Dollar Maintains Strength Amidst Confusion

Talking Points

·          Fukui wants to remain on post  

·          NK crisis remains unresolved

·          China hints that yuan may appreciate faster but rate above 8.000 once gain

·          Swiss import prices rise to 13 year highs but franc weak

·          US Durables on tap

News overnight that PBoC monetary policy committee member Yu Yongding noted that he expects the yuan to appreciate more quickly caused USD/JPY to strengthen temporarily with the pair dipping below  116.00. But the rally fizzled in less time than it takes to fill an empty <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />New York city parking space and soon traded back above 116.25. With the Fukui matter unsettled, following rumors yesterday that the BOJ Governor may resign and the North Korean missile still apparently  on the launch pad, the FX market continues to view long yen positions to be rife with risk.  Although Governor Fukui, testifying before Parliament,  stated that he would like to remain at his post, there is still an open possibility that he may be forced from his position due to appearance rather than the act of impropriety. Meanwhile, despite Mr. Yongding statements USD/CNY actually strengthened back above 8.000 as Chinese business interests, taking advantage of new capital liberalization laws sought out investments in  dollar denominated assets in mining, energy and commodity sectors. In short, the yen remains under pressure from a variety of external factors that have nothing to do with the sound underlying economic fundamentals. However, until those issues are resolved, yen longs may continue to feel pain.   <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

The euro also weakened somewhat, as markets continue to price in the possibility of additional Fed rate hikes beyond 5.25%.  With only Durable Goods on the calendar, trading may remain range bound for the rest of the day, however, if the number prints materially better, dollar bulls could decide to test the strength of the support at 1.2500 level which has been impenetrable so far. With so many stops rumored to be resident around that barrier volatility may well increase as we approach the 10 AM EST New York cut.

Finally,  one of the most surprising price action developments has been occurring in the EUR/CHF cross. The pair continues to rally despite the fact EZ data has been decidedly lackluster raising serious questions about the  degree of intensity of future ECB rate hikes, while the Swiss data has produced nothing but impressive results leading SNB authorities to adopt a progressively more hawkish rhetoric. Tonights Swiss Producer Import price are case in point. Having reached 13 year highs, they are only likely to redouble SNB determination to contain inflation by raising rates.  Therefore, in a such an environment, the fact that EUR/CHF trades near month long highs of 1.5640 remains a puzzle.  

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