Dollar Continues to Weaken Ahead of Jobs Report

  • The highlight today will be November jobs data; more Senators are lining up behind the latest bipartisan compromise proposal for fiscal stimulus; Christopher Waller will join the Fed’s Board of Governors; Canada highlight also will be jobs data
  • Sterling remains bid despite conflicting Brexit headlines; Germany reported strong October factory orders
  • Japan government will decide on a new fiscal stimulus package early next week; Australia reported strong October retail sales; the Taiwan dollar is trading at levels not seen since 1997
  • India left rates unchanged, as expected; oil prices resumed their upward trend after OPEC+ decided to slow its supply increases

Dollar weakness continues.  DXY traded at the lowest level since April 2018 near 90.542.  This weakness should persist and so we continue to target the February 2018 low near 88.253.  After finally breaking above the September 1 high near $1.2010, the euro hasn’t looked back and traded at a new cycle high near $1.2180 today.  We maintain our medium-term target of $1.2555.  Sterling traded at a new high for this move near $1.35 but continues to underperform due to Brexit concerns (see below).  USD/JPY is trading on both sides of 104 but remains heavy and so we still look for a test of the November low near 103.20.

 

AMERICAS

The highlight today will be November jobs data. Consensus sees 475k jobs added vs. 638k in October, with the unemployment rate seen falling a tick to 6.8%. The clues have been somewhat mixed but we believe the risks to NFP are tilted to the downside. Not surprisingly, a consensus outcome would continue the string of sequentially smaller job gains seen since the June peak gain 4.781 mln. October trade (-$64.8 bln expected) and factory orders (0.8% m/m expected) will also be reported.

Reports suggest more Senators are lining up behind the latest bipartisan compromise proposal for fiscal stimulus. What started out as a rank-and-file effort from both parties has now garnered support from the leadership. Democrats Pelosi and Schumer have endorsed the plan as a basis for compromise. So has Republican Senator Graham, though Majority Leader McConnell has yet to publicly come out in support. This is a delicate balancing act for the Republicans ahead of the January 5 runoff elections in Georgia, but we are becoming increasingly confident that a (smaller) compromise will be reached before year-end.

Christopher Waller was confirmed by the Senate and will join the Fed’s Board of Governors. We expected easy sailing for Waller yet the vote was 48-47, surprisingly narrow given Waller’s standing as a conventional choice for the post. As research director for the St. Louis Fed, Waller brings a wealth of knowledge. His research is said to have been a big part of St. Louis Fed President Bullard becoming much more dovish in recent years. Not so for Judy Shelton, whose controversial nomination appears to be dead in the water now that Democratic Senator Mark Kelly was sworn in Wednesday. With three Republican Senators opposed, Shelton cannot be confirmed barring some sort of attendance issues for some members of the Senate. Fed officials Evans, Bowman, and Kashkari speak today. After that, the media embargo goes into effect and there will be no Fed speakers then until Powell’s post-decision press conference December 16.

Canada highlight also will be jobs data. Consensus sees 20k jobs added vs. 83.6k in October, with the unemployment rate seen rising a tick to 9.0%. If so, this would be the smallest gain since the recovery began in May. Like the US, the Canadian labor market appears to be stalling a bit as the virus numbers rise. No wonder the Trudeau government just announced a new series of spending measures this week. Those new measures are worth CAD25 bln in FY202O-21 and CAD27 bln in FY2021-22. Finance Minister Freeland said the government plans to deliver additional stimulus of between CAD70-100 bln cumulatively over the next three years but did not provide further details as this additional stimulus is not in the fiscal framework. October trade will also be reported today, where a deficit of -CAD3.1 bln is expected.

 

EUROPE/MIDDLE EAST/AFRICA

Sterling remains bid despite conflicting Brexit headlines. Earlier, reports emerged that UK negotiators were incensed that the EU had introduced a new set of (unspecified) demands whilst the two sides were on the verge of a breakthrough. EU officials denied this but markets are jittery after reports yesterday of a hardening stance by France. Most recently, EU officials said a deal is “imminent” and likely by the end of the weekend barring any last minute breakdown. The FX market seems to believe this, with cable trading at a new high for the year near $1.35 today before edging lower to near $1.3455 currently. Lingering concerns about Brexit have so far prevented it from making a clean break above $1.35 but a deal would likely push sterling above that and towards the April 2018 high near $1.7375. An initial target comes in near $1.3675.

Germany reported strong October factory orders. Orders rose 2.9% m/m, nearly double the 1.5% consensus. September was also revised up to 1.1% m/m from 0.5% previously. Despite the strong German data, we know that the rest of Q4 and possibly Q1 will see greater headwinds due to the lockdowns. The ECB is well aware of this and is widely expected to add more stimulus at its meeting next Thursday. As far as the euro goes, the ECB is likely to push back against recent strength but there’s really not much it can do to directly address the exchange rate beyond jawboning. This is a broad dollar move, not a euro move.

 

ASIA

Japan Prime Minister Suga said his government will decide on a new fiscal stimulus package early next week. He said the overall size is still being debated, adding that the extra budget will extend the existing employment measures. Low-income, single-parent households will receive JPY50,000 in aid. Reports this week suggested the fiscal package would likely coincide with the BOJ meeting December 17-18, when the bank is likely to extend its emergency programs. Other reports also suggest this extra budget won’t be the last, especially if Suga’s popularity continues to fall ahead of elections next year.

Australia reported strong October retail sales. Sales rose 1.4% m/m, more than reversing the -1.1% drop in September. Since the RBA left rates steady Tuesday, the economic data have come in strong. This includes Q3 GDP, October trade, and now retail sales. This supports the RBA’s wait-and-see stance. The bank is prepared to do more if needed but the firm data supports no change in policy for now.

The Taiwan dollar is trading at levels not seen since 1997 despite ongoing conversations about the central bank leaning against the move. The weaker US dollar, the strengthening of the Chinese yuan, strong capital inflows, and rising exports all suggest that any official effort to contain the move is unlikely to do more than slow down the trend. The Taiwan dollar is up some 6% on the year against the USD, outperforming most Asian currencies but still behind the Korean won (+7%) and the Chinese renminbi (+6.5%).

The Reserve Bank of India left rates unchanged, as expected. The repo rate remains at 4.0%. The RBI’s forwards guidance remains accommodative, but the uncomfortable inflation trend will keep it from cutting rates further for the time being. CPI inflation is running around 7.6%, well above the upper end of the RBI’s target of 3-6% but driven largely by higher food and fuel prices. The bank is likely to continue leaning on liquidity-neutral operations such as their Operation Twist (selling short-end bonds for longer-dated ones) for now. Officials revised their FY2021 CPI projection to 6.8% (from 5.4%) in Q3 and 5.8% (from 4.5%) in Q4.

 

COMMODITIES AND ALTERNATIVE INVESTMENTS

Oil prices resumed their upward trend after OPEC+ decided to slow its planned supply increases. The group will increase supply by 500k bbl/day in January, less than originally planned. However, the group said it will meet monthly to assess the situation, which could mean greater volatility or at least more risk event for the sector. Indeed, a senior Russian official noted that the deal could add a maximum of 2 mln bbl/day to the market but OPEC+ could just as easily decide to cut production again if needed. The maximum change in any month is +/- 500k bbl/day. Brent is up 2% on the day and on track for a 3.2% gain for the week, marking the sixth consecutive weekly gain. Meanwhile, the curve is moving deeper into backwardation with futures 12-months ahead now $2 below the front month.