Greenback Softer, but Dollar-Bloc Momentum Fades

The US dollar has eased to new lows for the week against the euro and yen.  There does not seem to be a big fundamental driver.  If anything the weakness in German exports, following as it does the soft orders and industrial output data, warns the European locomotive may be slowing, and would seem to be euro negative.

The soft US bond yields (~2.03% on 10-year Treasury) and the heavier stock markets may be bolstering the yen.  Nevertheless, the unexpectedly sharp decline in machine orders, ostensibly a leading indicator of capex, keeps many looking for the BOJ to do more when it meets again at the end of the month.  

The next target for the euro is in the $1.1330-$1.1350.   It is moving above the trendline drawn off the August 24 (~$1.1715) and September 18 (~$1.1460) and October 2 (~$1.1320) highs.  It comes in today near $1.1290. From a technical point of view, the close is important.  A close above $1.1330 open the door to $1.1400. 

The symmetrical triangle the dollar had been carving out against the yen is at risk of turning morphing into the rectangle consolidation as the apex of the triangle draws near.  Initial support for the dollar is seen in the JPY119.30-JPY119.50 area.   Regaining a foothold above JPY120 would keep the technical setting neutral. 

The German trade surplus narrowed sharply in August.  July's surplus of 25 bln euros fell to 15.3 bln euros in August.  Exports plunged 5.2%.  The Bloomberg consensus was for a -0.9% decline.  It is the biggest decline since January 2009.  Imports slumped 3.1%, the most since April 2012.   The consensus was for a 0.6% decline. 

Separately, news that Germany largest bank will eliminate its dividend rather than raise more capital in the market to cover what may be the largest quarterly loss in at least a decade was warmly greeted by the market.  Not only are its shares higher, but despite the small loss in the DAX near midday, financials as a whole are higher (0.35%). 

Japan's core machine orders fell 5.7% in August.  The consensus was for a 2.3% rise.  It was the third consecutive monthly decline.  On a year-over-year basis, machine orders are off 3.5% ( in July they were up 2.8%.  This is the first decline year-over-year since last November.  It provides more evidence it would appear, that the economy has not found much traction.  The economy has contracted in four of the past seven quarters, and many economists project a contraction in Q3 GDP.  This coupled with core inflation (excludes fresh food) moving back into deflationary territory underpins the expectation for the BOJ to step up its efforts. 

Central banks dominate the remainder of the session.  The BOE is not going to do anything, the but the immediate release of the minutes may pose some headline risk.   Sterling is edging higher in the soft US dollar environment.  The $1.5380 area is the next target.   The ECB releases its "account" of the recent policy meeting.  The market will look for some hint of where the bar is for the ECB to extend, expand and/or change the composition of the asset purchases.   

The FOMC minutes from the September meeting will be released in the NY afternoon.  There are two key issues that have preoccupied investors.  First, how close was the decision not to raise rates.  Yellen seemed to suggest it was not close while comments from others suggest it was.  Both are right.  It was not a close vote overall.  There was only one dissent in favor of a hike.  It was a close vote in the sense that it was a finely balanced decision for individual members. This leads to the second issue.  What is needed to shift the balance toward a hike?  Do market-based measures of inflation expectations have to rise?  Does China's equity market need to stabilize?  

Some talk about the Fed's decision to stand having been redeemed by the weakness of the US jobs data.  However, we note that the Fed did not cite concerns about the labor market in their decision.  They were likely as surprised as the market was by the September jobs data.  Moreover, that argument also presumes that the Fed will see the softer jobs data as a particularly worrisome sign instead of focusing on the cumulative improvement in the labor market.  

It also assumes certain judgments about the business cycle.  The expansion is mature.  As the economy approaches full-employment 200k+ gains a month are going to be more difficult to achieve.  Other measures of the labor market, like weekly jobless claims and ADP, did not show such deterioration in the labor market either. 

Lastly, we note that China's markets reopened from the extended holiday.  The Shanghai Composite rallied 3%, and the Shenzhen Composite tacked on 4%.   The Hong Kong China Enterprise Index (tracks H-shares) fell 1% after rallying more than 10% during the holiday.  The yuan itself strengthened slightly and remained in the upper end of the range seen before in late-September.  The gap between the onshore and offshore yuan remained tight. 

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