go to the CBO for scoring. The Senate leadership will then
present the bill tomorrow, according to press reports. A procedural vote
could happen as early as next week. There has also been a two-week delay
in the summer recess, which now won't begin until mid-August.
The eurozone reported a strong
aggregate rise in industrial output in May. The four largest
economies had already reported national figures, so what appears to be an
overshoot may be less than meets the eye. It rose 1.3% on the month; the April rise was shaved to 0.3% from 0.5%. Nevertheless,
the year-over-year pace rose to 4.0% from a revised 1.2%, which is the fastest
since 2011. The ECB meets next week. We expect a small
tweak in the forward guidance to remove the risk that asset purchases can be increased if necessary.
The UK's labor report had something for everyone. The
unemployment rate ticked down to a new generational low of 4.5% from
4.6%. The three-month change in employment rose to 175k. The median
forecast was for the 120k increase.
The claimant count increased by 6k after a 7.5k increase in May. Even
earnings were mixed. At the headline level, they rose 1.8% in the
three-months year-over-year period, down from 2.1% in April and in line with expectations. Excluding
bonuses, the pace was a bit stronger than expected at 2.0%, up from a revised
1.8% in April (from 1.7%).
Sterling recovered fully from its earlier losses in response to the
employment data. The earlier losses had knocked sterling to almost $1.2810, extending
yesterday's drop. Although the BOE's Deputy Governor Broadbent did not
address his monetary policy views directly in yesterday's speech, in a
newspaper interview, he did. He was
clear. He is not ready to endorse a rate hike, though recognizes
pressures may be building. Broadbent seemed particularly sensitive to the
high degree of uncertainty or what he called "imponderables."
The euro made a new high for the year against sterling today near GBP0.8950 but has reversed course and is returned to GBP0.8900 in late European
morning turnover. Given yesterday's big outside day and the follow
through gains earlier, we suspect participants will be more inclined to buy the
euro on dips. A move to GBP0.8860-GBP0.8880 may be seen as such a dip.
The Bank of Canada is widely expected to raise rates by 25 bp today.
Senior officials appear to have engaged in a month-long campaign to prepare the
market. Many observers are trying to assess what changed for officials
that they have been aggressive in pushing from easing rise at the beginning of
the year to neutral at the start of Q2 to a sense of urgency now.
We see many considerations pushing in the same direction, including a
judgment that the risks emanating from the US had appeared to lessen.
US growth was not as poor in Q1 as it had initially appeared, and the rhetoric
and threat of a trade war also seemed to diminish. Also,
there does appear to be a synchronous expansion underway, reducing the global
risks. And all this in a backdrop of stronger Canadian economic data and
the likelihood that the output gap is closed
sooner than previously projected.
After posting strong gains at the end of last week after the employment
data removed the last potential obstacle (some thought) to today's rate hike,
the Canadian dollar has been sold a bit so far this week and is off about 0.4%.
That makes it the second worst major performer this week behind the New Zealand
dollar, which is off 0.65%. We also note that speculators in the futures
market are net short Canadian dollars but net long the Australian and New
Zealand dollars. That said, the Canadian dollar has come a long way over
the past two months (~6.5%), and the
technical indicators warn that while there may be another test higher, the risk
is for a deeper correction that lifts the greenback the CAD1.3000-CAD1.3020
area.
Disclaimer
Currencies Stabilize, but Yen Strengthens
Reviewed by Marc Chandler
on
July 12, 2017
Rating: