The Japanese yen and Swiss franc remain heavy as the markets continue
to shift away from the geopolitical risks. A return to the macroeconomic agenda is being deterred by new drama
from Washington and reports suggesting that ECB’s Draghi will not be discussing
the central bank’s monetary policy course at Jackson Hole confab, which will
take place next week.
Although Draghi will return to Jackson Hole for the first time in a few
years, we did not see it is a likely venue for him to talk about what the ECB
would likely do in a fortnight (September 7). Even though there is
some precedent, we saw the decision about extending the purchases past the year
end albeit at a reduced pace as being sufficiently nuanced that the ECB’s
leadership would prefer home turf and an increased chance avoiding misunderstandings.
Some suggest that the German Constitutional Court recognition of
reasonable arguments that the ECB is overstepping its authority in QE operations would encourage the ECB to
wind up its operations before the European Court of Justice hears the
case. We do not think this is particularly likely. The German
finance minister and the president of the Bundesbank quickly came out and
supported the ECB against such charges. The ECB must act with the
confidence that it is within its mandate
until proven otherwise.
In any event, the euro was knocked off its highs (~$1.1760) to session
lows, just below $1.17. Over the last several sessions the euro has
found new bids on a dip below the figure. It has happened three times in
the past five sessions, and without a close below $1.17 since July
27. New buying emerged today as well. There are no
significant options near current levels that expire today, but tomorrow is one
the busiest days in months, with large options expiring at various strikes
within the recent ranges.
The euro was also weighed down as
cross positions against sterling were unwound on news that the UK unemployment
fell to a new generation (42 years) low of 4.4%. The claimant
could fell 4.2k; while the June increase was pared to 3.5k from 5.9k. It was the
first decline since February. The UK economy grew 125k jobs in Q2, which
is better than expected (~100), but less than the 175k increase in
Q1. Earnings growth still lags inflation
but improved marginally. Average weekly earnings rose 2.1% (three months,
year-over-year) up from a revised 1.,9% pace in May (was 1.8%). Excluding
bonus payment, weekly earnings also rose 2.1%, up from 2.0%.
In early European turnover, sterling
had been sold off to marginal extend its recent losses. However the
technical support near $1.2840 we discussed yesterday held. The timing of
the Jackson Hole story and the UK employment data helped lift sterling toward
$1.29 (where there is a GBP240 mln option expiring today). After poking
briefly through GBP0.9140, the euro came back offered
and did not find a bid until close to GBP0.9080. The
December 2018 short sterling futures contract is unchanged suggesting that the employment data is not altering views on the
trajectory of BOE policy.
The rise in US yields yesterday (10-year
yield rose a little more than five basis points, the biggest increase in three
weeks), and the dollar holding on to gains that had lifted it above JPY110.50
failed to help Japanese share, which edged lower despite the 0.2% rise in the
MSCI Asia Pacific Index, the third gain this week. After being
on holiday yesterday, the Korean equity market continued to recover from last
week’s slide and matched Monday’s 0.6% gain.
The dollar is pushing at the lower
end of a band of technical resistance that extends from about JPY110.95 to
roughly JPY111.30. In a bigger view, the dollar has been moving between a little below JPY109 and JPY114 for the past five months, with a few
exceptions. The lower end of the range held again at the end of last
week.
Before getting to the FOMC minutes, investors will digest the July
housing start and permits data. Large increases in June warns of an
adjustment in July. However, given yesterday’s news, which included a
strong bounce back in July retail sales and a surge in the Empire State
manufacturing survey for August, confidence that the world’s largest economy
gained momentum at the start of Q3 is unlikely to be undermined by today’s
data.
We have played down the likely significance of the FOMC minutes from last
month’s meeting. The market does not expect a September hike.
Therefore, a debate about the significance of the weakness in inflation is unlikely to change that. We
note that the June minutes said that most participants understood the decline
in price pressures to be due to transitory factors. Also, we see place
emphasis on Dudley’s recent comments. We suspect he reflected the views
of the Fed’s leadership more broadly.
Lastly, two highlights from the emerging market space today.
First, the central bank of Thailand left its benchmark rate unchanged at
1.5%. There had been some talk of a cut in the face of the strong currency
appreciation and low inflation. However, instead
of the central bank provided a
verbal warning against further currency appreciation. Second, Czech and
Hungary reported Q2 GDP. The former beat expectations with a stunning
2.3% quarter-over-quarter expansion. The year-over-year rate rose to
4.5%. Hungary disappointed, but with a
0.9% quarterly expansion, its growth enviable. The year-over-year
pace slowed to 3.2% from 4.2%. The
koruna and forint, like most of the regional currencies,
are losing a little ground to the dollar today.