Dollar Corrects a Bit

The main theme in Asia and Europe has been a somewhat heavier dollar tone, against the major and emerging market currencies.  There has not been much of a fundamental driver as perhaps a bit of caution in a stretched-market ahead of key levels ($1.25 for the euro and JPY110 dollar-yen). 

Global equities are higher, following the pre-weekend US equity rally.  The MSCI Asia-Pacific Index gained 0.7%, which includes a 1% rally in the Hang Seng.   The Dow Jones Stoxx 600 is up a similar 0.7%, led by tech, materials and consumer discretionary.   Bond markets are more mixed, though most European bonds are firmer.  Of note, French bonds are also moving higher, despite some reports that the European Commission may very well reject the French budget proposal which had next year's deficit at 4.3% rather than the 3% to which it had previously committed. 

The week's data begin out slowly.  The two main European reports gave no reason to buy the euro, but the euro appears headed toward $1.2570-$1.2615 resistance.   German factory orders collapsed 5.7% in August, which was more than twice the 2.5% decline the Bloomberg consensus had forecast.  It brought the year-over-year rate to a decline of 1.4% from +5.9% (initially 4.9%) in July.   This warns of downside risks to the industrial production figures due out tomorrow.  The consensus expects a 1.5% decline in August output. 

While a weak economy poses a hardship on people, it may also boost Germany's willingness to more flexible with its macro policy.   Ironically, a strong Germany may help the periphery in terms of exports, but it also makes Germany less likely to boost investment and purse the kind of stimulative policies that could help the periphery.  Reports indicate that the IMF will cut German growth forecasts to 1.5% for this year and next, down from 1.9% and 1.7%, respectively.

The IMF will call upon Germany to boost its public and private investment.  It would not be surprising if the next US Treasury report on the foreign exchange market calls for similar measures for Germany.  Indeed, Germany, which prides itself on rules and agreements, shows no effort to reduce the external imbalances that the G7 and G20 have endorsed.  The US current account deficit has been halved and the Chinese surplus has been reduced even more.  

The second economic report was considerably less surprising.  The Sentix Investor Confidence survey fell to -13.7 from -9.8 in September, the lowest since May 2013.  Asset prices have struggled, with most equity markets off 3.5%-5.5% over the course of the past month and bond markets were mostly flat to weaker.  The negative 2-year rates in eight euro zone members and the poor economic data, with the German locomotive obviously struggling cannot be good for sentiment. 

The dollar had tested the JPY108 in middle of last week (which corresponded to the 20-day moving average), and with the help of the US jobs data, pushed to almost JPY110 before the end week.  The market seized on reports that GPIF may delay its portfolio review draft to pare short yen positions.   The BOJ began its two -day meeting and no change in policy or inclination is likely. 

Sterling, for its part steadied, but shows no inclination to resurface above $1.60.  Short-sterling, which the currency has been tracking,  is firm with yields on their lows.  Business Secretary Cable noted that sterling was 10-15% over-valued.  This is in line with the IMF’s assessment

The Reserve Bank of Australia makes is announcement the first thing tomorrow in Sydney.  The cash rate will most likely be left at 2.50%.  Governor Stevens comments on the housing market (macro-prudential measures needed) and the currency (it has fallen but not enough) will be closely watched.    Speculators in the futures market have swung to a net short position for the first time in six months.     Resistance is seen initially in the $0.8760 area, and then $0.8800.