Dollar Begins Important Week on Softer Note

<br /> Dollar Begins Important Week on Softer Note – Marc to Market<br />




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The US dollar, which finished last week on
a firm note, is under pressure to start the new week that features Bank of
Japan and Federal Reserve meetings. 
 The slighter stronger August CPI
reading helped lift the greenback ahead of the weekend, but investors continue
to see a low probability of a Fed hike
this week.  
Global equities
are moving higher, shrugging off the decline in the US markets at the end of
last week. 
 With Japanese markets closed for
holiday, the MSCI Asia-Pacific Index, excluding Japan advanced 1.2%, its
biggest gain in two weeks, and the third consecutive gain.  Taiwan’s bourse, which had been closed since last Wednesday, rallied 2.8%, in a catch-up and
as investors played the Apple suppliers’ card.   
European
equities are higher, with the Dow Jones Stoxx 600 up one percent in
late-morning turnover.  
All sectors are advancing, but the energy, utilities, and materials are leading the way. Financials are
matching the market.   Disruption in Libya is helping lift oil prices, and
there is some lingering hope of an agreement between producers.   Brent is
up about 1.25%, recouping most of its pre-weekend decline.  WTI is up about
1.5%.  Meanwhile, benchmark 10-year sovereign yields are mostly slightly
firmer, though Spain and Italy are a touch softer.  
Bombs found in
New York City and two New Jersey cities
understandably has raised anxiety. 
Authorities have claimed that there is no
evidence of international linkages.   The market impact looks minimal.
 
There were two
other developments over the weekend.
  First, Merkel’s CDU may have seen
its support sufficient erode in Berlin that it may not longer be part of a
coalition government with the SPD.  Both of these two main parties saw
their vote share drop about five percentage points from the previous election
in 2011.  However, with 23% of the vote, the SPD is still the single
largest party. There is talk that the SPD may chose to form a coalition with
the Greens and Left Party, both of whom got about 16.5% of the vote.
 Until now the SPD has been reluctant to invite the Left into a coalition.
 
The AfD, came
in fifth place, with about a 14% share. 
 However, that will suffice for it to
enter its tenth (of 16) state parliaments.  Nearly half of the AfD voters
had previously voted for other minority parties.  A quarter of AfD voters previously voted for the CDU.  The
refugee/immigrant issue was critical for nearly three-quarters of the voters.  The head of the Bavaria’s CSU
Seehofer indicated that a cap on immigration will be necessary if the party is
going to support Merkel for a fourth term. Merkel has resisted and has not
indicated whether she will stand for election.  She is ultimately expected
to do so, but a formal decision is unlikely until into next year.  
The other
development was the EU Summit.
  Three aspects caught our attention.
 First, Italy’s Renzi who faces a crucial referendum later this year, took
a strident stand, refusing to share press conference with Merkel and Hollande
to express frustration over the demands for austerity.  His willingness to
stand up to Merkel (and Hollande) may be
directed as his domestic audience.  Similarly, Merkel and
Hollande’s positions also seem to be a function of domestic political considerations as much as principle.  
Second,
officials indicated that new proposals on the direction of the EU will be ready
by the March 2017 summit. 
 It is here that Merkel may reach a
compromise on immigration.  Third, European Council President Tusk was
quoted indicating that the UK’s May suggested her government would likely be
ready to begin formal divorce negotiations in January-February next year.
 This is largely in line with
earlier suggests that Article 50 would be
invoked in Q1 17. 
The dollar-bloc
is leading the move against the US dollar today.
  News that Australia raised A$9.7 bln
in a 50-year lease of its largest port to global investors has helped the
Australian dollar advanced 0.75%.
 It is approaching the $0.7555-$0.7575 area that houses a retracement
objective, the 20-day moving average, and last week’s highs.   The Reserve
Bank of New Zealand meets this week and is not expected to change policy.
 The New Zealand dollar is underpinned by it interest rates and milk
prices, which are near the year’s high ahead of Tuesday’s auction.  
The Canadian
dollar seems to like the higher oil prices and the advance in equities.
   It has recouped its pre-weekend
losses.  Higher oil prices also seem
to be lending support to the Mexican peso, which had been sold to record lows
ahead of the weekend.   An advance today would snap a three-day losing
streak.  Last week, the US dollar seemed to climb alongside the five-day
moving average.  It is found near MXN19.37 today. 
The euro and
sterling are trading in the lower end of their pre-weekend ranges.
  The euro meets initial resistance
near $1.1180, and sterling may encounter new offers near $1.31.  The dollar has
edged below its pre-weekend low against the yen to test initial support at
JPY101.70.  Below there, we anticipate support (demand for dollars) in the
JPY101.20-JPY101.40 area.  
As we noted,
the dollar has strengthened against the euro and yen on the past five Friday’s. 
 The euro has fallen on three of the four Mondays.
 Today is the fifth.  The dollar’s performance on Monday’s against
the yen is split.  The Aussie has
fallen in six of the past seven Fridays.  It typically has moved higher on
Monday’s (five of the six), as it is today, the seventh Monday in this period.
 
No important data is set to be released from
either the US or Canada today. 
 We expect a relatively quiet North
American session, as investors await the BOJ and FOMC meetings this week.
 There is greater uncertainty surrounding the BOJ meeting than the Fed.
 Bloomberg’s calculations, based on the Fed funds futures, puts the odds
at one in five that the Fed hikes.  My own
calculation is more in line with the CME’s of 12%.  

Disclaimer


Dollar Begins Important Week on Softer Note
Dollar Begins Important Week on Softer Note

Reviewed by Marc Chandler
on

September 19, 2016


Rating: 5

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