Dollar Continues to Weaken in Absence of Any Fresh Drivers

  • The dollar continues to soften
  • Stimulus talks could be back on the table; October retail sales came in weaker than expected yesterday; Judy Shelton’s nomination to the Fed Board of Governors was blocked; Canada reports October CPI
  • UK government has launched its well-telegraphed climate change push; UK inflation data for October surprised on the upside; traders are understandably trying to hedge the risks around tomorrow’s Turkish central bank meeting
  • Japan reported mixed October trade data; the outgoing Trump administration is pushing for restrictions against Chinese companies trading on US stock exchanges

The dollar continues to soften.  After peaking near 93.208 last week, DXY is down for the fifth straight day.  The break below the 92.542 area yesterday sets up a test of the November 9  low near 92.13 and then the September 1 low near 91.746.  Likewise, the clean break above the $1.1855 area for the euro sets up a test of its recent high near $1.1920 and then the September 1 high near $1.2010.  Sterling is on track to test the November high near $1.331, but whether it tests the September high near $1.3480 will depend in large part on Brexit optimism. USD/JPY remains heavy.  The pair traded at another new low for this move today below 104 and the break below the 104.15 area sets up a test of the November 6 low near 103.20.

 

AMERICAS

Stimulus talks could be back on the table. Reports claim that Democratic leaders in the Senate have approached Senate Majority Leader McConnel about restarting talks. Aside from the unresolved issues of aid to state and local governments, there is still a dispute about the size of the package (with Republicans at $500 bln and Democrats at $2.4 bln). If they split the difference to reach a roughly $1.5 bln package, this would put it at the compromise number proposed by the so-called Problem Solvers Caucus. However, McConnell may feel he has the upper hand now and may not budge that much. Meanwhile, he White House has basically abdicated its role in these negotiations. Further complicating matters is the fact that the future of the Senate still hangs on the balance with the January Georgia runoffs, which could eventually play a decisive role in these negotiations. Stay tuned.

October retail sales came in weaker than expected yesterday. Headline sale rose 0.3% m/m vs. 0.5% expected, while ex-autos rose 0.2% m/m vs. 0.6% expected. However, big miss in the so-called control group was the lowlight, rising only 0.1% m/m vs. 0.5% expected. Lastly, there were significant downward revisions across all three measures to September. To put things in perspective, the control group was expected to rise 1.9% over the past two months; instead, it rose only half that pace. This was a weak report across the board and it will only get worse as we move through Q4 and into Q1. Besides widening state lockdowns, several emergency support programs will expire at year-end unless they are extended by another stimulus bill. As such, we expect significant markdowns to Q4 and Q1 GDP forecasts. Today, October building the permits (1.4% m/m expected) and housing starts (3.2% m/m expected) will be reported, while the Fed’s Williams, Bullard, Kaplan, and Bostic speak.

Judy Shelton’s nomination to the Fed Board of Governors was blocked. Three Republican Senators oppose her (Alexander, Romney, and Collins), and another two (Scott and Grassley) were unable to attend the vote due to quarantine. It later turned out that Grassley tested positive for the virus. Since he attended several Senate functions this week before he was diagnosed, we cannot ignore the possibility that there will be more infections discovered in the coming days. Down 48-49, Majority Leader McConnell switched his vote to a no, which allows him to bring her nomination up for another vote during the lame duck session. However, it’s unclear how long Scott and Grassley will quarantine for, and the calendar is working against McConnell. Next week is a shortened one due to the Thanksgiving holiday, and then Arizona Republican McSally will be replaced by Democrat Kelly as early as November 30, which would basically kill Shelton’s nomination beyond all doubt.

Canada reports October CPI. Headline inflation is seen falling a tick to 0.4% y/y, while common core inflation is seen remaining steady at 1.5% y/y. If so, headline inflation would fall further below the BOC’s 1-3% target range. Indeed, it has been below that range since March. At the last meeting October 28, the BOC kept rates steady but tweaked its QE program by scaling back its purchases whilst shifting them to the longer end of the curve. Since that meeting, the curve has actually steepened a bit rather than flatten as the bank desired. Next policy meeting is December 9 and we may get another tweak then to help push the long end back down.

 

EUROPE/MIDDLE EAST/AFRICA

The UK government has launched its well-telegraphed climate change push. It envisions creating or supporting some 250K jobs in the industry with £3 bln in government expenditure. On top of this, Johnson will bring forward by 10 years to 2030 the government’s plan to ban sales of new petrol and diesel cars. Many observers were quick to point out that the plan is, at least in part, intended to help create a bridge with incoming US president Biden, who will also have a strong green agenda. Jonson will definitely need it if he stirs up the Irish border dispute.

UK inflation data for October surprised on the upside. Headline CPI came in at 0.7% y/y vs. 0.5% expected, while CPIH came in at 0.9% y/y vs. 0.7% expected. The upside surprise was largely due to clothing prices, which is highly seasonal. We don’t expect the data to meaningfully impact the BOE’s thinking, as headline inflation still remains well below its 2% target. The most recent BOE forecast sees inflation rising in Q2 2021 and returning to 2% by the end of the year. We suspect this is too optimistic.

Traders are understandably trying to hedge the risks around tomorrow’s Turkish central bank meeting. Please see our preview here. In short, we expect a less aggressive hike (~400 bp) than consensus expectations (475 bp) because the recent lira price action is likely to afford the new CBRT administration the confidence not to frontload the cycle. The bank just needs to tighten enough to reaffirm the change of direction and issue a clear commitment to extend the cycle. The real concern comes if they deliver a hike of 200-250 bp or less, which we believe would lead to a dramatic move lower for the lira and undo the entire supportive narrative.

 

ASIA

Japan reported mixed October trade data. Exports fell -0.2% y/y vs. -4.5% expected, while imports fell -13.3% y/y vs. -8.8% expected. Exports may finally be catching up with the rest of the region, but the large drop in imports suggest consumption remains sluggish. This will only get worse as the virus numbers continue to rise and lockdowns spread. While low compared to other countries, Japan’s daily infection rate over 2000 now is a record high for the nation. Tokyo accounts for nearly a quarter of this and is preparing to rise its alert level to the highest level.

The outgoing Trump administration is pushing for restrictions against Chinese companies trading on US stock exchanges. The SEC is supposedly considering regulations to delist companies not complying with auditing rules. The new rules won’t be completed anytime soon, becoming a free option for Biden’s administration to exercise as needed. It’s unclear whether this is the path Biden will want to take in the US-China conflict, but we wouldn’t discard it given the wide bi-partisan support for pressuring China.