Euro Climbs Relentlessly, While Greenback is Mixed

The euro’s strength is surely partly a reflection of US dollar weakness,
but it is also a reflection of the improved sentiment among investors. 

The initial dollar losses at the start of the year was largely a correction
that is common after a Fed hike.  This
is more or less what happened at the start of 2016 as well, following the Fed
hike in December 2015.  However, the correction morphed into something
more profound beginning in late April as it became clear that the National
Front was going to be defeated in
France.   

We had suggested that there was not populist-nationalist wave sweeping
across the world, though that was the consensus narrative.
  Instead,
we argued that the center-right party in the two-party systems in the UK and US
adopted some of the rhetoric and policies of the populist-nationalists, but
that the multi-party systems in Europe served to dilute the same forces. 
The center-right in Europe ran away from the populist-nationalists, even if
appropriating some of the anti-immigration rhetoric.  

Meanwhile, the economic outlook of the US was
questioned
The prospect for supply-side deregulation, tax reform, and infrastructure spending, promised
by the new US President, whose party enjoyed a majority in Congress has dimmed,
as the legislative process has become stymied not so much by the opposition
Democrats, but by the inability of the Republican Party to harness its
majority.   The strategy of using its majority to ride roughshod over
the minority is at the core of both the health care efforts and tax
reform.  

At the same time, investors seem to put much stock in the forward
guidance of some central banks, including
the ECB, which
have
signaled a less accommodative stance
is
going forward. 
Yet, they
give little weight to the Federal Reserve, which has indicated it will most
likely begin shrinking its balance sheet and continuing the gradual
normalization of monetary policy.  The ECB’s balance sheet will likely be
expanding for nearly another year (mid-2018), and its deposit rate is likely to
still be negative in late 2018. 

The New Zealand dollar is weakest of the major currencies today.  
It is off 0.6% following news of a weaker than expected employment
report.  Although the unemployment rate dipped to 4.8% from 4.9%, the participation
rate fell to 70.0% from 70.6%, and the employment contracted 0.2% in Q2, while
the median Bloomberg forecast was for a 0.7% increase.  

The dollar dipped below JPY110.00 briefly in North America yesterday but was already recovering late in
the session.
  It finished NY near JPY110.35.  Asia bid it up to
almost JPY111.00.  Europe has seen consolidation
but provided JPY110.60 holds; it can make
another run at the JPY111.35 high seen before the weekend.   Details of
the long-rumored cabinet reshuffle have been
apparently leaked
ahead of the official announcement expected in Tokyo
on Thursday.  Essentially, it is a reshuffle in the literal meaning of the
word, with senior officials taking new roles rather the introduction of new
faces.  

For investors, indications that Trade Minister Seko and Finance Minister
Aso will retain their posts speaks to continuity.
  On the other
hand,  Foreign Minister Kishida will be
given
a senior party post (LDP policy chief), from which, people will
speculate, could be a challenger to Abe
next year.  Motegi, responsible for
supervising the
clean-up of the Fukushima Dai-ichi nuclear reactor
during would take over as Economy Minister from  Ishihara.

While the UK reported a better than expected manufacturing PMI yesterday,
the construction PMI disappointed today.
  It fell to 51.9 in July from
54.8 in June. It is the lowest since last August.   It is a relatively
small part of the UK economy, and tomorrow’s service sector reading is
considerably more important.  The Bank of England meets tomorrow, and it will release its Quarterly
Inflation Report along side the minutes of its
meeting at the conclusion.  While rates on
hold, the question is how close of a decision was it.   

Sterling is up about 0.3% in late morning turnover in London. 
It held yesterday’s low near $1.3190 and tested the $1.3250 area again, which
is nearly a cent above last week’s high.  The next target is
$1.3430-$1.3500, which houses several important technical objectives, including
the 50% retracement of the post-referendum losses.  The euro is flat near
GBP0.8950.  

In the US, the labor market comes into focus.  Today is the ADP
estimate, which is expected to show a jump to 190k from 158k.  Its ability
to track the month-to-month changes in
the BLS estimate is weak even if it catches the overall patterns. 
Tomorrow the US reports the weekly jobless claims,
and then Friday is the non-farm payroll
report itself.  The Fed’s challenge is not so much the real economy as it
is the softer price pressures.  After falling from February through May,
the June core CPI and PCE deflator stabilized.   The Fed’s Mester and
Williams speak today.  

The euro has reached a new two-year high near $1.1870.  Initial
support is seen around $1.1780, which
corresponds to last week’s high and near yesterday’s low.  The change
recently has been that after new highs are made,
a bout of profit-taking is seen, which seemingly reflects the nervousness of
the long euro longs.  This pattern seems to be unfolding again ahead of
the beginning of the US session. 

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