The US dollar is posting gains across the board. It has risen above JPY103 to its best level since early April. The euro has been pushed through the $1.33 and is at its lowest level since last September. The greenback is also edging higher against the dollar-bloc and most emerging market currencies.
Sterling is the main exception. It also had been under pressure, slipping to $1.6600, but two dissents in favor of an immediate rate hike at this month's MPC meeting sent sterling quickly higher (~$1.6680), before sellers re-emerged. The dissents came from the MPC's external members Weale and McCafferty. There had been some speculation of 1-2 dissents, though we were skeptical.
UK interest rates rose a few basis points across the curve, and this lent sterling support. However, data out since the MPC meeting indicates, coupled with the tone of the minutes, ensures Weale and McCafferty stay in the minority. In the minutes, the majority resisted the call for an immediate rate hike, concluding that an early rate hike would leave the UK vulnerable to fresh shocks. Moreover, since the MPC meeting, policy makers and investors have learned that average earnings on a year-over-year basis turned negative, and consumer inflation was 0.3% lower than the BOE had forecast.
That said, the market may not be done adjusting positions in sterling. The BOE is still expected to be the first of the major central banks to hike rates. And strength in upcoming data, including tomorrow's July retail sales report (expected to have risen 0.4% after softness in the May and June reports), could allow sterling to recover. The $1.6680, today's high, corresponds to the 200-day moving average. Above there, there is potential $1.6720 initially.
The strongest rise in US housing starts in a year, paced by the largest rise in multi-family dwellings since 2006, barely managed to lift the US 10-year yield to 2.40%. Nevertheless, the dollar remained firmed against the yen, and it was the disappointing Japanese trade figures that helped lift the greenback above the JPY103 threshold to reach JPY103.35 in the European morning. When adjusted for seasonal variation or not, Japan's trade shortfall was larger than expected. On an adjusted basis, the July deficit was over JPY1 trillion for the second month in a row, after snapping a streak of over JPY1 trillion deficit in April and May, that went back to last September.
Of note, the main culprit was not weak exports. In fact, exports rose 3.9% from a year ago, which was slightly better than expected, and the June decline was revised to -1.9% from 2.0%. However, imports were stronger than expected. The market had anticipated a decline of 1.5% after the 8.4% surge in June. Instead, imports rose 2.3%.
The yen's weakness is a bit surprising as the drivers are not what we have become accustomed to. Not only are Treasury yields soft, but the stock markets are not maintaining the momentum seen last week and the first part of this week. The Nikkei managed to eke out a small gain (0.03%), but European bourses are mostly lower, and the S&P is trading off in electronic trading. April's high near JPY104.15 is the initial technical target of the breakout.
Once the euro broke the shelf near $1.3330 yesterday, on the back of the US housing starts data (that may be positive for Q2 GDP revisions due next week, and positive for Q3 GDP), the euro has not looked back. It has fallen to $1.3275 in the European morning and showed no penchant for bouncing. Yesterday, we suggest that just such a break would target $1.3230. This still seems like the reasonable near-term target.
Reserve Bank of Australia Governor Stevens may have been talking before parliament, but he was addressing international investors. His rhetoric was strong but did not really break new ground. The markets were continuing to under-estimate the downside risks to the Australian dollar. Yet, given how long Stevens has been maintaining this stance, it might be the central bank that continues under-estimate the resilience of the Australian dollar. Indeed, Stevens' admission that intervention is unlikely to be effective under current conditions means that there is little the RBA is prepared to do to enforce its assessment.
The Australian dollar posted an outside down day yesterday (trading on both sides of Monday's range and closing the North American session below Monday's low), and there has been follow through selling today. The immediate target is the recent low in the $0.9240-50 area, but the lower end of the five-month trading range is found near $0.9200.
The main feature of the North American session will be the release of the FOMC minutes from last month's meeting. The minutes tend to reflect a wider range of opinion that the FOMC statement. There was likely more discussion about what happens after the tapering is over, and it will be over in October. The timing of the first rate hike is not the key focus for policy makers, but how will the excess reserves be addressed and with what instruments. The debate continues, and we expect greater clarity in the September minutes. The Jackson Hole confab starts tomorrow. Draghi and Yellen speak on Friday.
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