Dollar Recovers into the Weekend

<br /> Dollar Recovers into the Weekend – Marc to Market<br />


The US dollar is trading firmly ahead of the weekend as part of
this week’s losses are recouped. The
gains are sufficient to put it higher for the week against the Australian
 If its gains against the Aussie are sustained, it would be only the second
weekly gain since the end of May.  Although the news stream is light, the
Aussie has been undermined by the one of
the few developments today.  Moody’s cut the outlook for five Australian
banks from steady to negative, setting the stage for likely rating cuts in the coming months.  
The Australian
dollar nicked the $0.7600 level, but
buyers were found on the pullback.
  Resistance now is seen near $0.7650.
  The Aussie’s weakness and New
Zealand’s report that annual immigration fell for the first time in four years
took a toll on the Kiwi.  The New Zealand dollar is the second weakest
major currency this week against the US dollar, but its nearly 1% gain tells
you about how heavy the greenback has traded.  The New Zealand dollar is
trading within Wednesday’s range for the second consecutive session.  
The US dollar’s
break of CAD1.28 may be premature.
  It is bouncing back above there
today, ahead of the Canada’s retail sales and CPI reports, the main feature of
the North American session before the weekend.  Retail sales are expected
to have risen by 0.5% after a 0.2% increase in May.  A consensus reading
would mean that Canadian retail sales rose
each month in the quarter, which is something Canada has not experienced since
Q2 14.  Consumer prices are expected to be flat in July for a 1.4%
year-over-year increase.  The core rate, seemingly the envy of most other
high income countries, is expected to be
stable at 2.1%.  Heavier equity markets and some profit-taking on oil’s run-up, and the broadly firmer US dollar tone
may blunt the impact of Canada’s data.  
Though the
vagaries of the US dollar this week, it appears that Asia and European
participants give the signals from the Federal Reserve more credence that
the North American sessions this week, comments from several Fed officials,
most notably Dudley were shrugged off, with the greenback still trading
heavily.  However, twice this week, Asia and Europe seemed to respond more
Last Friday,
the odds of a  50-75 bp Fed funds target was 18%,
17.5% and 36.8% respectively for the next three FOMC meetings, September,
November, and December. 
 Now, before the last North American
session of the week, the odds are 20%, 23.9%, and
38.9% respectively.   US two and 10-year bond yields were little changed on the week.  
Equity markets
are finishing the week on a soft note.
  The MSCI Asia-Pacific is off for its
second day.  It has fallen in four of this week’s five sessions.  Of note, Chinese equities were the strongest in
the region this week, with the Shanghai Composite rising 1.9% and the Shenzhen
Composite gaining 3.6%.  Most of the Shenzhen’s gains were recorded before the confirmation that the
Hong Kong-Shenzhen link would be in place before the end of the year.  It
appears that less than 10% of Shenzhen’s gains this week were scored after the
announcement was made.  It is the
third weekly rise of the Shenzhen Composite and the second weekly rise for
Shanghai.  Both markets are looking better from a technical perspective.
In three of the
five sessions this week, the dollar has slipped below JPY100. 
Although it finished the North American session below this
important psychological threshold, it has yet to
break it convincingly.  Asian trader bid the dollar back up.
 At the same time, the greenback’s
upside has been blocked by the five-day
average that is found now near JPY100.50.  Note that there is a chunky
maturity of $750 option struck at JPY100 today.  
The Dow Jones
Stoxx 600 is off for the fourth session this week.
  It’s 0.5% loss is broad-based but led by the 1% drop in
financials led by insurers and banks.   The index has found support near
340 and a break of it on a closing basis would likely signal that the two-week decline may continue next week.  
For its part,
the euro is trading within yesterday’s range, holding to a little more than a half-cent above $1.13. 
 However, as we have noted, the Asia and European
participants appear more dollar-friendly than Americans.   The intra-day
technicals suggest the euro may retrace some of its earlier losses in the North
American session today.  Remember the $1.1350 area corresponds to a 61.8%
retracement objective of the euro’s decline since early-May.  A move above
there would target the $1.1400-$1.1450 area.  
0.25% slippage today makes its the strongest of the majors. 
 It has gained 1.7% for the week, making it the second
strongest major
after the Swiss franc (~1.8%).  It has been
helped by stronger employment and
retail sales data, which at least on the surface suggest that the referendum
was not as disruptive as it may have appeared.  We are still skeptical of
that conclusion and have recognized that
the impact will be more like cooking frogs than microwaving a meal.  Of
course, the slide in sterling and drop in interest rates (more when the BOE
failed to buy its full quota) can and likely will cushion the blow.  
initially extended yesterday’s retail sales sparked
gains to reach $1.3185 but the greenback’s firmer tone proved too much, and sterling has retreated toward $1.3100. 
The $1.3150 area now offers initial resistance, while a
break of $1.3100 could spur another half cent decline.   

Lastly, we note
that Fitch is to review Portugal’s credit rating today.  Fitch has had it
at BB+ (below investment grade) since November 2011.
  The outlook since March has been
stable (down from positive).  The immediate issue is whether the weaker
than expected growth, which boosts the deficit/GDP ratio risks a negative
outlook.  DBRS is the only one of the four rating agencies that the ECB
puts emphasis on that gives Portugal an investment grade rating.  Recent
comments by DBRS shows it is getting a bit more concerned.  However, when
it formally reviews Portugal’s credit at the end of October, it may cut its
outlook for stable, but not take away the investment grade status. A loss of
this status would likely spark a new crisis in Portugal.  


Dollar Recovers into the Weekend
Dollar Recovers into the Weekend

Reviewed by Marc Chandler

August 19, 2016

Rating: 5

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