Dollar Begins Week Little Changed, Yen At One Month Highs

In what may prove to be the calm before the storm, the US dollar has been confined to fairly narrow trading ranges against most of the major foreign currencies, mostly within Friday's ranges.

The Japanese yen is the main exception. It is posting across-the-board gains. The dollar is trading below JPY98 for the first time since late June. Macro funds were reportedly among the featured buyers of yen and some accounts linked it to the unwinding of equity related hedges.

The Nikkei, which had a poor showing before the weekend, with a settlement on the lows after gapping lower, followed suit today with another gap and a close on the lows. Over the last three sessions, it has lost about 7.5%. Technically, there is not sign that the selling pressure has been exhausted. Today's 3.3% decline was led by oil/gas and basic materials, but no sector escaped the carnage.

European bourses are faring better. Outside of Italy, which is off almost 0.5%, pressed by banks and profit-taking in Telecom Italia after a 4-day advance, other European markets are higher, with the Dow Jones Stoxx 600 up about 0.4% near midday in London, with only financial and utility sectors struggling. A couple of large M&A deals are among the main talking points, with the US's Perrigo (PRGO) reportedly acquiring Ireland's Elan (ELN) for 6.6 bln euros (~$8.6 bln) in an equity and cash deal, and France's Publicis (PUB.PA) merging with Omnicom (OMC) in an all-stock transaction to create the world's largest advertising company.

Japan reported disappointing retail sales to kick off the week which sees new data nearly every day. Retail sales fell 0.2% in June. The consensus had expected a 0.8% increase. The recovery of the Japanese economy has been led by reconstruction, industrial output and exports. Still, the rise in Japanese retail sales in the April-June period is the strongest in 2 years.

Separately, last week, electoral victory for the government has seen new interest in the retail sales tax hike planned for next year. PM Abe, who has seen support wane a bit, continues to seek more expert opinions, while BOJ Governor Kuroda has come out in support.

News from Europe has been light. News that UK mortgage approvals unexpectedly declined in June and that business lending slowed casts some doubt on the ability to sustain the second quarter growth, which was reported at 0.6% last week. A separate report from the the Bank of England showed that foreign investors reduced their gilt holdings by GBP2.6 bln in June. The 10-year gilt yield rose about 45 bp in June, and has fallen around 10 bp in July.

Italy reported a rise in business confidence, which at 91.7, stands at its highest level since January 2012. However, Italian bonds and stocks are under-performing amid increased political anxiety. The Supreme Court is expected to hear Berlusconi's final appear on tax fraud charges. It is not immediately clear whether the court will make a ruling tomorrow. Although Berlusconi has indicated that he will not pull support for Letta's coalition government, the members of parliament may have different ideas.

The busy week of US economic reports begins slowly, with only June pending home sales due today. May's 6.75% increase was the largest rise since April 2010. It is expected to have slipped back 1%. Investors (and some officials) may take note of a softness in an interest-rate sensitive report.