Narrowly Mixed Greenback in Summer Churn

<br /> Narrowly Mixed Greenback in Summer Churn – Marc to Market<br />


The US dollar is going nowhere fast.  It is
narrowly mixed against the major currencies.  The market awaits for
fresh trading incentives, with much hope placed on Yellen’s presentation at
Jackson Hole at the end of the week.  Is it too early to suggest that the
build-up ahead of it is too much? 
First, to the
extent that she addresses the current economic situation, it is unreasonable to
expect it to differ from the general thrust of both Fischer and Dudley. 
 The resilience of the labor market and the economy
are recognized.  Core inflation is not far from the 2% target. The market
and the economy appear to have weathered several potential destabilizing
events, including the continued depreciation of the yuan and the UK referendum.
Second, she may
address broader economic issues. 
There are several compelling issues.
 One suggestion that she may bat aside is raising the inflation target. There seems to be little appetite for
such a step.
A particularly
vexing issue is the weak productivity growth over the last several years. 
 Although Yellen is unlikely to offer much new insight
in the problem, it is an important consideration in determining the neutral
rate of interest.  For many investors, the shift in the Fed’s assessment from
thinking four interest rate hikes this year would be appropriate to two now, and likely soon one was significant.
 Perhaps, over the medium and longer-term, the Fed’s adjust of the neutral
rate may be more significant.
Another issue
that has been discussed is how the Fed
can respond to the next cyclical downturn, i.e., a recession.
  Rate cuts may not be sufficient.
 Asset purchases may have limited effectiveness as well.  It would be
surprising is Yellen spent much time addressing this issue.   However, we
note in passing, Yellen recognizes the limitations of monetary policy and has
advocated fiscal support for public investment.   
Separately, but
not totally unrelated,  the Federal
Reserve reported yesterday that eight of the 12 Federal Reserve regions,
including all four of rotating voters have called for a discount rate hike. 
 The request is non-binding,
but it is indicative of the mood.  The last time a majority favored a
discount rate hike was last December. 
The news stream
today is light.
  Three items stand out.  First,
there was a deadly earthquake in central Italy.   The casualties and
damage are still being assessed.  In terms of economic impact, a natural disaster
tends to disruptive but the rebuilding positive for GDP.  The Italian
economy has been struggling to sustain forward momentum and the Renzi
government was seeking some stimulus scope.  Is it too cynical to suspect
the earthquake may provide the latitude needed?  
Second, with
Germany’s confirmation of its 0.4% expansion in Q2, more details have been
 Trade added 0.6% points to growth.
 That means all other components, including private and government
spending fell.  Of note, the Germany reported a 18.5 bln euro (~$21 bln)
budget surplus in H1 or 1.2% of GDP.
Third, UK
consumer credit rose in July 6.4% year-over-year, according the BBA.  This is the most in nearly a decade.
  It follows the stronger than
expected labor and retail sales reports.  The combination of lower
interest rates and a weaker pound are helping cushion the referendum shock.
Although the new government has not announced fresh
spending plans, the austerity of the previous government
appears to have been abandoned.  
The euro
drifted toward its recent low near $1.1270. 
 Additional support is seen near $1.1250. The lack of interest may
deter more significant losses today.  The two-year interest rate
differential continues to edge in the greenback’s favor.  The euro may
also be pressured by the unwinding of
some cross positions against sterling.  The euro has been pushed through
its 20-day moving average against sterling for the first time since
early-August (~GBP0.8550).  There is near-term scope toward GBP0.8500.
The unwinding
of the cross is also buoying sterling. 
 It has edged higher against the dollar to reach
$1.3235.  It finished last week near $1.3075.   The intraday
technicals warn that additional gains today may be
marginal at best.  
Meanwhile, the
dollar remains pinned near JPY100.
 We suspect there is room for small
gains in the North American session today.  A close above JPY100.40 would
be constructive.  Elsewhere, the dollar-bloc is mixed.  The recent
string of soft Canadian data coupled with the large API build keep the Loonie
with a heavier bias.  The Aussie recovered from the Asian-dip below
$0.7600, but ran out of steam near $0.7630 and is presently little changed.
 The New Zealand dollar is rivals sterling for the strongest of the majors

Equity markets
are mixed.
  Asia took little comfort from yesterday’s US advance.
 Losses in China, Taiwan and Korea offsets gains elsewhere to leave the
MSCI Asia-Pacific Index practically flat.  European shares are doing
better.  The Dow Jones Stoxx 600 is up about 0.4%, led by the financials.
Eurozone banks are advancing for the third consecutive session for about a 5%
cumulative gain. Italian bank shares are also advancing
for the third session.  They are up
about 9% over this streak.  Lastly, bond markets are trading with a
slightly heavier bias. 


Narrowly Mixed Greenback in Summer Churn
Narrowly Mixed Greenback in Summer Churn

Reviewed by Marc Chandler

August 24, 2016

Rating: 5

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