Dollar Pulled Higher By Yen, Pushed Lower By Europe

It is difficult to talk about the US dollar today--it rises sharply against the yen and dollar bloc currencies, while falling against the European currencies. The economic data has reinforced this price action, but it seemed emergent prior to the data.

The dollar had already recovered from the dip below JPY96 in early Asia yesterday and was near chart resistance seen at JPY97 before the Tokyo opened. There were two developments in Japan to note.

First, machinery orders for June were reported. While weak, they were not as bad as expected. Like US durable goods orders, this report is volatile. The June decline was 2.7% rather than the 7.0% (Bloomberg) consensus forecast and follows a 10.5% rise in May and a 8.8% decline in April. The data may encourage some to anticipate a small upward revision to Q2 GDP when reported next month.

More importantly, local press reports suggested that the cabinet is debating a possible corporate tax cut to offset the retail sales tax hike penciled in for April. It is the first of a two-step move that will double the retail sales tax.

Consumption was more important than business investment based on Japan's economic growth and the excess capacity in many industries. The surplus savings that have long plagued the Japanese economy has shifted from the household sector to the corporate sector. That a corporate tax cut in such conditions can offset a hike in a retail sales tax seems incredulous.

Nevertheless, equity investors liked the idea which helped to send the Nikkei up 2.6% and send the yen lower across the board. The dollar is testing the JPY98 level as North American dealers return to their desks. The six-week down trendline comes in near JPY99.20. While that is a reasonable target, more immediately, the JPY98.50 area may be important. It is where the 20-day moving average and retracement objectives converge.

The UK's inflation data was much awaited after forward guidance--and conditionality--were outlined by the BOE last week. The PPI and especially the CPI were reported spot on with consensus. Sterling spiked higher, but could not push through $1.5500 and slipped back to where it was prior to the reports. Consumer prices were unchanged in July after a 0.2% decline in June. The year-over-year rate slipped to 2.8% from 2.9%. Output producer prices rose 0.2% for a 2.1% year-over-year pace, up from 2.0% in June. Input prices rose 1.4% for a 5.5% year-over year pace, up from 4.0% in June.

Separately, the UK's RICS house price index was stronger than expected at 36 from 21. This represents a 7-year peak. Rising prices may encourage more house construction in the UK and boost confidence through the wealth effect.

Germany's ZEW survey was stronger than expected. The current assessment measure rose to 18.3 from 10.6. This is the strongest since last August and contrasts with the consensus forecast of 12. The expectations component rose to 42 from 36.3. This is the highest since the end of Q1. The news seems to offset the negative effect of the slightly disappointing euro area June industrial production data. It rose 0.7% rather than the 0.8% consensus. The euro held support near yesterday's lows and recovered to almost $1.3320. While firm, the euro lacks much momentum, though the US-German 2-year differential is near 12 bp, its lowest level since late June.

Fresh impetus is awaited from the US data. Import prices are expected to have jumped in July and this is already largely reflected in expectations for an increase in tomorrow's PPI report. July retail sales will garner more attention and risk appears to be on the downside of the consensus 0.3% forecast. However, the quality of the report may be more important. The component used for GDP calculations excludes auto, gasoline and building materials and may have risen by the most since last December.

Economists may take notice too in the business inventory report as they assess revisions to Q2 GDP. Inventories unexpectedly added to Q2 GDP and last week's wholesale inventory data suggests a downward revision is likely. However, this appears to have been offset by improvement in the net export function.