Dollar Sports Heavier Tone as Yesterday’s Bounce Runs out of Steam

(The sporadic updates continue while I am on a two-week business
trip.  Now in Barcelona, participating in TradeTech FX Europe)
Several developments have
attracted our attention, but the key take away is that the global capital
markets have stabilized after appearing downright frightful at the end of last
week, as stocks, yields, and the dollar plummeted. 
 Equities rallied om Monday and there
was follow through buying in Asia on Tuesday.  The US S&P 500 gapped
higher yesterday, leaving a four-day island in its wake (after gapping lower on
September 5) and posting a new record closing high.  The dollar was
two-three standard deviations below its 20-day moving average at the end of
last week, and the recovery on Monday helped ease the over-extended condition
of the market.  The US 10-year yield is about 10 bp above the low hit last
week, amid optimism that the Irma storm may not have been as devastating as
initially feared before hitting Cuba sapped some of its energy.  
There are three macro
developments to note.
  First, after
tough rhetoric, the Trump Administration chose to dilute some of its demands
for another round of sanctions on North Korea in order to ensure Chinese and
Russian consent. It succeeded in winning a unanimous decision from UN Security Council.
South Korea’s Kospi advanced for the second consecutive session. Its gains are
modest (0.75% this week) in line with the MSCI Asia Pacific Index (except that
the MSCI benchmark is at new 10-year highs).  The Korean won itself
remains a little lower on the week (~-0.2%).   Of course, the underlying
challenge has not been addressed, and many seem to be increasingly skeptical
that the sanction regime result in a change in behavior of North Korea.
Second, the Great Repeal
Bill that is the legal basis for Brexit was approved by Parliament. 
 The fight within the Tory Party
seemed to have been deferred, as the fundamental issue of ministerial powers
remains a divisive issue.  In some ways, the UK government is fight a
two-front battle.  The first is with the EU, and it does not appear yet
that sufficient progress has been made on the terms of the separation from the EU’s
vantage point that would allow the next stage in the negotiations to start next
month as some had hoped.   
Sterling is trading firmer
ahead of the August CPI report, which is expected to edge higher.
  The pass through of last
year’s decline in sterling is not quite complete yet, though it is expected to
peak in the next couple of months.  Initial support may be pegged near
Third, the center-right
appears to have won a third term in Norway.
  The Conservative Party will continue to lead
the government, but will rely on four smaller parties rather than three.
 At least on the surface, this makes its somewhat more fragile.  Labour
suffered a sharp defeat.  It had been polling near 40% a few months ago,
but garnered slightly more than a quarter of the vote.  
The euro advanced yesterday
from NOK9.30 to NOK9.40.  It is consolidating in a tight range
election results may have been a bit closer than expected, but the weight on
the krone yesterday seemed to stem more from the unexpectedly soft inflation
report.   The median forecasts expected an increase in price pressures,
but they fell.  Headline CPI eased to 1.3% from 1.5% rather than increase
to 1.7%.  Underlying inflation, which excludes energy and tax changes,
slowed to 0.9% from 1.2%.  The median expectation in the Bloomberg survey
was for a small rise. 
After sterling, the New
Zealand dollar is the strongest of the major currencies.  It is up about
ostensible trigger are polls suggesting that the National Party is doing better
than it seemed last week when it appeared the opposition Labour was moving
ahead.  The election is September 23.  The New Zealand dollar has
been the worst performer since the start of last month, losing nearly 3%
against the otherwise heavy US dollar through yesterday.   A move now
above the $0.7330-$0.7345 area would confirm a low is in place and suggest another
run at $0.7500.  
The euro’s pullback from the
post-weekend high, just shy of $1.21 was extended slightly in Asia. 
 It overshot our $1.1960-$1.1980
target to trade near $1.1945.  Below there, support is seen around
$1.1925.  The technical indicators are mixed, though a bullish divergence
is seen in the Slow Stochastics.  Initial resistance is seen in the
$1.2000-$1.2020 band.  
Yesterday, the dollar
recovered smartly from its pre-weekend plunge toward JPY107.30 to test
resistance in the JPY109.40 area.
  It has edged slightly higher today (~JPY109.60).
 It may take greater follow through selling of US Treasuries encourage a
move to JPY110.  The US 10-year yield has not traded above its 20-day
moving average in nearly a month.  It is found near 2.15% today.  The
December 10-year note futures gapped lower yesterday.  That upside gap is
potentially an important technical development, especially if it is not closed
in the next several days.  The real test may come later in the week when
core CPI is expected to have eased again. The 20-day moving average of the
futures contract is seen near 126-24.   


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