USD Firm, But Antipodeans Slide

The US dollar retains a firm tone against the major currencies, but the real move today is the drop in the Australian and New Zealand dollars. The latter is very much in focus as the Kiwi has lost about 1.4%. That brings the month to date loss to 7.3%. The central bank confirmed it sold NZD521 mln in August. This is the most since July 2007. On top of that Prime Minister Key was quoted indicating $0.6500 was the "Goldilocks" level. It sold off to almost $0.77 initially before rebounding to almost $0.7780 in late Asian activity.

The Australian dollar fell, partly in sympathy and partly as a function of its own sharp slide this month. It is off 6.7%. It was briefly traded above $0.9400 as recently as September 5. Today it briefly traded below $0.8700.

Both have eclipsed the yen, which is off a little more than 5% this month. The dollar edged a bit closer to the JPY110 level but did not quite make it there. It has been stopped at JPY109.75 so far.

Hong Kong shares sold off 1.9% (down 2..5% at its worst) in response to the widespread weekend protests (and police crackdown) over the Chinese control of the 2017 elections. This was reportedly the biggest clash in decades and the pro-democracy now seek the resignation of the Special Administrative Region's Chief Executive Leung. While China is letting Hong Kong police deal with the protesters, there is a fear that Beijing could respond more directly if local forces fail. There is some fear that China could also respond by simply canceling the 2017 election.

China is on an extended holiday as of Oct 1. There is also much anticipation of the Shanghai-Hong Kong equity link that will be activated in early October. The link will allow CNY23.5 bln (~$3.8 bln) of daily cross-border purchases. Reports suggest large inflows into China shares in anticipation of this and has been a factor underpinning Chinese equities. The Shanghai Composite rose to 18-month highs today.

European stocks and bonds are off to a rough start. Most bourses are lower, and the Dow Jones STOXX 600 is off 0.3% near midday in London. The index was off 1.8% last week. Bond yields are higher and the peripheral yields are up 4-6 bp while Greece's 10-Year bond yield is up 21 bp.

There are both economic and political developments to note. On the political front, in the UK, another Tory defected to the UKIP and this on the eve of the Tory Party Conference. At that Conference, Osborne will reportedly announce the abolition of the inheritance tax on pensions starting next April. This is seen costing the government GBP150 mln and is understood to be part of the fiscal inducement that the government plans ahead of next May's election.

In France, the center-right secured a majority in the Senate. Le Pen won two seats in the Senate for the first time. The Senate can be obstructionist, but legislation is approved in the chamber. It is more embarrassing and symptomatic of the weakness of the Hollande's government.

In Spain, the Catalan President Mas signed authorization to hold the non-binding referendum on November 9. Madrid will resist and will legally challenge the referendum. Separately, Spain reported a favorable mix of data. Retail sales which had been expected to fall 0.3% in August, rose 0.4%. This lifted the year-over-year pace to 0.4% from a revised -0.2% (initially -0.5%). Deflation pressures eased in September, according to the preliminary reading. The EU-harmonized measure stands at -0.3% after -0.5% in August.

German states reported September inflation figures as well. They point to a little changed national reading of 0.7%-0.8%. The preliminary September inflation euro-area CPI will be released tomorrow. A combination of the weaker euro and base effects suggests that inflation in the euro area is near a cyclical low.

The US reports August personal income and consumption data. Spending is expected to recover from the 0.1% fall in July. US Q3 GDP is tracking around 3.2%. The core PCE deflator, the Fed’s preferred inflation measure may tick down to 1.4% from 1.5%. This dovetails with other market-based reading that suggest inflation expectations have eased. Elsewhere pending home sales are expected to have slipped in August after the strong 3.3% increase in July.