Dollar Continues to Consolidate

  • Virus numbers continue to rise globally; the upswing in yields continues across most developed countries and there is probably more to go; the dollar continues to consolidate its recent gains
  • It will likely be a quiet day in the US due to the Veterans Day holiday; the White House has told federal agencies to prepare budget plans for the next fiscal year; Senate Majority Leader McConnell released 12 spending bills to fund the government through next September
  • Brexit talks will continue beyond the November 15 deadline that most had penciled in; EU officials have reached a compromise on the size of its next seven-year budget; Turkey reported September current account data
  • Japan reported improved October machine tool orders; RBNZ kept rates steady at 0.25% and expressed skepticism about negative rates; fears of regulatory crackdown in China’s tech sector led to heavy losses in some of its largest companies; China’s latest credit numbers continue to show a supportive story

Virus numbers continue to rise globally. Italy and France recorded the highest daily Covid deaths since April, while US hit a record hospitalization rate. In addition, 93% and 70% of ICU beds across France and Germany, respectively, are occupied with Covid patients, according to Bloomberg estimates. In the US, hospitalizations are at nearly 62,000, rising by some 1,500 per day.

The upswing in yields continues across most developed countries and there is probably more to go. The US 10-year yield is nearly breaching the 1.0% level, with significant increases also seen in the UK and Germany. Yields in Japan remain pinned by the BOJ, while those in China have increased only slightly but starting from a much higher level. We think this move higher has further to run, especially in the US as investors rebalance into a new reality of vaccine and the end of the US elections risk event. Here, a break above the .98% area would set up a test of the March 19 high near 1.27%. That said, we think the move will be capped eventually by a combination of yield-starved investor demand and concerns of policy action by the Fed.

The dollar continues to consolidate its recent gains.   DXY is testing the 93 area, a level that has capped its gains all week. The euro has broken below $1.18 while sterling is holding up better and is trading near $1.3260 after earlier trading above $1.33 for the first time since September 4. USD/JPY rally is running out of steam but could test the 106 area. We continue to believe that dollar weakness will resume and so DXY should eventually test the September low near 91.746.

 

AMERICAS

It will likely be a quiet day in the US due to the Veterans Day holiday. US stock markets are open, while the US bond market is closed. Originally known as Armistice Day, it is celebrated on November 11 to acknowledge the peace treaty signed that day to end World War I. It is meant to commemorate those Americans that had died in that war and was first observed in 1919 on the one-year anniversary of war’s end. Armistice Day become Veterans Day in 1954 and was expanded after World War II ended to honor all American soldiers and not just those that died in World War I. Note that Veterans Day honors all American soldiers, while Memorial Day honors those that died in battle.

Reports suggest that the White House has told federal agencies to prepare their budget plans for the next fiscal year. The problem here is that such budget proposals are typically submitted in February for the fiscal year beginning October 1, and President Trump will no longer be in office January 20. This is an obvious sign of defiance and comes after reports that the Trump administration has ordered its top officials not to cooperate with Biden’s transition team. This may just be more posturing as the Trump administration takes its election complaints to the courts, but it is highly unusual, to put it mildly.

Senate Majority Leader McConnell released 12 spending bills to fund the government through next September. With the current stopgap measure expiring December 11, a successful effort here would remove shutdown risks for the time being. That said, negotiations with the Democrats will be difficult. Patrick Leahy, the top Democrat on the Senate Appropriations Committee, highlighted several objections to the Republican proposals, including the absence of emergency pandemic funding as well as the inclusion of nearly $2 bln in border wall funding. House Democrats say they are studying these bills and preparing to begin bipartisan negotiations.

 

EUROPE/MIDDLE EAST/AFRICA

Reports suggest Brexit talks will continue beyond the November 15 deadline that most had penciled in. The current round of talks in London will continue through the end of this week, and so EU officials can’t be updated at a regular meeting today and will instead be briefed on November 18. The fact that the two sides are still talking is a good sign, and EU officials said they now expect negotiators to come up with an agreed text around the middle of next week. “The real cut-off point is late next week,” according to one EU diplomat.

Elsewhere, EU officials have reached a compromise on the size of its next seven-year budget. Last week, there was a compromise on the so-called rule of law clause. Together, these two agreements will account for EUR1.8 trln of spending, with EUR750 bln earmarked for the recovery fund. They still have to get final approval from EU lawmakers and ministers but sources suggest the recovery fund will be operational by the start of 2021, as hoped.

Turkey reported September current account data. The deficit came in at -$2.4 bln, slightly narrower than expected but a substantial improvement from last month’s reading of -$4.6 bln. Still, the 12-month total rose -$27.54 bln, the largest deficit since November 2018. If the deficit continues to grow even as foreign capital flows have dried up, Turkey is facing a potential balance of payments crisis. No wonder Turkey just made it a bit easier for foreign investors to access lira funding. Reversing earlier restrictions, the banking regulator increased the amount of currency swaps and derivatives that local banks can carry out with foreign counterparties. The regular noted that this was another move towards “normalization” and so fits in with expectations that the central bank will deliver a dose of orthodoxy with a big rate hike November 19.

 

ASIA

Japan reported improved October machine tool orders. Orders fell -5.9% y/y vs. -15.0% in September, and was the best reading since October 2018. With low base effects from 2019 and early 2020, it seems likely that orders growth will positive over the next month or two. September core machine orders will be reported tomorrow and are expected to fall -12.0% y/y vs. -15.2% in August. Policymakers will be quite happy with the softer yen seen this week, with USD/JPY moving back into its familiar 104-106 trading range that largely held from mid-September to early November. With dollar weakness expected to resume, we think the pair will likely remain capped near 106.

Reserve Bank of New Zealand kept rates steady at 0.25% % and expressed skepticism about negative rates. Asset purchases were kept steady but officials delivered the new Funding for Lending Program, as signaled at the previous meeting. FLP will provide 3-year funding for banks at the official cash rate and was widely seen as setting the table for negative rates next year. However, Governor Orr said “it’s too early to tell” whether the RBNZ will need to take rates negative.  Consistent with this improved outlook, the bank upgraded its 2020 growth forecast to -4.0% from -5.8% previously. All in all, the surprisingly hawkish tilt in the communication led to a nearly 1% gain for the Kiwi against the dollar while local yields rose 10-15 bp across the curve and implied rates priced out negative rates throughout 2021. NZD is nearing the early 2019 highs near .6940 and then the December 2018 high near .6970. After that is the June 2018 high near .7060.

Fears of regulatory crackdown in China’s tech sector led to heavy losses in some of its largest companies. New antitrust rules are pushing back against monopolistic practices in the tech industry, though officials have not released a lot of details yet. This follows the surprising halt to Ant Group’s IPO. Alibaba Group (-8%) and Tencent (-5%) were some of the biggest losers, losing an estimated $260 bln of market value over the last two sessions. It’s probably no coincidence that the new measures came during Alibaba’s annual Singles’ Day sale, which just registered another huge record with spending at around $56 bln.

Separately, China’s latest credit numbers continue to show a supportive story. New loans came in at around CNY690 bln and aggregate financing came in at CNY1.4 trln. While both showed a big drop from last month, this is due in large part to seasonal factors relating to the holidays. Of note, household spending continues to recover, supporting the official plan to continue rebalancing the economy away from the export sector.