Tuesday, October 10, 2017

FX: "Dollar Pullback Extended"

From Marc to Market:
The US dollar's advance faltered before the weekend after rise average hourly earnings and a new cyclical low in unemployment and underemployment initially fueled greenback buying. There is no doubt the data was skewed by the storms, though the upward revision to the August hourly early cannot be attributed to the weather distortions. The reversal in the dollar before the weekend has carried over into the early trading this week. Even the Turkish lira, which had been battered yesterday amid a diplomatic squabble with the US, is firmer today, though there is no resolution at hand.

The dollar reached a high at the end of last week nearJPY113.45, a nearly three-month high, before reversing and finishing on it lows before the weekend nearJPY112.65. It dipped below JPY112.35 yesterday and is trading near there now. Support is seen near JPY111.75. The main driver of the dollar-yen exchange rate continues to be US Treasury yields. The yield on the 10-year note is nearly six basis points below the pre-weekend peak of 2.40%, which is the upper end of the six-month range.

Meanwhile, the momentum behind the "Party of Hope" has begun fading. The party is not running sufficient candidates unseat the LDP, and a new party, formed from the rump of the Democratic Party of Japan, called the Constitutional Democratic Party, led by former Cabinet Secretary Edano is attracting support. The takeaway is that although there may be an underlying desire for an alternative, it will not be satisfied in the upcoming election.

At the same time, a new corporate scandal has exploded in Japan. One of the largest metal producers admitted to falsifying reports of the strength of a durability of its aluminum and copper products that are used for aircraft and autos. Kobe Steel lost more than a fifth of its value today. The Topix gained nearly 0.5% to reach a fresh two-year high. Separately, the August current account was considerably larger than expected. This reflects not only the trade account and tourism but more importantly, the income from overseas investments. The current account surplus of JPY2.38 trillion compares with a surplus of JPY1.97 trillion in August 2016.

In the UK, May's contingency for Brexit without an agreement won praise from her hard Brexit wing, at the same time as she recognized a role for the European Court of Justice in a transition phase. Brexit wrestles with the outlook for UK monetary policy as a driver for sterling. Last week, sterling's drop was a function of politics as the expectations for a hike in November were little changed. This week, the estimates of high unit labor costs (lower productivity), and today's news of stronger industrial output (0.2%), and especially manufacturing (0.4%), with a recovery in construction (0.6%) helped keep sterling's recovery intact....

The dollar index is down 0.30 at 93.20