The US dollar is generally firm, though gains against the antipodeans and sterling are somewhat larger. These were the currencies that had been the strongest last week and the stalling of the upside momentum, rather than fresh fundamental developments appear to be the major catalyst.
The euro posted an outside down day yesterday (trading on both sides of Friday's trading range and closing the North American session below Friday's low), but there has been no follow through (yet) today despite the disappointing details of the German IFO survey. The headline edged higher for the fifth consecutive month, to 107.7 from 107.6, but fell shy of the consensus forecast of 108.2. This was a function of an increase in expectations, but a decline in the current assessment.
There has been much ink spilled on ECB Draghi's comments yesterday, but we do not think he broke fresh ground. That the ECB is prepared to do more if needed, including another LTRO, has been said before. We suspect if a new LTRO is in fact offered, it is at the end of the year at the earliest, and more likely in Q1 2014. Draghi also seemed to play down a tight link between money market rates and the 200 bln euro excess liquidity, which many, including ourselves, have expressed concern over. Draghi's position, though, is no news either. That said, EONIA reached a two and a half week high yesterday and observers are noting the recent acceleration of LTRO repayments.
In the US, the Fed's Fisher and Dudley were also true to form. Fisher is rightly seen on the hawkish wing of the Federal Reserve. He has long called for tapering and the end of QE at the earlier possible moment. He argued in favor of tapering, but has not voted on the FOMC this year. Dudley, the NY Fed President and Vice Chairman of the FOMC, favored maintaining the current pace of purchases on the grounds outlined by Bernanke last week: that the economy had not yet shown the strength needed, while measured inflation remains below the Fed's target. While sounding dovish, Dudley kept to the Fed's position that tapering was still possible before the end of the year.
Today, the Fed's George and Pianalto speak. George has been dissenting from FOMC decisions on hawkish grounds. We should expect more of the same. The point, though, is she is in a minority of one and does not speak for the Fed. Pianalto may be more interesting. She was due to rotate onto the FOMC as a voting member next year, but has indicated she is stepping down, making her a bit of a lame duck and her views somewhat less significant.
Some market participants and some Fed officials themselves, like Fisher, have expressed concern about the Fed's credibility in the Fed's decision last week not to taper. This is a strong claim, especially given that surveys before the event were fairly consistent, showing a full third of the market did not expect the Fed to taper in September. Strong claims need strong evidence. Market-based indicators do not seem to confirm such claims. The bullish flattening (i.e., yields across the curve have fallen with the long-end yields falling more than the short-end yields) is not consistent with such claims. In addition, the dollar's sharp knee-jerk losses are being retraced. The euro, for example, has retraced more than a third of those gains and sterling has retraced about two-thirds.
The Treasury seeks to raise funds today via a $33 bln auction of two-year notes (followed by a 5-year auction on Wednesday and a 7-year sale on Thursday). The results will be closely watched, but the context is not just shaped by Fed policy, but also the fiscal morass.
One of the reasons Bernanke cited for not tapering was the fiscal headwinds. Indeed, the debate on continuing resolution is going to be a cliff hanger. The Senate is almost certain to put the bill, stripped of the effort to defund the healthcare reforms, which begin going into effect October 1 no matter what Congress does at this juncture. However, this may not be done until late in the week and possibly over the weekend. Eventually, a couple dozen Republicans in the House will join the lion's share of Democrats to approve a continuing resolution.
In addition to the Fed speakers and the Treasury auction, the CaseShiller home price index, the Richmond Fed survey and Conference Board's measure of consumer confidence will be reported. None of these are typically market movers. Canada reports July retail sales. The consensus expect a 0.5% rise after a 0.6% decline in June. The US dollar strengthened against the Canadian dollar following the FOMC meeting. It appeared to run out of steam yesterday near CAD1.0320. We look for near-term consolidation.