US Dollar Starts New Week on Firm Note

The US dollar is enjoying modest gains against most currencies as
prospects of both tax reform and additional monetary tightening by the Fed
carry over from last week. 
The strong showing of the Liberal
Democrats in Japan, where the governing coalition has maintained its
super-majority is seen as confirmation of
continuity.  This helped lift
Japanese shares and weighed on the yen.  The Nikkei advanced 1.1%, the
most in a month, and extends the advancing streak to a record 15
sessions.  The Nikkei is at 20-year highs.  

The dollar gapped higher against the yen. The pre-weekend high was
JPY113.57 according to Bloomberg, and today’s low has been JPY113.62.  The
greenback briefly traded to JPY114.10 in early Asian turnover, the highest
since mid-July.  The low was recorded late in the Asian

Abe’s victory is seen as giving his
constitutional reforms new impetus.
  However, polls suggest the LDP is
more popular than Abe and polls show the public still needs to be persuaded
about the need for the constitutional changes.  A Yomiuri polls earlier
this month found a little less than half of the public support the changes and
a survey by Asahi last month found a little more than a third favored the
changes.  Recall that constitutional changes need to be approved in a public referendum.  

The debt markets are giving little hint that Spain’s government is set to
proceed with removing Catalonia’s autonomy or that the Catalans are going to
The 10-year Spanish bond yield is off nearly three basis points, and the premium over Germany is edging
down.  Prime Minister Rajoy, who heads up a minority government has the
support of the Socialists, Ciudadanos, many businesses in the region (which
accounts for 20% of Spain’s GDP)  and the army.  To invoke Article 155, Rajoy needs the approval
of the Senate, which is expected over the
coming weekend.   

With the law on its side, the Spanish government faces a dilemma over the
appropriate level of force that can be effective to stop the push toward
secession without alienating the public and political support.
Basque Nationalists who supported the minority government earlier has begun abandoning it, and this appears to be delaying the 2018
budget plans.  

Spanish equities are trading heavily. The 0.35% decline contrasts
with a small upside bias of the Dow Jones Stoxx 600.Financials and industrials
are the largest drags on Spain’s equity market, while materials and information
technology sectors are moving are offsetting part of the decline.

The shift to the right in the Czech Republic as a result of the weekend
election failed to impress the market. 
The Czech koruna is unchanged, while most of the central and eastern
European currencies are lower.
  The yield on the 10-year Czech bond is off almost a single basis point, but other regional bond yields are
1-2 basis points higher.  The two-year yield is off four bp, among the
most in Europe.  

We make the same point about Italy.  Two regions (Lombardy and
Veneto) held non-binding referendums seeking greater financial autonomy. 
The referendums won easily, but the markets have not paid much notice. 
Italy bonds and stocks are holding their own.  

The euro is trading heavily as follow-through selling after the poor close
before the weekend brings the single currency back toward last week’s lows
   The euro is
in a little more than a two-cent range between roughly $1.6660 and
$1.1880.  The widening rate differentials continue to weigh on the
euro.  The US premium on two-year money is above 230 bp today, a new high
since 1999, when it peaked near 270 bp, almost 20 bp shy of the modern peak in
1997.  The 10-year differential is knocking on 195 bp, the most in four

The Dollar Index is flirting with important resistance in the 94.00-94.25
area, which corresponds with a neckline of a bottoming pattern that would
project toward 97.00, where the 200-day moving average is presently found.
  The 97.40 area matches the 50%
retracement of this year’s decline.  

There is a nearly 900 mln euro option struck at $1.1730 that expires
  There is also 605 mln euros struck
at $1.1785 that are on the bubble.  While the yen’s sell-off clears the
options deck, the is a $1.6 bln option
struck at JPY114 that expires Wednesday. 

The US and Canadian calendars begin off quietly, without much in the way
of tier one data on tap today.
  The highlight of the week for the US
include the Oct ISM/PMI which will give a sense of how Q4 has begun, but also
the first look at Q3 GDP.  Economists look for a modest slowing from the
3.1% pace in Q2 to 2.5%, which, for the record, remains above trend.  A
pullback in consumption after a 3.3% annualized pace in Q2 is expected to be
the main drag.  The highlight of the week for Canada is the central bank
meeting.  Not only has speculation of a rate hike eased considerably, but
the market is giving up on a hike this

The Canadian dollar was sold ahead of the weekend on the back of
disappointing retail sales and the smaller than expected rise in CPI.
The US dollar closed above CAD1.26.  Follow through Canadian dollar
selling has seen the greenback rise toward CAD1.2640.  The next immediate
target is the late August high near CAD1.2660 and then the CAD1.2725, the 38.2%
retracement of this year’s decline.    We suggest that among the
best contemporaneous indicators for the USD-CAD exchange rate is the two-year
interest rate differential.  Initially today, the two-year rates are
moving in opposite directions, with the US yield up slightly and Canada’s yield
off a basis point.  The 11 bp premium the US offers is the most in two


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