Greenback Remains Firm To Start Key Week

The US Dollar is firm, though largely confined to the pre-weekend range. The Australian Dollar is a significant exception. The sharp downside momentum seen over the past several sessions has been further encouraged by disappointing Chinese data. Over the weekend, the world's second largest economy reported a rash of disappointing data, including a slowing of industrial production to six year lows.

The Australian dollar fell more than 3 cents last week and finished on its lows. Today it gapped lower. It opened just below $0.9020 after having recorded a low before the weekend just above $0.9030, according to Bloomberg. The Australian dollar fell to about $0.8985, which is essentially technical retracement level. Although the Aussie has stabilized back above $0.9000, the gap remains unfilled. How it behave around the gap in pricing will be important in shaping the near-term technical outlook.

China's economic news has helped spur expectations of some stimulus response, especially in the context of last week's soft inflation report (CPI 2.0% vs 2.3%). Chinese shares advanced though the Hong Kong Enterprise Index of Chinese shares fell 1.6%. The yuan, which has been steadily appreciating since the end of April (y about 2.3%), despite the dollar's broader gains, weakened today. It appears to be carved out a near-term bottom in the second half of last week.

Economic news has been light, but there are a couple of political developments to note. First, the political uncertainty stemming from the results of the Swedish election is failing to have a lasting impact on the krona. It is weaker in the face of a firm dollar, but it is holding its own on the crosses. Initially, the krona was sold. The euro rose to almost SEK9.28 from below SEK9.23 before the weekend. This was recorded in thin Asian turnover. The euro's gains were completely unwound by midday in London.

The key take away is that although the Social Democrat coalition got a plurality of the vote to unseat the center-right government, it did not secure a majority. The nationalistic Swedish Democrats garnered nearly 13% of the vote. The rub is that the other parties do not want to form a formal coalition with it due to its anti-immigration platform. Barring such an alliance, there seems to be three possibilities. The Social Democrat coalition can lead a minority government that will depend on gaining support on an issue-by-issue basis. The Social Democrats can seek a unity government with the center-right though the Center Party and Liberal Party seem to have ruled this out. There can be new elections.

The second political development to note was the two state elections in eastern Germany. The take away here is not that there was a change in governments, but how well the anti-EU AfD party performed. It drew 10% of the votes in Thuringia, and a little more than 12% of the vote in Brandenburg. This followed a similar showing last month in Saxony. It will be be represented in all three state parliaments, as well as the European parliament.

It enjoys political momentum and has begun shaping the political agenda as Merkel has had to tack right on immigration and law-and-order. The AfD campaigned not so much on its anti-EU stance as in filling the center-right void created by the demise of the Free Democrats.

Separately, and arguably with more immediate impact, over the weekend, the Bundesbank's Weidmann can down forcefully against public guarantees for asset-backed securities as part of the ABS- purchase scheme that Draghi won ECB support of over Germany's objections. Draghi has argued that the program would be more effective if it would include the mezzanine tranche (riskier than senior tranche) of the ABS. Yet, Draghi did not want the ECB to absorb the risk that this entails, and instead pressed for national government guarantees. Weidmann objected to this transfer of risk from the banks to taxpayers, which he said is contrary to the main thrust of policy in recent years.

The North American session features the Empire State manufacturing survey for September and the August industrial production report. The data is overshadowed by this week's FOMC meeting and will not change the main impulse from recent economic reports. The takeaway is the Q2 GDP will likely be revised up to something closer to 5%, and Q3 GDP is tracking some closer to 3.3%-3.5%.