Greenback Goes Nowhere Quickly, While Yen Remains Bid

The summer doldrums begin early.  The
US dollar is little changed against most
of the major currencies.  Bond yields are mostly one-two basis points
lower, and equity markets are mixed but
with a downside bias.     Oil prices slump more than 2% on
Tuesday and again on Wednesday.  This
is weighing on bond yields and equities.  

European shares are lower for the third day
and the Dow Jones Stoxx 600, off 0.5%, is dragged by a 1.5% drop in the energy
The MSCI Asia Pacific Index rose nearly 0.4% as the other markets
offset the losses in Japan and China.   The Nikkei slipped 0.15%,
with a 0.75% drop in energy.  The Shanghai Composite surrendered half of
the gains scored yesterday, ostensibly in response to the MSCI decision to
include A-shares for the first time in its emerging market equity index
beginning near the middle of next year.  

Fresh market moving news remains light.  The
US and Canada report data that provide some headline risk.  The US reports
weekly initial jobless claims that cover the week that the national non-farm
payrolls survey is conducted.  As of
last week, weekly jobless claims were at three-week
lows.  Contrary to claims in some quarters that the US is headed or
already in a recession, the Leading Economic Indicators. There is no sign that
it is signaling anything like a recession.  The monthly reading was
negative three times last year.  The last one being in August.  The
LEI rose on average 0.2 each month in 2016.  It is averaging 0.4% this

Canada reports April retail sales. 
The headline is unlikely to repeat the 0.7% gain in March.  Auto sales
will likely drag it lower.   The higher gasoline prices may boost the
ex-auto figure, but the volume of retail
sales may have fallen.  The Canadian dollar has pared half of the gains
scored in the wake of the more hawkish talk from senior BoC officials.  US
dollar sellers have emerged in front of
that retracement near CAD1.3350.  Support is
near CAD1.3380.  Tomorrow, Canada reports May CPI figures
and the headline rate is expected to ease. 

Federal Reserve Governor Powell speaks before
the Senate Banking Committee shortly after the US equity market opens. 

Powell is the only Republican-appointed Governor.  One cannot tell that by his voting pattern.  This is important to keep in mind as in the
coming weeks, nominations for the vacant three Governor seats are expected.  We are struck by the technocrat and collegiate culture.  Think
about more than three- decade tradition of the Chair being named by the
president from one party and re-nominated by the president of the other party
(Volcker, Greenspan, Bernanke).  

This is
not to argue for rigid institutional inertia, but rather suggest the
difficulty, for example, in trying to set monetary policy driven by a set of
decision-making rules, like the Taylor Rule
.  It also suggests that being in favor or high or low
interest rates is a misleading abstraction.  The views must be understood within the context of economic
and financial conditions.  Hawks and doves are contextual and relative

Notable option expiries today include 1.5 bln euros at $1.1175, 1.1 bln euros
at $1.12, and 1.5 bln euros at $1.1250.
  There is $2 bln struck at JPY111.00, and another nearly $400 mln struck at JPY110.95
that roll off today.  Almost GBP375 mln options with a  $1.27 strike
are on the bubble. 

The central banks of New Zealand and Noway
left rates on hold, as did the couple of Asian central banks that met. 

That leaves Mexico still on tap.   With firm price pressures, the market
is looking for the central bank to deliver
a 25 bp rate hike, which would be the seventh consecutive meeting it would
hike.  The Mexican peso remains the world’s strongest currency this year, gaining a little more than
14% against the US dollar (the Polish zloty in second place with a 10.4% gain). 
Since the end of June 2016, the peso is practically flat (+0.7%).  It has
been a round trip, but the price pressures from the past depreciation are
proving sticky.  

Things are about to get tougher for UK Prime
Minister May, who is carrying on as if the Tories still enjoyed a majority.
The DUP is reportedly seeking an increase of about GBP2 bln in
government spending on infrastructure and National Health Service for their
support of a minority government (which means no ministerial portfolios for DUP
MPs).  The Tories themselves seem to be jockeying for position behind the
scenes to succeed May.   Depending on which report you read, Hammond,
Davis, and/or Johnson are quietly
maneuvering, not wanting to seem too eager.  Meanwhile, Labour and the Lib
Dems are reportedly considering the more than 70-year old convention that the
House of Lords refrains from blocking or
significantly amending laws that implement the
governing party’s manifesto.  How can the Tory’s
manifesto now have the same gravitas as then the Tory’s had a majority?

In addition to this fluid, yet fractured,
political situation, we seemed to learn yesterday that the BOE Governor and
chief economist are odds about the
outlook for the UK economy, and the
urgency by which the accommodation provided last summer should be removed.  
Haldane suggested he
nearly voted for a hike last week.  That would have made it a four-four
tie.  The odds of a rate hike before the end of the year has risen but
does not appear to be the most likely scenario (still below 40%, interpolating
from the OIS).  UK high frequency data in the run up to the next BOE
meeting, which is in August, may have more impact in the market than is usually
the case.  


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