Dollar Edges Higher, though US Rates Soften

The US dollar is firm, and the euro
has slipped below $1.10 for the first time since late-July. 
Although the dollar’s gains against nearly all the major and emerging market
currencies are being attributed to the FOMC minutes, which underscored ideas that
another hike was drawing near, US interest rates are a lower today.  Both
the two and 10-year yields yesterday rose to their highest levels in four
months (87 bp and 1.80% respectively).  Both are now 2-3 bp

The FOMC minutes suggested that understandings of the labor market were a critical issue that divided
Yesterday’s JOLTS data in this context was not particularly
helpful, though it is reported with an
additional month lag behind the non-farm payrolls.  The August JOLTS
report showed the biggest drop in job openings year. The takeaway was healthy but slower.   The decision to
include a risk assessment for the first time since January in the FOMC
statement coupled with the minutes underline that debate at the Fed is over the
timing of the move, not direction.  

Meanwhile, the main news today has been China’s trade balance. 
The $42 bln surplus was much smaller than the market had expected.  The
median forecast from the Bloomberg survey was $53 bln, which would have been a
small increase from August’s $52 bln surplus.  It is the smallest surplus
since the Lunar New Year distortions that saw the trade surplus fall to $32.5
bln and $29.6 bln in February and March.  

Imports and exports were weaker than expected, and this plays on ideas
that the Chinese economy is continuing to slow though other data has shown it
is stabilizing.
  Exports fell 10% after falling 2.8% in August. 
Some deterioration was expected, but only
about a third of what was reported
Imports fell 1.9% after rising 1.5% in August.   Of note, exports to
the EU fell 9.8%, and exports to the UK
fell 10.8%.  China may be more exposed to Brexit than generally perceived.   Exports to the
US fell 8.1%.  Steel exports fell for the third month to stand at their
lowest levels since February.  

Among imports, two products stand out.  First, as a new
strategic reserve site went online, China‘s crude oil imports reached a new record
high.  Second, China’s copper imports fell for the sixth month to the
lowest level since February 2015.  Demand slowed,
and domestic output increased.  Domestic smelters increased output by 8.7%
to a new record (5.5 mln tons) in the year through August.  

Investors have turned cautious.  Equities continue to slip
lower.  The MSCI Asia-Pacific Index is off 0.7% for its fifth consecutive
decline.  The losing streak matches last month’s May and April’s
run.  Recall it started the year with a seven-session slide.  MSCI
Emerging Market equities are off 1.1%, for the third consecutive losing

The Dow Jones Stoxx 600 is off 0.8%.  It is the third day of
declines and the sixth of the past seven sessions.  The weakest sector is
financials, which are down twice the overall market.   Deutsche Bank
shares are off 2.55%, which is the biggest loss this month and is sufficient to push shares lower on the week.  The
losses come as the SEC fined the bank another $9.5 mln for failing to properly
safeguard non-public information, while reports suggest the bank has
implemented an immediate hiring freeze.  Italy’s bank share index is off

The euro held above $1.10 in Asia after it was approached in North
America yesterday.
  European participants took it to $1.0985 before
the single currency found a bid.   The $1.1040-$1.1060 offer the initial cap.  The dollar initially traded at its
best level against the yen since late-July near JPY104.65.  However, it
was sold down a big figure to JPY103.55 in Asia.  It has straddled the
JPY104 level in the European morning.   The yen’s 0.25% gain makes
its the strongest of the major today.  

Sterling is consolidating its losses but remains fragile.  The
$1.2090 low from Tuesday continues to hold. The wide ranges seen since the
flash crash” at the end of
last week may be gradually easing.  So far today, sterling has been
confined to about 0.8 cents.  Yesterday’s range was a little more than two
cents.  Sterling is struggling to sustain upticks above $1.2200. 
Above there, sellers may re-emerge near $1.2250. 

The Australian dollar is the weakest of the majors today, with a 0.25%
loss through the European morning.  
The Chinese trade figures, 
news that October inflation expectations ticked up to 3.7% from 3.3%, matching
the high for the year, and Fitch’s warning that a housing slump is the biggest
risk saw the Australian dollar near $0.7500.  Buyer emerged in late-Asian activity, and Europe took it back through
$0.7540.   The Aussie has pulled away from the $0.7700 cap that it
had repeatedly tested in vain.    It may have bottomed here
today (near-term view).  A move above $0.7585-$0.7625 band would spur another test on the

The US reports import prices and initial jobless claims.  Import
prices are expected to firm in August,
and a rise of more than 0.2% may warn of bigger than expected rise in
tomorrow’s PPI reading.  That said, the retail sales report tomorrow,
released at the same time as the PPI, is the most important of the two

Weekly jobless claims were lower than expected last week, but it is next
week[‘s report that coincides with the monthly survey for non-farm payrolls.
  The Fed’s Harker and Kashkari
speak, but here too, tomorrow’s event, namely,  Yellen’s speech at a
Boston Fed conference, overshadows the regional Fed Presidents.  


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