Greenback Stabilizes

The US dollar has been battered this week amid a shift in sentiment seen
in how the market responded to comments mostly emanating from the ECB’s annual
  It is not really
clear that Draghi or Carney gave new policy indications.  

The ECB President has recognized the improved growth prospects, but until
inflation is on a sustainable and durable path toward, a heavy dose of monetary
accommodation is still needed.
  The Bank of England Governor Carney
indicated a week ago that it was not the time to raises the rate.  He has not changed his mind. 
He identified a couple of factors he will be looking at to see if removing more
accommodation is warranted (the BOE announced an increase in the cash buffer
required of banks).  

In recent days, the Fed’s leadership have added to their argument for a
continued gradual increase in rates by noting rich asset prices and easier
financial conditions when the Fed desires less accommodative conditions. 

This is a reminder that contrary to the
traditional understanding of the Fed’s dual mandate, it really has three goals: Price
stability, full employment, and least we forget, financial

The market is tired.  After rising mostly 15-20 bp this week,
10-year yields in Europe are mostly a little lower.  The US 10-year yield
is steady.  Yesterday’s jump in Europe and the US forced Asia-Pacific
countries to play catch-up a bit.  Australian and New Zealand benchmark
10-year yields jumped nine bp. 
Japan’s 10-year yield rose two basis points, but the yield rose to three-month highs, just inside the BOJ 10 bp
band on either side of zero.  

The US dollar is mixed.  The three worst performing majors for
the week, the yen, the New Zealand dollar and Norwegian krona are the three strongest currencies on the day.  The euro
could not get much above the $1.1440 area seen the NY afternoon
yesterday.  Options struck at $1.1360 (~810 mln euros), and $1.1450 (~700 mln euros) may mark the range.  It
terms of sentiment; it is striking that
despite the slightly higher than expected preliminary June inflation, the euro
could not make more headway.  This
also seems to reflect a stretched or maybe just a cautious market.  

Headline eurozone inflation eased
to 1.3% from 1.4% in May.
  Before yesterday’s German report, a decline
to 1.2% was expected.  The core rate
rose more than expected to stand at 1.1%, up from 0.9% in May.  
Recall that core rate bottomed at 0.6% in early 2015, and at 0.7% as recently
as March.   The threat of deflation has been averted.   

In contrast, Japan’s May CPI was little changed.  The 0.4%
headline pace was unchanged, while the core rate, which excludes fresh food,
ticked up to 0.4% from 0.3%.  Excluding food and energy, the
year-over-year rate was unchanged at zero.  Separately, Japan reported
that for the 15th month, household spending on a year-over-year basis
contracted.  The 0.1%  contraction is the smallest in the run,
suggest consumption is stabilizing.  

Separately, the unemployment rate unexpectedly rose to 3.1% from 2.8%,
even as employment rose to its higher since 2007 and the job-to-applicant ratio rose (1.49 from 1.48). 
number of unemployed unexpectedly rose in German as well.   While
unemployment claims were unchanged at 5.7%, Germany reported that unemployment
increased by 7k instead of fall by 10k as the market expected. 

After reaching almost JPY113 yesterday, the dollar has pulled back
against the yen, as the Japanese currency benefits from short-covering on some
of the crosses today.
  It appears to be finding support around
JPY111.70-JPY111.80.      There is a $382 mln option
struck at JPY112.00 that rolls off today.  

The resilience of the Chinese economy is one of the notable developments
in the H1 17.
  It appears to be finishing the period on a positive
note.  The official manufacturing PMI rose to 51.7 from 51.2, defying
expectations for a decline.  The non-manufacturing PMI increased to 54.9
from 54.5.  New export orders rose to 52.0, the highest since April 2012,
and more broadly, new orders rose to 53.1 from 52.3.  Price components

The yuan had fallen against the dollar in all but one session from June
12 through June 26.
  However, in a squeeze in what may have been
spurred by the PBOC, the yuan has now risen for four consecutive
sessions.  It has risen 0.8% this week, which appears to be its biggest
weekly advance since March 2015.  

Sterling extended this week’s survey to $1.3030 in Asia before pulling
back, perhaps encouraged by a soft GfK consumer confidence (lowest since the
referendum) and the lack of an upward revision to Q1 GDP (remained unchanged at
The $1.3055 area corresponds to a retracement objective of the
decline since the referendum.  A move above it would encourage talk of

Meanwhile, the Labour Party is unable to enjoy its strong showing in the
recent election. 
  More than four dozen Labour MPs voted with the
Tories on the Queen Speech and will lose the whip.  Some were leaders and
will have to be replaced.  What many
observers do not seem to realize is that Labour’s manifesto (political platform)
and the Tory’s was not very different on exit from the EU.  However, there
are many remains (in both parties) who do
not want to lose access to the single market, which is arguably the litmus test
for a hard Brexit. 

The US reports personal income and consumption data that will shape
forecasts for Q2 GDP.
  The core PCE deflator is expected to confirm
the general movement in the core CPI and
ease for the fourth consecutive month.  Chicago PMI and Univ of Michigan
consumer confidence reports are not typically market movers.  Canada
reports April GDP, and perhaps, more importantly, the Bank of Canada’s survey
of senior loan officers may solidify expectations for a rate hike at the next
meeting (July 12).  Indicative pricing in the OIS market implies almost a
70% chance of a hike then. 


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