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The U.S. dollar has continued to recover against most of the major currencies in the aftermath of the FOMC minutes. We continue to believe that an objective reading of the minutes fails to shed fresh light on the precise timing of the Fed's tapering.

The rejection of George's proposal to provide a clearer indication of tapering sooner rather than later, suggests the Fed does not want to be boxed into a corner. Moreover, even if the Fed does taper next month, the market is still vulnerable to disappointment over the size of the adjustment. In addition, interpolating from the curve and forward-forward rates, a fair value model suggests the market is quite rich now.

There have been five other developments to note since the FOMC minutes: China's preliminary (HSBC) PMI, Japan's weekly portfolio flows, euro area PMI, Swedish employment, and the ongoing pressure on many emerging markets.

1. HSBC's preliminary estimate of August manufacturing PMI rose to 50.1 from the 11-month low in July of 47.9. The official measure had been pointing to a recovery and now the HSBC one appears to be playing catch-up. Of note, the new orders component is at a 4-month high (though new export orders slipped).

2. Japan's weekly portfolio flows showed a reversal to the recent pattern. Foreign investors bought Japanese shares for the first time in four weeks in small size (JPY47.9 bln) and continued to buy Japanese bonds (JPY38.7 bln). The largest move was into Japanese bills (JPY1.2 trillion), which may part of a larger structured trade. For their part, Japanese investors snapped a six-week buying spree of foreign bonds. They sold JPY904 bln, offsetting more than half of the sum purchased the previous week (JPY1.67 trillion). Japanese investors also sold a small amount of foreign shares (JPY3 bln) and bought a modest amount of foreign bills (JPY32.0 bln).

3. While the French flash PMIs were disappointing, Germany's were stronger and this helped lift the flash EMU readings. The French manufacturing PMI was unchanged at 49.7. The consensus had expected improvement toward 50.2. The service sector slipped to 47.7 from 48.6. The Markit compilers warned that the French economy may contract 0.3% here in Q3 after a surprise 0.5% expansion in Q2. Germany's manufacturing improved to 52.0 from 50.7 and the service sector improved to 52.4 from 51.3. This translates into the EMU composite of 51.7 from 50.5. This is the fourth consecutive monthly gain in the composite, which now stands at a two-year high.

4. Swedish unemployment appeared to plunge to 7.2% in July from 9.1% in June. However, the raw data is terribly distorted by seasonal patterns. When adjusted, the unemployment rate slipped to 7.8% from 7.9%. Nevertheless, the data and especially the contrast with Norway, has underpinned the krona against the dollar, euro and krone. After a weaker Q2 GDP preliminary figure, many were waiting for the details next month before drawing implications for monetary policy. The Riksbank remains on hold.

5. Pressure is still evident on the emerging markets as an asset class, even though the South African rand and some other emerging markets currencies have stabilized today. The MSCI Emerging Market Index is off about 5% today, but appears to be trying to recovery and is near the session highs as the Americas are about to open.

The global reflation story, which has been strengthened by the Chinese and euro area preliminary PMI reports, is seen not as EM-positive as may have been the case previously, but instead as encouraging a re-balancing of portfolios. Those countries with current account deficit are particularly vulnerable as are those countries that experienced strong inflows. One of the consequences of the pressure on EM currencies is that intervention to slow or smooth out adjustment involved selling Treasuries and U.S. dollars.

The U.S. session features the weekly initial jobless claims, which have fallen to new recovery lows. The flash PMI may draw some attention, but the data series is relatively new. The Jackson Hole confab may also attract some interest, but without Bernanke, Draghi, Carney, it may be devoid of much potential significance.

Source: Dollar Recovery Extended