Euro Softens on Crosses, Treasuries Stabilize

The US dollar had steadied after
softening in the North American afternoon yesterday when the dissolution of
President Trump’s business councils as a series of executives stepped down.
The FOMC minutes added more fuel to the move. 

The market responded to the minutes by selling the dollar and buying US
notes and bonds. 
The narrative was the offered was that the market
had seen in the minutes a reduced chance of another rate hike this year.

The place to test that hypothesis, however, is not the long-end, but the
The closest proxy is the December Fed funds
contract.  The implied yield rose a single basis point, and at 1.21%, it
is slightly higher than it was at the end of last week (1.195%). 

In trading, a written confirmation is superior to a verbal confirmation. 
When interpreting the Federal Reserve, a similar principle applies.  The
minutes are an imperfect communication tool to guide expectations.  Voter
and non-voter views are indistinguishable.  The passion and conviction are not easy to assess.  The record of a
meeting from a few weeks ago is less significant than more recent comments by a
person part of the Fed’s

Simply put, in addition to the limited movement in the Fed funds futures
contracts, Dudley trumps the minutes.
  Dudley expressed what we assume
is the leadership’s view:  balance sheet announcement next month, and a
relatively low bar to a rate hike in December. Moreover, as we have been
pointing out, Fed officials have buffered their argument about rates by
spending more time talking about financial conditions.  This
is important:  “vulnerabilities associated with asset valuation
pressures edged up from notable to

The dollar was turning better bid in late morning turnover in Europe.  The euro returned to nearly $1.17 after being turned back from almost $1.18.  The dollar returned to above JPY110 after slipping to nearly JPY109.60.  The greenback is also firm against the freely accessible emerging market currencies.  US yields are firmer while European and Asia-Pacific rates are lower.  Asian equities rose 0.4%, the largest gain in the four-day rally.  We note that Korea’s shares continue to recover.  Foreign investors were net buyers today, but as set net sellers on the week.  Europe could not match suit.  The Dow Jones Stoxx 600 is off 0.2% to snap a three-day streak.  Financials are the largest drag.  Copper and zinc prices are leading the industrial metals complex higher.

US yields are slightly firmer, and
the dollar has recovered back to JPY110, after being sold to JPY109.70 (tested
the JPY111 area yesterday). 
The dollar found bids ahead of Tuesday’s
low (~JPY109.60).  There are several options
expires that are in play today:  JPY109.50 for $363 mln, JPY110-JPY110.05
for $1.8 bln), and JPY110.20-JPY110.30 for $1 bln.  

Japan reported a larger than expected July trade surplus. 
Exports strengthened, growing 13.4% from a year ago up from 9.7% in June. 
Japan’s exports are a key catalyst for its industrial sector and capex.  Imports were also stronger. 
They rose 16.3% after a 15.5% pace in June.  The imports are partly a reflection of domestic

The yen is rivaling the Australian dollar as the strongest of the majors.
Australia’s July employment data was reasonable and will not change views of
monetary policy.
  Australia created 27.9k jobs, which was a bit more
than expected, but there were all part-time positions.  There were 20.3k
fewer full-time positions.  On the other hand, the June series was revised
up to show a dramatic 69.3k full-time position.  The unemployment rate
ticked down to 5.6% from a revised 5.7% even though the participation rate also
rose (65.1% from 65.0%). 

The Australian dollar has built on yesterday’s strong gains, some
suggesting in part because of the continued rally in industrial metals,
including copper to two-year highs. 
It is testing a retracement objective near $0.7965.  
There is an A$1.1 bln option expiring
today struck at $0.7975.

Sterling was sold into a brief bounce after the headline retail sales
report edged out expectations.  Retail sales rose 0.3% instead of 0.2%

However, the June gain was cut in half to
0.3% from 0.6%.  Admittedly some of this is the result of petrol, though a
concerning picture is still evident.  Excluding auto fuel, retail sales
slowed to 1.5% in July from a revised 2.8% in June.  Including fuel,
retail sales rose 1.3% from a year ago, down from 2.8%.  Sterling is
trading within yesterday’s ranges. 

The euro is surrendering yesterday’s gains, of which we were
There does not appear to be a macro driver.  
The eurozone confirmed July inflation
readings, and the June trade balance was a little largest than expected, but
mostly offset by a downward revision in May.  There is no material
impact on GDP expectations.  Nevertheless, the euro is heavier on the
crosses as well. The euro is holding a down trend
peaking on August 2 a little above $1.19.  The trend line
comes in today near $1.1815.  The high in Asia and Europe is
$1.1790.  Support is pegged in the
$1.1680-$1.1720 area.  There are nearly two
bln euros of options struck between $1.17 and $1.1715 that are on the block
today.  There is another option for nearly 550 mln euros
struck at $1.1760. 

The US reports weekly jobless claims, which cover the period in which the
national survey is conducted

The Philadelphia Fed survey for August is unlikely to repeat the surge of the
Empire State survey earlier in the week, but the bar is low for an upside
surprise.  Industrial output for July is also on tap.  Note that
perhaps one of the considerations holding back investment is that fact the
capacity utilization rates are low (76.6% in June).  The cyclical peak was
three years ago and below 80%. 


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