Officials Fill Vacuum of Data to Drive FX Market

The light economic calendar has cleared the field to allow officials to clarify their positions. Yesterday it was NY Fed President Dudley and Chicago Fed Evans who argued that economic conditions continued to require a gradual removal of accommodation.  The Fed's Vice Chairman Fischer did not address US monetary policy directly but did note that housing prices were elevated and that low interest rates contributed.

The comments (and more Fed officials are speaking today--Rosengren and Kaplan--and four more over the next three days) come as many market participants have been critical of the Fed's decision to hike rates. The overwhelming majority of the FOMC (except for one dissent) last week's hike. In essence, the Fed argues that the recent lower inflation readings are transitory. The decline in energy accounts for a large part of the decline in headline CPI.

The decline in the core rate is a bit more complicated and do not appear related to the business cycle or monetary policy per se. The cut in the price of wireless plans, for example, is about competition. There are also some quirks the in data that cannot be accepted at face value. The decline in homeowner equivalent rents is falling while actual rents are increasing raises questions, as does the decline in doctor fees.  In any event, the June Empire and Philly Fed survey showed prices received rose to five-month highs (and are strongly correlated with headline CPI).

Bank of England Carney faces a similar but different challenge.  Last week's decision to keep rates on hold was based on a 5-3 vote. Many observers think since this is two more dissents than previously, which a rate hike is getting closer. Carney set the record straight earlier today, and sterling fell half a cent in response.

The Bank of England Governor was clear.  As he was a year ago, Carney remains concerned about the economic consequences of Brexit.  Domestic inflation, he argues, is subdued, and wage growth is anemic.  He signaled it would take the next several months to see if there are offsets to the weaker consumption, whether wages recover, and the economic response to the tighter financial conditions. He noted the great degree of uncertainty as Brexit negotiations begin.

The takeaway is that the Bank of England is most likely not going to raise rates anytime soon. The market responded immediately and began unwinding the tightening bets.  The implied interest rate on the December short-sterling futures contract fell six basis points. This is the largest decline in four months. The 10-year Gilt yield is off more than three basis points, which pushes the yield again below 1.0%.  

Sterling had poked above $1.28 briefly yesterday but stopped a couple of ticks shy of last week's high.  It finished the North American session poorly yesterday and is at one-week lows today (a little below $1.2670). We peg resistance now near $1.2720.   There is a modest option (~GBP335 mln) struck at $1.27 that expires today.

The minutes from the Reserve Bank of Australia's recent meeting were released today. There were not surprises.  It recognizes the risk combination of high levels of household debt and weak wage growth. The RBA stance remains neutral. Moreover, since the RBA met on June 6, the country reported constructive--even if overstated due to sample changes--employment report.  The unemployment rate fell to 5.5% from 5.7%.  Four-times more jobs were created than the median in the Bloomberg survey forecast and 52k full-time jobs were created

The Australian dollar remains firm. Even Moody's decision to downgrade the four large Australian banks failed to push the Aussie out of its recent range. Potentially it appears to be like a spring coiling. In recent sessions, it has built a base in the $0.7570-$0.7580 area and has been making slightly lower highs for the past few sessions near $0.7630.

Beginning on June 9, the Aussie has been moving in a saw-tooth fashion alternating between advancing and declining sessions, though it has appreciated about a cent over this period.  We suspect it has been carving out a continuation pattern, meaning that the consolidation may resolve itself with a push higher.  However, this will likely further extend the stretched technical indicators, suggesting that participants ought to be careful, and the next leg up could represent the end of the move that began last month near $0.7330.

The US dollar rose to its best level against the Japanese yen a few weeks (since May 26).  The rise in US yields yesterday (in response to Dudley) helped lift the greenback. There was some follow-through buying but the additional gains on top of JPY111.60 yesterday were limited. US 10-year yields are easing a little after rising four basis points yesterday.  We note that the five-day moving average is crossing above the 20-day average for the first time in a month. Other technical indicators are constructive. However, the JPY112.00-JPY112.15 may offer a formidable challenge unless US rates continue to recover.

Between the Asian session and the European morning, the euro has been confined to less than a quarter cent range against the dollar; pinned, as it were, in the lower end of yesterday's range.  It is the fourth session; the euro has put in a low in the $1.1130-$1.1140 area. The five-day moving average fell below the 20-day moving average last week for the first time in two months. Technical indicators still warn that the downside is not exhausted.

MSCI is expected to make its announcement in early Wednesday in Asia about changes to its emerging market equity index. The focus is mostly on whether China's A shares will be included. Other Chinese equities, such as H-shares that trade in Hong Kong and ADRs that trade in the US is already included.  Ahead of the decision, Chinese shares slipped, a did the H-shares. 

Three other elements of the MSCI decision are awaited. Will Korea be upgraded into the development world equity index?  Will Saudi Arabia be included in the emerging market equity index?  Will Argentina?   Korea's Kospi edged fractionally lower today.  Saudi share is also trading with a slight downside bias today. Yesterday's Argentina's bourse advanced roughly 1.8%. 

Overall, the MSCI Asia Pacific Index eked out a minor gain but extended the advance for a third session and five of the past six. Of note, the Topix and Nikkei rose to its best level since August 2015. However, they gapped higher, following the NASDAQ's biggest jump since last November as the large-cap technology shares continued to recovery, and both settled on their lows. If it is a "normal" gap, should be filled in the near-term.

The Dow Jones Stoxx 600 rallied nearly six percent over the past two sessions and appeared tired.  It is up marginally today.  Its 0.2% advance in the European morning is being led by consumer names, with energy and real estate the drags.  Recall it gapped higher yesterday, and has not looked back.  The index peaked May 15 a little more than one percent higher.  There is some thought that window dressing ahead of the half-year end next week is prompted some new buying of European shares.

The S&P 500 and NASDAQ also gapped higher yesterday. The former closed at new record highs. The latter reached its best level since the sharp drop on June 9  and closed near its highs.  The key level to monitor is about 6252.5. It represents the 61.8% retracement of the decline, and overcoming it would boost ideas that it is on its way to new highs.