Greenback Ticks Up in Cautious Activity

The US dollar is consolidating its recent losses with a small upside
  What promises to be an eventful week has begun with the Bank of
England stress test and the publication of the Fed’s Powell prepared remarks
for his confirmation hearing to succeed Yellen
as Chair.  

Unlike last year, this year’s BOE stress test saw all seven banks
The BOE also went forward with increasing the counter-cyclical
buffer the large banks are too hold from 0.5% to 1.0%.  It is effective
next November.  It may also not be capped
there; the BOE said it would review the level again next year. 
The 0.5% increase costs about GBP6 bln.   

While the BOE said that the stress tests demonstrate that UK banks can withstand
a disorderly exit, it acknowledged that there would
be economist costs if Brexit is not smooth.
  This was also the gist of the OECD assessment in its semi-annual
report.   The OECD’s new global outlook warned that the UK economy
would continue to slow in 2018 and 2019 and that uncertainty around Brexit is
the main threat to the outlook.  One of the implications is that the rate
hike that was delivered in September is
unlikely to be repeated unless conditions

There was an area concern that the BOE drew attention.  It
warned that UK financial firms might
constrain UK financial institutions to form
servicing an estimated GBP26 trillion of outstanding (OTC) derivative
contracts.  The BOE said that about 25% of these positions involve a UK
and EU entities.  Each contract will require renegotiation and cautioned that there were no precedents for such
an undertaking in eighteen months.  

Meanwhile, the Brexit negotiations may become even more difficult if the
Irish government collapses. 
There is a no-confidence vote on the
Deputy Prime Minister scheduled for tonight in Ireland.  The latest email
revelations suggest Fitzgerald may have known more about the potential legal
strategy of discrediting the police whistleblower
that has been
acknowledged.  If a new election is necessary, it would likely be
next month, and during which time, there will be little scope to compromise,
which in this context means allowing the negotiations to proceed with a promise
of it (open border with Northern Ireland) being
resolved later.  

In the US, Powell’s confirmation hearing starts. 
His prepared statement underscored the continuity that his candidacy
represents.  He endorsed the gradual increase of interest rates and the
shrinking of Fed’s balance sheet.  While he is open to refining the post-crisis regulation, he
endorsed the capital and liquidity provisions, stress tests, and living wills.
  Powell also defended the institutional structure of broad thrust of the
Federal Reserve.  

The US Senate Finance Committee may steal whatever thunder there may be
in Powell’s confirmation hearing. 
The tax bill must be formally voted
to by committee (12 Republicans and 11 Democrats) to set the expected floor
vote late this week.  However, two Republican Senators are balking. 
Johnson from Wisconsin wants a greater pass-through tax break.  Corker,
retiring from Tennessee, wants to include a tax increase that would be
triggered if subsequent growth is insufficient to cover the $1.4 trillion in
revenue over the next decade.  Reports suggest that at least two other
Senators who are not on the committee favor Corker’s amendment, which could
jeopardize the bill even if it gets out of committee.    

The market seems nonplussed.  The US 10-year yield is steady to
slightly firmer, but with the pullback in Asian and European yields, the
spreads have edged more into the dollar’s favor.  After last week’s poor
close, the dollar saw follow-through buying in Asia and Europe yesterday, 
but North American participants were less enthusiastic,
and the greenback finished well.  A bit more short-covering is seeing the
dollar enjoy a firmer tone across the board.  

After a weak start in Asia, global equity markets are advancing. 
The MSCI Asia Pacific Index slipped fractionally, for the second day of losses after closing last week with a four-day
advance in tow.  European shares are recouping yesterday’s losses. 
The Dow Jones Stoxx 600 is up 0.45% in late
morning activity.  Energy and consumer staples
are leading the advance.  Industrial metals are lower as expected weaker
Chinese demand weighs on prices.  This
is pressing the material sector lower.

The euro is approaching initial support seen in the $1.1840-$1.1865 area. 
It peaked yesterday near $1.1960.  A break of $1.1800 would be technically
important.  Sterling, like the euro, appears to have traced out a reversal
candlestick pattern-shooting star-and there is also follow modest follow-through selling today.  Sterling
briefly poked above $1.3380 yesterday and is off nearly a cent from it. 
However, the intraday technical studies suggest the $1.3280 may offer reasonable support.  Note that
there is a GBP248 mln option struck at $1.33 that expires today.  

The greenback initial slipped against the yen on Kyodo reports that some
radio signals that Japan detected may signal that North Korea is preparing
another missile launch soon
.  However, the dollar did not spend much
time below JPY111.00.  It has been holding above JPY111.20 in
Europe.  Yesterday’s high is a distant JPY111.70.   A close
above it would lift the technical tone.  

The US dollar posted an outside update on the Canadian dollar yesterday, and
today it is pushing back toward last week’s highs near CAD1.2840.
  Last month’s high was near CAD1.2920.  The trendline connecting those highs intersects today near CAD1.2820.  The Australian dollar slipped to four-day
lows just below $0.7590.   Note that the
Australian two-yield is now below the US two-year yield. 

The US reports merchandise trade, inventories, house prices and
Conference Board’s measure of consumer confidence. 
The data are
unlikely to alter general perceptions that the US economy is continuing to
experience above-trend growth.  The
Atlanta Fed’s GDP tracker suggests the
economy is expanding at an annualized pace of more than 3% for the third
consecutive quarter, after the disappointing Q1 performance (1.2%).  


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