The Dollar is Firm in Quiet Market

The US dollar is advancing against the major and most emerging market
    Activity is
and ranges are narrow. 

We share four observations about the price action.  First, the
euro has been unable to sustain upticks even after Germany reported a jump in
industrial orders three-times more than the median estimate (1.0% vs.
0.3%).  More generally the dollar’s rise has coincided with the firmer
equities and higher oil prices.   After today’s report, there may be
some upside risk to tomorrow’s industrial output report, where a 1% gain is
expected to offset a chunk of the 1.5% drop in July. 

Second, the dollar is extending its
gains against the yen for the eighth consecutive session.
Yesterday, the
dollar finished the North American session near JPY103.50.

Third, we think it is notable that the dollar’s firmer tone is happening alongside a rise in interest rates. 
Yields on the two and 10-year Treasury has risen four consecutive sessions
coming into today.  

Fourth, at the same time, we
recognize that it is not just a dollar story playing out.
heavy tone, for example, is a function of perceptions that Prime Minister May
is steering the UK toward a harder exit
from the EU.  In a speech yesterday, Merkel forcefully argued against any
exception to the single market rules.  Ideas that German businesses could
be a fifth column pressing for compromises were disappointed when the head of
the BDI (business association) took a
similar stance as the Chancellor.  

Equities are rising today  The MSCI Asia-Pacific Index rose
0.4%.  Only India and Indonesian markets bucked the
trend.    Rising oil prices helped lift Japan’s Topix (0.45%),
with a 2.2% advance in the energy
sector.  In Europe, the Dow Jones Stoxx 600 is fractionally, but strength
is being seen in financials, industrials,
and energy.  Yesterday’s  nearly 0.6% loss snapped a six-day

Bonds are recouping some of their recent losses today, with benchmark
European 10-year bonds mostly 3-5 bp lower
.  Asia-Pacific yields had
earlier followed US yields higher.  

The Australian dollar is the heaviest of the majors today; giving up
almost 0.5% to the greenback. 
Its losses, the euro’s, comes despite favorable economic news.  In Australia’s case, the favorable news took the form of a
smaller trade deficit.  The August shortfall was A$2.01 bln.  The
median expectation was for an A$2.3 bln
deficit.  The July series was revised almost A$300 mln better to an A$2.12 bln deficit.  The $0.7700 area
has proved a formidable cap, and once again the Aussie has been turned back
from it.  It has been sold through
the $0.7590 low seen at the end of September.  Today’s low, a little ahead
of $0.7575 coincides with the 50% retracement of the rally since the
mid-September low near $0.7450.  The next retracement is found near $0.7550.  

In an otherwise quiet news stream,
we note the deputy speaker of Italy’s Chamber of Deputies and one of the
leaders of the opposition 5-Star Movement stirred the pot.
Di Maio broke
ranks with officials in Europe to say that the UK should be given market access
and migration controls.  He would naturally say this as he and the 5-Star
Movement want to have a referendum on EMU membership.   The better the
deal the UK gets, the more compelling of a narrative he can offer.  And
this is precisely why a hardline is being sought.

In terms of domestic politics, De
Maio argued that if the referendum loses, Renzi must resign.
  This strikes us as simple partisan
politics.  Di Maio is quoted on
Bloomberg:  “I am sure that Italians will ask him to maintain his
promise despite the fact he has changed his mind.” What we noted earlier,
still strikes us important.  The referendum does not change party
representation in parliament.  It would be difficult for Di Maio and the opposition
parties to force Renzi out.     Meanwhile, the 5-Star Movement won
the mayoral contests in Rome and Turin.  The former is a bit of a poison
chalice in the sense that it is thought to be an exceedingly difficult task,
and it is proving itself so now.  Italian assets are mostly outperforming
Spain today.  

The US calendar is light with Challenger job cuts the weekly jobless
claims the main events. 
Yesterday’s jump in the service ISM,
including employment, new orders, and new export orders offset the disappoint
ADP estimate (165k) that reached a five-month low.  The improvement in the
US stands in stark contrast with the eurozone
and Japan.  In the coming month, investors will learn whether the
diverging sentiment is reflecting diverging
economic performances


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