Quiet Start To A Quiet Week

The US dollar is narrowly mixed against the major currencies in quiet turnover. Global equities are taking their cues from the US recovery before the weekend. Core bond markets are a touch heavier, while peripheral European bonds are firmer.

Press reports are playing up Russia's decision to cancel some military exercises on the Ukrainian border, but this cannot be assumed to be more than a feint. The key issue remains: how much more support is Putin willing to provide the insurgents to avoid their defeat.

The dollar fell to 4-day lows against the Russian ruble, but has since rebounded back into the ranges seen at the end of last week. MICEX is up nearly 2%, but the biggest move in Russian asset markets is the advance in the bond market. The Russia 10-Year yield is off 20 bp to 9.60%.

Erdogan's victory margin in Turkey's presidential election was sufficient to avoid a run-off. While the results were largely in line with expectations, investors do not seem particularly enthusiastic. The lira is marginally lower and equities are off around 1.0%.

There have been two economic reports to note today. Japan's tertiary index slipped 0.1% in June. The consensus looked for no change. This does nothing to deter expectations of a sharp drop in Q2 GDP, which will be reported early on August 13 in Tokyo. A contraction of 7-7.5% on an annualized basis is expected. The dollar has been confined to about a 20 pip range above the yen—JPY102. Reports indicate large ($1.2 bln) expiry today of options struck near JPY102.50.

The other economic data was Norway's CPI, which surprised on the upside. The headline rate jumped 0.7% in June. The consensus had forecast a flat report. The year-over-year rate firmed to 2.2% from 1.9%. The underlying rate rose 0.6%. The market expected a 0.1% decline. The year-over-year rate rose to 2.6% from 2.4%. The consensus had expected a decline to 1.9%.

The immediate impact was to rally the Scandi currencies. Yes, Sweden went along for the ride, even though the fundamentals compared with Norway are not as favorable. Sweden is still wrestling with deflationary forces and indications suggest the government will revise down its growth forecasts. The Norwegian krone has gained about 0.8% today against the US dollar, while the Swedish krona is up 0.6%.

The euro has eased toward recent lows seen in the SEK91.5-SEK9.17 area. Its breakdown against the krone is more serious. It is trading back below NOK8.30 for the first time since mid-June. The next technical target is near NOK8.26. A break of there could spur a move back toward NOK8.20.

The North American session is likely to be quiet. There are no US economic reports today, ahead of the JOLTS data tomorrow. The Fed's Vice Chairman Fischer's prepared remarks for a speech in Sweden warned that the sluggish growth in the US labor supply (participation rate?) remains troublesome and this coupled with the disappointing housing market, are sources of concern. While aware of the risks, he does not seem to embrace the secular stagnation hypothesis that has been revived by former Treasury Secretary Summers.

Canada reports July housing starts. They are expected to slip after a strong Q2. Investors are still digesting the disappointing jobs data reported at the end of last week that saw a nearly 60k loss of full-time jobs and the third loss in the past four months. The US dollar has been confined to about a 16 tick range against the Canadian dollar, just off of last Friday's best levels. Resistance is seen around CAD1.10.