The US dollar started softer in Asia, where Japan is on holiday for the first half of the week, but has come back bid in Europe. The key issues now seem to revolve around intentions and implementations. Those are the key unknowns.
Intentions refer to the major central banks. Three Fed officials spoke over the weekend. Williams, Ballard, and Lacker (who dissented) all said a hike before the end of the year may still be appropriate. US interest rates are a couple basis points firmer today.
ECB officials who spoke before the weekend played up the flexibility of its asset purchase program. The recent appreciation of the euro (on a trade-weighted basis) and the drop in oil prices make its policy objectives more difficult to reach.
At the end of the week, Japan may report core inflation, which excludes fresh food, and it may slip back into negative territory for the first time since April 2013. Many observers still expect the BOJ to expand its asset purchase program as soon as the end of next month.
Implementation refers to the challenges of China and Greece. Chinese President Xi has a state visit to Washington later this week with all the pomp and circumstance. China has indicated that it will allow market forces greater sway in deciding interest and exchange rates. Implementation is key.
Similarly, Tsipras will return as Greek Prime Minister, heading up the same coalition as before. Greece needs to implement the agreement to pave the path toward some forms of debt relief. Securing debt relief will also help Tspiras’ broader reform agenda.
Asian equities were mostly lower after the US pre-weekend slide. China was a notable exception, with the Shanghai Composite up almost 1.9% and the Shenzhen Composite up nearly 3.6%. European bourses are mostly higher. The DAX is an exception. It is being dragged down by the emissions scandal at VW.
Asian bonds rallied, but European bonds are 1-2 bp lower. France was downgraded before the weekend, and the 2 bp higher 10-year yield is in line with the 1.5 bp increase in the German 10-year yield. Portugal, which was upgraded by S&P, is outperforming. The 10-year yield is off almost 2 bp.
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