The Dollar Rides High against Majors, while Emerging Markets Recover
The dollar is broadly higher against the major currencies, with the Swedish krona and euro suffering the most. Poor retail sales in Sweden and unexpected weakness in the German labor market report (unemployment rose 7k vs the consensus forecast of a 5k drop) were the ostensible drivers after a relatively quiet Asian session. While the dollar is within its recent ranges against the krona, the euro has slumped to its lowest level since mid-month.
The euro has found a modicum of support near $1.3240. However, the selling pressure may not have been exhausted. Many observers had been looking for one more push higher to sell into and now are tempted to jump aboard. Recall that the CME futures positioning showed that the recent euro rally has been driven more by the establishment of new longs than short covering.
These longs are vulnerable now. In addition, we have noted that the put-call skew (risk reversals) have shown a rising put premium (call discount). Given the rising (implied) vol environment, it suggests a bearish outlook has been expressed through the purchases of put options. Initially the euro has scope to ease toward $1.3200 and some observers are anticipating a near-term test on the 100- and 200-day moving averages that converge in the $1.3130-40 area.
At the same time, the 2-year interest rate spread between the US and Germany is recovering after finishing last week near 2-month lows below 10 bp. The spread stands at 16 bp today and is the widest in about a month. High expectations for Fed tapering next month, couple with yesterday’s poor 5-year auction (and a build concession for today’s 7-year sale) is also impacting.
Italy’s Letta government reached a compromise yesterday over the unpopular property tax. This year’s payments will be suspended and the tax abolished and replaced with a municipal services tax starting at the beginning of the new year and a new gambling tax. Unspecified spending cuts, to be included in the 2014 budget, were also promised.
This pushes off the political confrontation between the center-right and center-left to the real issue and that is Berlusconi’s political future. That debate is slated to begin in earnest earl;y next month. Italian bonds and stocks have responded with gains, though several European officials have already expressed concern that the reforms by the unelected Monti government are at risk of being unwound.
Meanwhile, new actions by emerging market officials and some sign that an air strike is not as imminent as it may have seemed are helping the emerging markets stabilize today. The MSCI Emerging Markets equity index is up about 1.1%. Brazil hiked its overnight rate 50 bp late yesterday to 9% as widely expected. Indonesia followed with its own 50 bp hike today. The Philippines reported stronger than expected GDP (7.5% vs 7.2%). South Korea reported another substantial current account surplus in July, though slightly smaller than June’s, but contained new of a larger trade surplus.
Both Taiwan and South Korea saw net foreign inflows into the local equity markets today. Both their bourses rose about 1.2%. The Philippines equity market advanced 3.6%. News that India would grant swap lines to its large oil importers, which is tantamount to targeted intervention, helped lift the beleaguered rupee 2.7% (behind the Indonesian rupiah’s leading 3% rise), and bolstered the local equity market by a little more than 2%.
News from Japan was disappointing. First, July retail sales slumped. The 1.8% drop in the month brought the year-over-year rate to -0.3%, the first negative print since April. Abenomics is partly predicated on boosting consumption and yet it appears to be poised to implement the retail sales tax hike, at least in some fashion starting next April.
Second, Japan investors sold foreign bonds for the second consecutive week, after having gone on a bit of a buying spree in July and the first half of August. The bonds they sold (JPY318 bln) more than offsets the small amount of equity (JPY9.6 bln) and bills (JPY5.7 bln) that they bought. Meanwhile, foreigners sold Japanese stocks for the fourth time in 5 weeks. Still the JPY89.5 bln of net equity sales is dwarfed by the JPY862 bln of Japanese bonds and the JPY915 bln of bills sold.
Japan has a big data dump tomorrow and overall household spending should hold up better than retail sales. The manufacturing PMI, employment, consumer prices, and industrial production are on tap.
The dollar began recovering from Tuesday slide yesterday and extended that earlier today. Tuesday high is the next objective near JPY98.50. The downtrend line drawn off the late May highs comes in near JPY99.00 and this remains the key to the dollar’s upside from a technical perspective.
News that Australia’s private sector Q2 capital expenditures and the new found stability in the emerging markets helped stead the Australian dollar. However, fresh upticks have been hard to come by. It remains confined to yesterday’s ranges.