News of the defection of two more Republican Senators doomed the Senate attempt to replace and repeal America’s national health care. The failure to replace the system dubbed Obamacare, despite the Republican majority in both legislative chambers and the executive branch raises questions about the broader strategy of the Administration and raises serious questions about the rest of it’s legislative agenda; we are taking the liberty to assume healthcare replacement is the keystone of the Administration’s agenda.
The US dollar was already trending lower against most of the major currencies, and the losses had accelerated following disappointing news on retail sales and a lackluster CPI. News of the failure of the Senate’s effort saw the greenback take another leg down in early Asia, for which it has not been able to recover.
Sterling is the main exception. At #1.3025, it is off about 0.25% on the day. It had been participating in the broad move against the dollar, rising to new highs since last September (~$1.3125), until news of softer than expected UK inflation caused it to tumble more than a cent. Judging from derivative prices, investors never took seriously the possibility of a rate hike at the next BOE meeting (August 3), but the softer CPI figures further reduce the perceived odds of a rate hike in H1, 2018.
Sterling in posting a potential key reversal by making a new high for the move and then selling off through the previous day’s low. A close below that low (~1.3050) would complete the one-day reversal and point to losses that could carry sterling toward $1.2930 initially. Resistance in the North American trading session will likely be encountered in the $1.3050-#1.3060 area. There is a $1.3050 option strike for nearly GBP220mln than expires today.
UK consumer prices were flat in June, and this saw the year-over-year rate slow from 2.9% to 2.6%. The BOE’s new preferred measure, CPIH eased from 2.7% to 2.6%, while core inflation slowed from 2.6% to 2.4%. It is the first drop in the year-over-year headline rate since last October. While it’s suspected that the UK price pressures are near a peak, today’s data is exaggerated by seasonal developments (i.e. clothing).
While sterling is the weakest of the majors, the Australian dollar is the strongest, gaining 1.6% on the back of the weaker US dollar, a 5.7% surge in iron ore prices (highest since early May), and minutes from the RBAS meeting whos overall tone was optimistic on the economy and wages. The Australian dollar is at two-year highs and is racing toward $0.8000 and the 2015 high near $0.8165. A note of caution comes from the fact that the surge in the Australian dollar has pushed it above its upper Bollinger Band found near $0.7855; to $0.7955, three standard deviations above the 20-day moving average.
News that Germany’s ZEW survey weakened more than expected in July has been lost in the US dollar drop. The investor sentiment survey is not often a market mover, but today’s response was barely noticeable. The assessment of the current situation eased from 88.0 to 86.4, which is still highly elevated. The expectations component eases from 18.6 to 17.5. It is the second consecutive decline, something not see since the start of last year.
The euro took a step higher, through $1.1500 and toward $1.1540 on news from the US Senate. It then consolidated before taking another leg higher late in the European morning that carried it to nearly $1.1560. The next immediate target is $1.1615, last year’s high, and then the August 2015 high near $1.1715. For the record, the upper Bollinger Band is found near $1.1585 today.
Ahead of Thursday’s ECB meeting, where Draghi is expected to repeat his assessment that inflation is not yet on a sustainable and durable path toward its target, European bonds are undwinding more of the mini0taper tantrum. Peripheral yields are off 4-5bp, while the core bond yields are a couple basis points lower. US 10-year yields are lower for the third day running and for the sixth time in the past seven sessions.
The fall in yields is helping the yen recover. Recall that from around the middle of June to middle of July, the dollar rose 5.35% against the yen to reach nearly JPY114.50 a week ago. Today the greenback traded at tis lowest level since July 3 at JPY112.00. The JPY 111.65 is the 50% retracement of the recent advance and JPY111 is the 61.8% retracement. There are $850mln options struck at JPY112.25 that expire today and can influence the price action.
The US economic calendar features import and export prices; and at the close of May, TIC data. The political implication of the health care reform failure is the main consideration today. The political development take place amid skepticisms over the trajectory of monetary policy in light of the poor data. Market participants were still digesting Yellen’s testimony before Congress last week. Many observers heard her more dovish than we did, and note that the cleanest read of her impact on policy expectations was to be found in the unchanged Fed funds futures rather than the softening yield at the long-end.