Dollar Pushes Higher

The US dollar is extending its recent gains. There does not appear to a new driver. Rather the momentum, without meeting official resistance, is encouraging piling on.

Australian and New Zealand central bank officials may have given a bit of a push to their currencies, but their assessment has been consistently articulated. The central banks see their currencies as unreasonably strong. The RBNZ threatened intervention. The RBA's push for macro-prudential measures to cool the housing market means that monetary policy (higher rates) will not have to be used.

However, the euro is trading at new low, moving beyond our near-term target of $1.2750 target. The next technical objective is about a cent lower, but key psychological level is $1.25. Draghi's indication that additional unconventional measures can be adopted if necessary is not real news. This has been the direction of his guidance, and the perceived risk of it has risen since the poor initial participation in the new four year loan facility (TLTRO).

Next week's flash euro area CPI figure is the key event ahead of the ECB meeting, where details of the ABS/covered bond purchase plans are expected. There is some talk of another decline. The 0.5% monthly increase from last September drops out of the base effect and the ongoing weakness of commodities fuels the pessimism. The policy response to a potential weak report could dominate the "modalities" of the private sector asset purchases.

Eurozone money supply figures provided more fodder for the euro bears. Money supply growth ticked up to 2.0% from 1.8%. It is the fastest pace since last September. However, the contraction in loans barely slowed (-1.5% from -1.6% in July). Improvement in lending to households stalled at -0.5% year-over-year, while the pace of contraction in lending to non-financial business slowed to -2.2% from -2.4%. The lending numbers are of increasing importance for estimating the second phase of the TLTRO, which depends more on the expansion of the loan book.

The dollar's push higher is taking place amid a softening of US yields. The US 10-year yield has slipped nearly 10 bp from last week's peak on what we argued as an exaggeration of the role of the FOMC's dot plot forecasts. Various measures of inflation expectations have fallen.

There are four considerations here: First, as we have argued, the truer policy signal is generated from Yellen, Fisher, and Dudley. Dudley was dovish earlier this week. Second, as Yellen and Dudley argued, the confidence around the longer-term forecasts limits their reliability. Third, next year, two hawkish regional presidents Plosser and Fischer are expected to step down. This may impact the dot-plot forecasts while the rotating votes will go to somewhat less hawkish regional presidents. Four, the rise in the dollar and fall in commodity prices weighs on inflation expectations.

Meanwhile, the market has largely shrugged off the comments from some quarters in Japan, which seemed aimed at slowing the yen's descent. There was the initial comments by the junior member of the governing coalition, a poll of Japanese businesses that also saw a reluctance to see a weaker yen, comments by a former BOJ official, and then comments by Prime Minister Abe. Some observers play down the seriousness of the comments, and suspect that more to do with positioning ahead of the upcoming G20, IMF/World Bank meetings. The weaker yen is likely to rekindle the upward pressure on Japanese prices, though tomorrow's inflation report may be too early to reasonable expect it.

The weaker yen helped lift the Topix and Nikkei to new six-year highs. There are some reports some Japanese equity buying may have been related to efforts to secure dividends which as of record tomorrow. European shares are in rally mode today, helped by yesterday's recovery in the US markets.

The North American session features the weekly jobless claims and durable goods orders. The weekly jobless claims unexpectedly fell sharply last week. It is a noisy time series and is likely to snap back this week. That said, we remain concern that the US labor market may be losing some momentum. Durable goods orders were terribly distorted in July by the surge in commercial aircraft orders. The headline data will be distorted in today’s August report as well, but to the downside. US capex investment has picked up, but it remains well below levels seen in other cycles.