Capital Markets: "Corrective Pressures Give the Greenback a Reprieve"

From Marc to Market:

Overview: After poking above $1.20 for the first time in more than two years, the euro reversed lower yesterday and is continuing to succumb to profit-taking pressures today. Comments from ECB's Lane appeared to trigger a reversal yesterday throughout the currency markets. Gold also reversed after approaching the $2000 level, and follow-through selling has been seen today too. The dollar is stronger against all the currencies today. The US benchmark 10-year bond yield is little changed at 69 bp, while European bond yields are off 3-5 bp. The stock markets have not been distracted. Asia Pacific bourses were mixed, but the yen's pullback helped lift the Japanese equities. Korean, Australian, and Indian stocks led the advancers. In Europe, consumer discretionary, information technology, and materials are posting substantial advances to lift the Dow Jones Stoxx 600 more than 2% near midday. Financials are lagging. US equities closed on a high note yesterday, and the S&P 500 is poised to gap higher. Gold retreated to about $1956 in late Asia before finding a bid in early Europe. October WTI is firm, straddling the $43-level in a narrow range. API estimated another sharp drop in US crude inventories. If confirmed by the EIA today, it would be the sixth consecutive weekly decline.

Asia Pacific
Australia's Q2 GDP contracted by 7% quarter-over-quarter. It was larger than expected and follows a 0.3% decline in output in Q1. Year-over-year, the economy shrank by 6.3% after growing 1.6% in the year through Q1. The new outbreak of the virus will impact the strength of the recovery this quarter, and a small expansion is expected.

South Korea's inflation picked up for the third consecutive month. In May, the year-over-year rate slipped below zero, but price pressures have been rising, and in August stood at 0.7% year-over-year, matching the 2019 year-end reading. Part of the force is coming from an unusually wet season that has pushed up fresh food prices. The core rate, which excludes food and energy, rose 0.4%, the same year-over-year pace as in July....

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....Europe
Around the time the euro was pushing above $1.20 yesterday for the first time since May 2018, the ECB's Chief Economist Lane said that while the central bank does not target the exchange rate, the euro-dollar exchange rate matters. Many see this as a sign of the ECB's growing concern about the euro's strength, especially after the preliminary August CPI report showed a deflation. The risk they see is some more talk along these lines from next week's ECB meeting (September 10)....

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