Overview: As seems often to be the case a counter-trend move began in the foreign exchange market on Tuesday and continued into Asia today. In the current context, this meant a dollar pullback. Although move seemed to falter early European activity, we expect the dollar to move modestly lower in North America today. Asian stocks snapped a seven-day slide, with the help of small gains broadly in the region, including Japan, China, and India. Of note foreign investors, foreign investors sold Philippine shares for the 30th consecutive session. The Philippine Stock Index has fallen the past five weeks, during which time it has lost about 9%, and it is off another 1% this week. European shares are struggling to extend yesterday’s gains, but Italian stocks, including bank shares, are doing a bit better.  However, in the debt market, Italy remains under pressure, with yields and the premium over Germany still widening. European benchmark 10-yields are up small, and the US 10-year yield is slightly firmer at 3.22%.  

Federal Reserve’s Independence: Our technical reading of the market warned of a likely pullback in the US dollar after China’s markets re-opened from a week-long holiday. US President Trump’s comments, reiterating his criticism of  Fed policy (moving too fast) may have helped spark the technical move.  That said the price action in the fed funds futures market suggested investors do not think that the Fed will change its stance, and therefore despite appearances, the Fed’s independence is still seen as secure. The December 2019 fed funds futures contract implies an expectation for the average effective fed funds rate to be 2.925% at the end of next year. It currently is at 2.18%. The difference is nearly 75 bp or three hikes. The Fed’s projections are for one more increase this year and three next.  

US Dollar:  The euro bottomed yesterday near $1.1430 and reached $1.1515 in Asia. Support is seen near $1.1480 and should hold if the euro’s upside correction is to continue. There are options struck $1.1500-$1.1510 for nearly 1.4 bln euros that expire today. For the third consecutive session, the dollar found bids a little below JPY113.00. There is a $1 bln JPY113 option that will be cut today. The JPY113.40 area as blocked the upside this week and a move above there today would lift the tone. Sterling move to a new high for the month near $1.3185 in Asia. However, the momentum stalled, and Europe has been reluctant to rebuild it. Support is seen a little ahead of $1.31. The Australian dollar has recovered nearly a cent off of Monday’s lows, but resistance in the $0.7140-$0.7150 proved sufficient to keep stronger gains in check. A return below $0.7080 would be disappointing.  he US dollar reversed lower against the Canadian dollar yesterday from CAD1.30 and found bids near CAD1.2930 in Asia. The CAD1.2970 may provide a near-term cap. The dollar consolidated within yesterday’s range against the Chinese yuan, which itself was inside Monday’s range.