Dollar Dumped on Doubts on US Economic Agenda

News of the defection of two more Republican Senators doomed the Senate
attempt to replace and repeal America’s national health care.
  The failure to replace the system dubbed
Obamacare, despite the Republican majority in both legislative chambers and the
executive branch raises questions about the broader strategy of the Administration and raises serious questions about the rest of its legislative

The US dollar was already trending lower against most of the major currencies, and the losses had accelerated
following disappointing news on retail sales and uninspiring CPI. 

News of the failure of the Senate’s effort saw the greenback take another leg
lower in early Asia, for which it has not been able to

Sterling is the main exceptions.  At $1.3025, it is off about
0.25% on the day.  It had been participating in the broad move against the dollar, rising to new highs
since last September (~$1.3125), until
news of softer than expected UK inflation sent it down a little more than a
cent.    Judging from derivative prices, investors never took seriously the possibility of a rate hike at the
next BOE meeting (August 3), but the softer CPI figures further reduced the
perceived odds of a rate hike in H1 18.    

Sterling is posting a potential key reversal by making a new high for the
move and then selling off through the previous day’s low. 
A close
below that low (~$1.3050) would complete the one-day reversal and point to
losses that could carry sterling toward
$1.2930 initially.    Resistance in the North American session
will likely be encountered in the
$1.3050-$1.3060 area.   There is a $1.3050 option strike for nearly
GBP220 mln that expires today. 

UK consumer prices were flat in June,
and this saw the year-over-year rate slow to 2.6% from 2.9%.  Most
expected an unchanged pace.
  The BOE’s new preferred measure, CPIH
eased to 2.6% from 2.7%.  Core inflation slowed to 2.4% from 2.6%. 
It is the first drop in the
year-over-year headline rate since last October.    While we
suspect that the UK price pressures are near a peak, we wonder if today’s data is exaggerated by seasonal developments
In particular, we note that clothing and footwear prices fell 1.0%.  This looks like summer discounting.  


While sterling is the weakest of
the majors, the Australian dollar is the strongest, gaining 1.6% on the back of
the weaker US dollar, a 5.7% surge in iron ore prices (highest since early
May), and minutes from the RBA meeting whose overall tone was optimistic on the
economy and wages.
  The Australian dollar is at two-year highs and is racing toward $0.8000 and the 2015
high near $0.8165.   A note of caution comes from the fact that the
surge in the Australian dollar has pushed it above its upper Bollinger Band
(two standard deviations above the 20-day moving average) found near
$0.7855).  Indeed the Aussie is closer to three standard deviations above
the 20-day moving average (~$0.7955).  

News that Germany’s ZEW survey weakened more than expected in July has been lost in the US dollar drop.  The
investor sentiment survey is not often a market mover, but today’s response was
barely noticeable.  The assessment of the current situation eased to 86.4
from 88.0, which is still highly elevated.  The expectations component
eased to 17.5 from 18.6.  It is the second consecutive decline, something
not seen since the start of last year.  

The euro took a step higher, through $1.1500 and toward $1.1540 on news from the US Senate.  It then
consolidated before taking another leg higher late in the European morning that
carried it to nearly $1.1560.  The next immediate target is $1.1615, last
year’s high, and then the August 2015 high near $1.1715.  For the record,
the upper Bollinger Band is found near $1.1585 today.  

Ahead of Thursday’s ECB meeting, where Draghi is expected to repeat his
assessment that inflation is not yet on a sustainable and durable path toward
its target, European bonds are unwinding more of the mini-taper tantrum.
Peripheral yields are off 4-5 bp, while the core bonds yields are a couple of basis points lower.   
US 10-year yields are lower for the third
day running and for the sixth time in the past seven sessions.  

The fall in yields is helping the yen recover.  Recall that from
around the middle of June (the day of the FOMC meeting)  to almost the
middle of the July, the dollar rose 5.25% against the yen to reached nearly JPY114.50
a week ago.  Today the greenback traded at its lowest level since July 3
at JPY112.00.   The JPY111.65 is the 50% retracement of the recent advance
and JPY111 is the 61.8% retracement.  There are $850 mln options struck at JPY112.25 that expire today can
influence the price action.   

The US economic calendar features import and export prices and at the
close the May TIC data.
The political implication of the health care reform
failure is the main consideration today. The political developments take
place amid skepticism over the trajectory of monetary policy in light of the
poor data.  Market participants were
still digesting Yellen’s testimony before Congress last week.  Many
observers heard her more dovish than we
did, and note that the cleanest read of
her impact on policy expectations was to be found in the unchanged Fed funds futures
rather than the softening yield at the long-end.  We do not think that she
opened the door to a pause in September.  That door was already open as
very few participants expected a hike then.  Yellen did not break fresh
ground in her testimony and even referred to the FOMC’s statement regarding
monitoring inflation. 


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