Dollar Gains Pared But Yen Remains Soft

The sharp US dollar rally in response to the unequivocally strong jobs data left short-term technical indicators a bit over-extended, and the consolidative tone now is not unexpected. The dollar's pullback is minor, and it did manage to extend its gains against the yen. It has pushed a little through the JPY123.50 high set on August 21 just before the August 24 collapse to almost JPY116.00.

The dollar's gains against the the yen seem vulnerable, although the US 10-Year yield is edging a bit higher. The S&P 500 is called lower, and European shares are mostly a bit lower as well. Intra-day technical readings suggest that if a dollar high for the day has not been recorded, it is close. Initial support is seen near JPY123.

The yen's losses before the weekend and earlier today helped lift the Nikkei by nearly 2%. Exporters and Japanese banks were among the strongest sectors. There are two developments to note. First, the junior coalition partners in the Abe government has endorsed an economic stimulus package that is tied to Q3 GDP, which will be reported on November 16. Many economists expect a small contraction.

Second, Japanese wages are slowly firming. Regular pay rose for the seventh consecutive month (0.4% year-over-year). Moreover, adjusted for inflation, real wages rose 0.5% in September after a 0.1% increase in August. Overtime and bonus payments were each up 1.4%. Total cash earnings were 0.6% higher from a year ago, which is also a little more than expected.

China's reserves figures were out over the weekend suggest capital outflows are steadying. China also reported a record trade surplus, though imports and exports fell. Tomorrow China reports inflation figures. Softer CPI and continued deflation in producer prices is expected to result in easier PBOC policy in the months ahead. The decline in China's imports and prospects of Fed tightening are a headwind for many emerging markets.

Unrelated to China or the US, the Indian rupee has been crushed by the local election that saw Modi's coalition trounced 24% to 73%. Initially this is seen as undermining Modi's reform efforts. The dollar finished last week near INR65.7625 and reached INR66.5024 today, before easing back to INR66.3740. The currency took it harder than Indian assets. Stocks were marginally lower (~ -0.5%) and the 10-Year bond yield was only 3.5 bp higher, among the smaller increases in Asia.

The Australian dollar initially extended last week's losses, encouraged by the fall in China's imports, but it recovered fully. A modest rise in job advertisements, the fourth straight increase, helped. The national job figures will be reported toward the end of the week. The Aussie briefly slipped below $0.7020, but now looks poised to test the $0.7080-$0.7100 area.

The euro and sterling are near session highs as North American dealers are returning to their desks. Fundamental developments are meager, and the trading seems largely technical. There are three developments in the eurozone to note. First, a two billion euro disbursement to Greece has been delayed as Greece has not fulfilled the prior actions (milestones) necessary. The focus is foreclosure rules and some rules involving dealing with the recapitalization of banks.

The second development in the eurozone is in Portugal, and it is taking a toll on Portuguese bonds, where the benchmark 10-Year yield is up nearly 20 bp. The story here is that the center-left parties appear to have forged a coalition that will deny the formation of a minority conservative government, as early as tomorrow. The center-left is hardly homogeneous, but cannot be counted on to be docile supporters of austerity.

Third, the ECB's new cap on individual bonds—to 33% from 25%—goes into effect tomorrow. The ECB had made the decision to do so back in early September. This is important as it comes when the ECB is considering increasing the amount of bonds it is buying. This gives it more flexibility.

Technically, the euro has scope toward $1.0800-$1.0825. Sterling can rise toward $1.5150 without changing the underlying technical condition. Their upticks are corrective in nature. The news stream from North America should be subdued, with no important economic data or Fed speeches on tap for the reminder of the session.