Dollar Edges Higher, While Equities Trade Heavily to Start the New Week

The US dollar is mostly firmer against most of
the major and emerging market currencies.
The main impetus appears to be
some position adjustment emanating from equities. The equity markets turned
south in the second half of last week and are moving lower today. Foreign
investors appeared to have sold around $100 bln of European equities in 2016
and bought around a third back this year.   

The Dow Jones Stoxx 600 is off around 0.25%
today. It could be the second three-day drop this month. 
benchmark of European shares peaked three months ago and fell 6.3% through
August 11.  It bounced in the first
part of last week, but, after gapping lower before the weekend is back near the
recent lows.  

The euro peaked August 2 a little above $1.1900. 
Last Thursday marked the low a little ahead of $1.1660.  The euro has been confined to
a third of a cent range in Asia and the European
morning.   With a light events schedule and the focus on Jackson
Hole, participants seem content to tread water.  The 20-day moving average
that served as support now is acting as resistance.  It is found near $1.1770.  

The MSCI Asia Pacific Index fell for the second day
This two-day decline (~0.5%) broke
a four-day advance
.  This
regional benchmark gapped lower before the weekend
and spent today’s session inside the previous day.  While most markets in Asia were lower, the Greater
China markets (Shanghai, Shenzhen, Hong Kong, and Taiwan) all advance.
Nearly every other market fell, with Thailand ((~0.2%) an exception, perhaps
aided by the better than expected Q@ GDP (1.3% vs.
1.0% median forecast).  While there is a strong correlation (~0.76,
60-days, percentage change basis)  between the MSCI Asia Pacific Index and
the MSCI Emerging Market Index, the latter
is posting a small (~0.2%) gain so far today.  

That said, EPFR reported that emerging market
equity funds saw the first net liquidation in several months and the largest of
the year. 
This fund tracker says that $1.6 bln left emerging market
equity funds in the week ending August 16.  It also said that investors
liquidated $79 mln in emerging market fixed income funds, the first time since

The main focus this week is on the central
bank gather at the end of the week in Jackson Hole.
  We do not expect
much light to be shed on current policy
debates either in the US or Europe. 
The topic at hand “Fostering a Dynamic Global Economy,” lends itself
to a broader discussion of structural forces.  Draghi champions structural
reforms in the EMU, while Yellen has argued in favor of increasing
participation, especially women, in the labor market.   

Meanwhile,  US-South Korean military
exercises start to and run a couple of weeks. 
Although they have long
been scheduled, and is a bit of an annual event, in the current content, they may be provocative.  Last
year, North Korea launched a ballistic missile from a submarine, demonstrating
the difficulty in denying it a second strike capability.  Korean shares
fell 0.15% for the second day, though the Korean won’s 0.2% advance leads the regional currencies higher
today.  It has been alternating between gains and losses daily for the
past week.  

Lower bonds yields and heavier shares may be
helping underpin the yen today. 
The dollar is in half a yen range, after closing last week near JPY109.20. 
It leaves the greenback pinned near the lower end of the five-month
range.  While the yen is the strongest of the majors, the Swiss franc is
the weakest (~-0.25%).  The euro peaked near CHF1.1550 on August 4 and has
built a little shelf now near CHF1.1260.  Given the volatility, rates, and
our subjective assessment of the likely actions by the central banks, we have
suggested that the Swiss franc may be a preferable funding vehicle compared
with the Japanese yen. 

Sterling is holding its own today.  Some profit-taking on the
euro-sterling cross seems to be the main impetus behind cable’s mostly steady
tone.  The UK is to submit several new position papers on Brexit this
week.  However, it is still at loggerheads
with the EU, and in our assessment, the EU holds the most important cards
now.  Reports suggest the UK is still trying to drive the process and
hopes that the EU’s negotiating position changes after the German election if the FDP rather than the SPD is part
of the governing coalition.    This
does not strike as as particularly
realistic and time continues to tick down.   

The economic calendar in North America is
light today.
   There are euro options struck at $1.17 and $1.18
that expire today, but are not relevant it seems.  There are $410 mln
struck at JPY109 and $600 mln
struck at JPY109.50 that could be in play.  There are GBP550 mln options
struck at $1.28 but are not likely to be
in play.  


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