Dollar Rides High

The US dollar is broadly higher against the major and emerging market currencies.  The driving force continues to be the divergence between the US on one hand and the euro area and Japan on the other.  At the same time, the considerably stronger than expected UK construction PMI was overshadowed by the latest YouGov poll, which indicated that the Scottish referendum is tightening. 

EONIA was fixed below zero for the first time last Thursday before popping up on Friday, reflecting month end pressures, before being fixed yesterday below zero.  The EONIA curve is consistent with a 10-15 bp rate cut on Thursday.   A little more than 20.5 bln euros were drained at today's 7-day main repo operation.   

The Germany and Dutch 2-year yields remain below zero as well.  France joined this exclusive club yesterday, but its 2-year yield is slightly positive today.  The market appears set to take out the $1.3100 area.  We look for a move toward $1.3020 before the ECB meeting. 

After a soft manufacturing PMI yesterday, the UK reported a better than expected construction PMI today.  The 64 reading is not only a six month high, but it is the second strongest in history after the 64.6 record high in January.  The consensus was for 61.4 after 62.4 in July.  However, the news failed to lift the sterling, where the short-term market is still net long, judging from the futures market, and the approaching Scottish referendum is making for some nervousness.  

The YouGov poll found those preferring to remain within the UK still leading 53%-47%.  However, this six-point gap is less than half what was reported in mid-August.  Moreover, compared with other polls, the YouGov survey had generally shown a larger victory for the "No" camp. 

Sterling had risen to an eight-day high yesterday near $1.6645, but today has fallen back to its lowest level since last Monday, which was a banking holiday in the UK.   A break of $1.6500 tests the March low near $1.6460 and we look for a break of $1.6300 in the sessions ahead. 

The dollar has approached the JPY105 area.  Above there, the obvious target is the multi-year high set at the start of the year near JPY105.45.   Much is being made of the capital outflows from Japan as the cabinet reshuffle expected later tomorrow is tipped to strengthen the hands of those seeking greater overseas investment from the Japanese government pension funds.  The data today, on the margins, would seem to argue against those seeking more stimulus from the BOJ.  

We have been sympathetic to the argument that the third arrow of Abe's program is not missing in action as many suggest.  Rather it resides in a number of modest measures, including more outside directors on company boards, more equity investment scheme for households and individuals, small steps on immigrant workers, and increased role of women.  

The part of Abenomics we did recognize as missing was wage growth.  Japanese workers have not seen wages keep pace with inflation.  The return on savings has not kept pace with inflation, and now consumption is being taxed more, while corporate taxes are being cut.  Today, Japan reported cash wages rose 2.6% year-over-year in July.   The consensus was for a 0.9% increase.  The June series was revised up to 1.0% from 0.4%.  This is the the fastest rise in cash earnings in 17-years.  

The Reserve Bank of Australia was the first of several major central bank meetings this week.  As widely expected, rates were left on hold and confirmed to be so for sometime.  There was little fresh guidance on the currency, which the central bank sees as over-valued given the decline in commodity prices.  

Separately, the economic data were mixed.  Building approvals were up more than expected (2.5% in July vs consensus of 1.9% and the June series was revised to -3.8% from -5% initially).  The current account deficit, on the other hand, blew out to A$13.7 bln from a revised A$7.8 bln in Q1 (initially A$5.7 bln).   This means that net exports were likely a bigger drag on Q2 GDP, which will reported tomorrow, than economists had anticipated.  The consensus calls for a 0.4% expansion in Q2 GDP after 1.1% growth in Q1.  The risks are on the downside. 

The Australian dollar has been pushed below $0.9300 for the first time since early last week.  Modest support is seen in the $0.9260-70 area, though risk extends toward $0.9240, last month's lows. 

The North American session features the ISM manufacturing report and July construction spending.    The data focus this week is on the national jobs report at the end of the week.  The Fed’s Beige Book will be released tomorrow.  There is much talk that the FOMC statement on September 17 will begin modifying the forward guidance to prepare the market for the end of QE.  New Fed economic forecasts will be released at the FOMC meeting as well.