Dollar Pullback Extended

The US dollar’s advance faltered before the weekend after rise average hourly earnings and a new cyclical low
in unemployment and underemployment initially fueled greenback buying.
There is no doubt the data was skewed by the storms, though the upward revision
to the August hourly early cannot be attributed
to the weather distortions.   The reversal in the dollar before the weekend has carried over into the early
trading this week.  Even the Turkish lira, which had been battered
yesterday amid a diplomatic squabble with the US, is firmer today, though there
is no resolution at hand.  

 The dollar reached a high at the end of last week nearJPY113.45, a
nearly three-month high, before reversing and finishing on it lows before the
weekend nearJPY112.65. 
It dipped below JPY112.35 yesterday and is
trading near there now.   Support is
seen near JPY111.75.  The main driver of the dollar-yen exchange
rate continues to be US Treasury yields.  The yield on the 10-year note is
nearly six basis points below the pre-weekend peak of 2.40%, which is the upper
end of the six-month range.  

Meanwhile, the momentum behind the “Party of Hope” has begun
The party is not running sufficient candidates unseat the LDP, and
a new party, formed from the rump of the Democratic Party of Japan,
called the Constitutional Democratic Party, led by former Cabinet Secretary
Edano is attracting support.  The takeaway is that although there may be an underlying desire for an alternative, it
will not be satisfied in the upcoming election.   

At the same time, a new corporate scandal has exploded in Japan. 
One of the largest metal producers admitted to falsifying reports of the
strength of a durability of its aluminum and copper products that are used for aircraft and autos.  Kobe
Steel lost more than a fifth of its value today.  The Topix gained nearly
0.5% to reach a fresh two-year high.  Separately, the August current
account was considerably larger than expected.  This reflects not only the trade account and tourism but more importantly, the income from overseas investments. The current account
surplus of JPY2.38 trillion compares with a surplus of JPY1.97 trillion in
August 2016.  

In the UK, May’s contingency for Brexit without an agreement won praise
from her hard Brexit wing, at the same time as she recognized a role for the
European Court of Justice in a transition phase. 
Brexit wrestles with the outlook for UK
monetary policy as a driver for sterling.  Last week, sterling’s drop was
a function of politics as the expectations for a hike in November were little
changed.  This week, the estimates of high unit labor costs (lower
productivity), and today’s news of stronger industrial output (0.2%), and especially
manufacturing (0.4%), with a recovery in construction (0.6%) helped keep
sterling’s recovery intact.  

Separately, note that the UK’s trade account continues to deteriorate. 
The visible trade balance (goods) widened to GBP14.245 bln.  It had been
averaging GBP11.22 bln this year, and August is the fourth consecutive month of
deterioration. The overall trade deficit widened to GBP5.63 bln from GBP4.24
bln.  The August shortfall is twice as large as the year’s average before today’s report.  

Sterling had neared $1.30 before the weekend and is pushing through $1.32
in late morning turnover in London.
  There is potential now toward
$1.3250-$1.3270.  Support is pegged initially around $1.3160.  

The euro is also enjoying a firmer tone.  It is trading above $1.18 for the first time since
October 2.    The euro is higher for
the third session after recovering following the US jobs data before the
weekend.  It is the fourth advancing session in the last five. 
Initial support is seen in the $1.1750
area.  The price action appears corrective.  Recall the euro peaked a
month ago just shy of $1.21.  It fell more than a 4.5 cents at last week’s
lows.  Initial resistance is seen in
the $1.1830 area.  

Catalonia’s President Puigdemont is slated to speak to the regional
parliament early evening (early afternoon EST). 
Talk is that he made trying to square the circle and talk about a
“gradual independence,” but
without a parliamentary vote, its legal meaning is not clear.  The
challenge for the Catalonians is to turn the constitutional crisis into a
government crisis.  Rajoy heads up a minority government that can be toppled with a vote of confidence.  This requires allies in the form of the
Socialists, Podemos, the Catalonia, and the Basque Nationalists.  

Ahead of tomorrow’s EMU industrial production report, Germany reported a
2.6% surge yesterday, and Italy followed suit today
.  Italy’s 1.2%
gain was well above expectations, and the
year-over-year pace (workday adjusted )
rose to 5.7% from an upwardly revised 4.6% in July (from 4.4%).  France,
on the other hand, disappointed.  Industrial and manufacturing output fell
0.3% and 0.4% respectively in August.  

The Bloomberg median forecast had expected a 0.4% rise in industrial
Industrial output for the region is expected to have risen 0.6%, and the strength of Germany and Italy
offsets the negative surprise from France.   Separately, German
reported a slightly larger than expected
August trade balance (20 bln euros), helped by a 3.1% rise in exports (after a
0.2% rise in July) and a 1.2% rise in imports (2.4% in July).  

The North American session features Canada’s housing starts and permits
(looks for softer numbers), and speeches by Fed Presidents Kashkari and Kaplan. 

The annual meetings of the IMF and World Bank also kick-off.  The key US data, consumer price inflation and
retail sales, will be reported at the end of the week and the storms will
likely skew both reports to the upside.  


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