Dollar-Bloc Run Continues, Sterling Shines

Dollar-Bloc Run Continues, Sterling Shines

  • The dollar bloc currencies have outperformed the euro, yen, and sterling since the last Fed meeting, in part supported by higher oil prices
  • Both German and Spanish industrial output figures disappointed; the UK’s was better than expected
  • As widely expected, the BOJ left policy alone at the conclusion of its two-day meeting
  • Norway’s minority coalition government has indicated that it will withdraw funds from the sovereign wealth fund\
  • We provide a quick roundup of the various data points out of EM overnight, and preview the key ones ahead

  • Since the Federal Reserve left rates on hold on September 17, the dollar bloc currencies have outperformed the euro, yen, and sterling, all three of which are lower against the dollar.  So far this week the New Zealand dollar is the strongest, rising 2.8%, followed by the Australian dollar’s 2.1% gain.  The Canadian dollar is up 1%.
  • Higher commodity prices, including oil and copper, are lending support.  The EIA’s warning that US output will slip through the middle of next year helped lift the November light sweet crude oil futures contract to almost $50.  This is its highest level since late July.  The New Zealand dollar was aided by a good dairy auction.  Yesterday, the RBA signaled no urgency to cut rates.
  • The US dollar briefly slipped below CAD1.30 for the first time since mid-August.  Support is seen in the CAD1.2950-1.2980 area.  A move back above CAD1.3050-1.3065 would stabilize the technical tone.  The Aussie poked through $0.7200.  Last month’s high near $0.7280 is the next target.  Finishing the North American session today below $0.7200 would be disappointing.  The New Zealand dollar has risen nearly four cents since September 23.  The August highs in the $0.6690-0.6710 area is the next target but seems too far today, even though the intra-day technicals warn of the risk of new session highs.
  • Sterling has gained 0.5% today to $1.5310 to test the 20-day (and 200-day) moving average.  There are two main forces lifting it.  First, the bulls got excited by news that Anheuser-Busch was raising its bid for the UK’s SAB Miller to GBP68 bln.  We are typically skeptical of the direct investment boost as corporations can often borrow and need not buy the target currency.  However, it seemed to have lifted sentiment before the other force was clear.  That other force was news that despite the softness in the manufacturing PMI, industrial output rose 1.0% in August.  The consensus forecast was a for a 0.3% increase.  The 0.4% slippage in July was pared to only 0.3%.  Manufacturing itself was up 0.5%.  The consensus was also for a 0.3% increase.
  • In contrast, both German and Spanish industrial output figures disappointed.  German industrial production fell 1.2% in August.  The market expected a small gain.  The disappointment may be mitigated by the upward revision in July to 1.2% from the 0.7% increase initially reported.  However, yesterday’s drop in factory orders (-1.8%) and the sharp downward revision to July (to -2.2% from -1.4%) warns against shrugging it off.  Industrial output in Spain fell 1.4% in August.  The consensus was for a 0.4% decline.  The year-over-year rate stands at 2.7% in Spain compared with 2.3% in Germany.
  • Last Friday’s range in the euro ($1.1150-1.1320) remains intact this week.  The euro is also holding below the trendline drawn off the August spike high to almost $1.1715 and the September high near $1.1460.  It was tested last Friday and again today, where it comes in near $1.1300.
  • As widely expected, the BOJ left policy alone at the conclusion of its two-day meeting.  Some who expect the BOJ to ease later this month anticipated some preparation in the form of a reduced economic assessment, but this did not materialize either.  Although the US equity market snapped a 5-day advance, Japanese stocks extended their rally into the sixth session.
  • It is not a market mover today, but it is notable that Norway’s minority coalition government has indicated that it will withdraw funds from the ~$830 bln sovereign wealth fund.  It intends to spend NOK208 bln (~$25.2 bln) of its oil fund, which is just above what it expected to receive from its offshore oil and gas fields.  The difference is about NOK3.7 bln.  Of course, the fund’s investments also generate cash flow in the form of dividends and interest on its fixed income portfolio.  Overall the oil fund is expected to still have more assets under management at the end of next year.  Note that the Norwegian budget assumes Brent oil averages $52 a barrel this year and $53 next year.
  • The US economic calendar is light.  Williams is the only Fed official scheduled to speak, and his views are now well known.  He continues to favor a hike this year.  Many observers were shocked by yesterday’s US trade figures and revised down Q3 GDP forecasts in response.  However, note that earlier released flash merchandise trade figures were even worse, and it was in response to that advance report that the Atlanta Fed’s GDPNow was cut from 1.8% to 0.9%.  However, the trade report was not at bad, and the GDPNow tracker was lifted to 1.1%, which is still below market expectations.  Separately, note that the Republicans in the House of Representatives will choose a new Speaker today to replace Boehner.  This is important for legislation through next year’s national election.  It could also be significant in terms of the debate over TPP.
  • Here is a quick roundup of all the data out of EM overnight. Taiwan’s September CPI showed the first positive reading since December last year. It came in at +0.28% y/y, considerably higher than then -0.5% expected. We don’t think the upside surprise is at odds with the central bank’s decision to cut rates in the last meeting.  Indeed, September trade showed a greater-than-expected contraction in both exports (-14.6% y/y) and imports (-24.4% y/y).  As such, we could see easing to continue in the coming quarters.  We also think fiscal stimulus will be seen. In Malaysia’s August trade data, exports surprised on the upside (4.1% y/y), while imports unexpectedly contracted (-6.1% y/y).  This led to a sharp increase in the trade surplus to MYR10.2 bln, back to levels not seen since the end of last year.  MYR saw a huge move today, in part driven by the data and in part driven by the rally in oil, up about 4.5%.  But to put this in context, the currency is still down 16.5% year to date.
  • Data in Easter Europe was downbeat.  Hungary reported disappointing IP for August at 6.2% y/y (vs. expectations for 8.3%).  The central bank minutes will also be released later today.  In the Czech Republic, retail sales grew only 4.4% y/y in August, far less than expected, while IP also disappointed at 6.3%.  In general, the CEE economies are facing headwinds and deflation risks.  While the central banks are all on hold, we believe there are rising risks of further easing in 2016.
  • Later today, Chile reports September trade, with exports expected at -12% y/y and imports at -5% y/y.  It then reports September CPI Thursday, and is expected to rise 4.9% y/y vs. 5.0% in August.  Like Peru and Colombia, Chile’s central bank has tilted more hawkish and appears likely to hike rates too.  Next policy meeting is October 15, and markets are looking for a 25 bp hike to 3.25% then.
  • Brazil reports September IPCA inflation, and is expected to rise 9.48% y/y vs. 9.53% in August.  Higher fuel prices recently announced by Petrobras should put upward pressure on inflation, and so further tightening may be needed.  The first preview for October IGP-M wholesale inflation will be released Friday, and is expected to rise 9.1% y/y vs. 8.4% in September.  While the panic has abated a bit, markets are still pricing in several rate hikes ahead that would take the SELIC rate up to 15.75% from 14.25% currently.  Next policy meeting is October 21, but a move then seems too soon.