Capital Markets: "Dollar Losses Extended"

From Marc to Market:

The US dollar remains on the defensive after retreating yesterday. Its losses against the most of the major and emerging market currencies are being extended today. The combination of softer US inflation coupled with a less dovish than expected ECB, a Bank of England lifting growth forecasts, while warning that a Brexit without an agreement could spur higher mortgage rates, and a more aggressive rate hike by Turkey conspired to force the dollar lower.

A weaker than expected CPI report plays into the hands of the doves at the central bank who are reluctant to remove the proverbial punch bowl and offer a contrast to it neighbors in Norway, who are expected to hike rates next week. Sweden's headline and underlying rate eased by 0.2%. The median forecast in the Bloomberg survey was for a flat report.

The rally in US shares yesterday and the dollar's pullback is helping lift global equities today. Relatively cheap valuations given the recent sell-off spurred bargain-hunters. The MSCI Asia Pacific Index ended its 10-day slide yesterday with a 0.9% gain and is up another 1.2% today. The 1.3% gain for the week is the most since late July. China is not participating in the broad market moves. The yuan is a little weaker, and this ensures it will post its third consecutive weekly decline. Indeed, since the middle of April, the yuan has risen in only three weeks. China's Shanghai Composite and the Shenzhen Composite were off 0.2% and 0.8% respectively today (bringing the weekly loss to 0.75% and 2.1%).

China reported sequentially better retail sales and industrial production in August. Retail sales rose 9.0% year-over-year, after an 8.8% pace in July. Industrial output rose 6.1% after 6.0% in July. If there was some disappointment it came from the 5.3% rise in fixed investment is the slowest pace since before 2000.

The dollar traded above JPY112 in early Asia, for the first time since early August but it could not take out the high recorded then (~JPY112.10) and has come off a bit in Europe. There is a $493 mln option struck at JPY112 that will expire today in North America.

The Australian dollar was unable to rise through yesterday's high (~$0.7230). Still, the Australian dollar is threatening to advance each session this week for the first time this year. There is an A$1.5 bln option at $0.7200 that will expire today. However, it is being challenged, and support in the $0.7175 area may have to be tested.

European equities are mostly firmer, and the Dow Jones Stoxx 600 is recovering yesterday's modest decline and is poised to close higher for the first week in three (currently ~ 0.85%). Most sectors but healthcare and consumer staples are edging higher, led by energy and consumer discretionary. Bond yields are edging slightly higher in Europe, but Italy's bank index is steady to firmer and set to finish the week up over 2% to extend last week's nearly 6% advance....MORE