Dollar Corrects Lower


  • The US dollar is trading heavily today, but the losses are not particularly steep against either the majors or the emerging market currencies – it’s probably more of a technical not a fundamental development
  • Japan reported its first trade surplus in seven months, and the BOJ left policy as it is at today’s meeting, as expected
  • UK retail sales were disappointing
  • The market is almost evenly split about whether the South African Reserve bank will hike rates today; we think they can wait a bit longer

Price action: The dollar is broadly weaker against the majors. The Antipodeans are outperforming, while sterling and the Swiss franc are underperforming. The euro is trading back above $1.07 after making a new low for this move yesterday near $1.06. Sterling is trading around $1.5260, lagging a bit due to soft UK retail sales data, while dollar/yen is edging lower to trade around 123 after the BOJ left policy unchanged, as expected. EM currencies are firmer. MYR and KRW are outperforming, while INR and CNY are underperforming. MSCI Asia Pacific rose 1.7%, with the Nikkei up 1.1%. China markets were higher, with the Shanghai Composite up 1.4% and the Shenzen Composite up 3.1%. The Dow Jones Euro Stoxx 600 is up 1% near midday, while S&P futures are pointing to a higher open. The 10-year UST yield is flat at 2.26%, while European bond markets are mostly firmer. Commodity prices are mostly higher, with Brent oil up around 1%.


The US dollar is trading heavily today, but the losses are not particularly steep against either the majors or the emerging market currencies.  A common narrative is attributing the dollar’s pullback to “dovish minutes,” but we do not think that this is a fair assessment.  Instead, it seems that a typical “buy the rumor, sell the fact” reaction offers a more robust explanation.  The FOMC minutes did not contain any surprises, and it does not appear anyone’s views really changed.  The December Fed funds futures finished yesterday unchanged for the ninth consecutive session.

Indeed, the fear that the labor market may have lost some momentum has been allayed by the October jobs report.  Of course, given the various forces at work, the Fed did not commit to a hike in December, but the burden has shifted.  Barring an unanticipated shock, the hike in December remains the most likely scenario.

The dollar’s pullback looks primarily a technical, not a fundamental, development.  The euro, for example, made a new low below $1.0620 after the FOMC minutes, but large euro bids near $1.06 stalled the momentum.  Late shorts were forced to cover, and the euro bounced to almost $1.0720 in the Asian morning.  European participants turned more cautious ahead of the ECB meeting record.  The ECB’s version of minutes rarely goes beyond what Draghi reveals in his post-meeting press conference.  The ECB statement turned more dovish, and the record is likely to reflect that.

Two economic reports stand out today.  First, Japan reported its first trade surplus in seven months.  The JPY111.5 bln surplus is mostly the effect of seasonal factors.  Adjusted for such factors, Japan recorded a JPY202.3 bln trade deficit. Japanese imports fell more than expected (-13.4% vs consensus -8.6%).  Exports fell (2.1%) for the first time since August 2014.  Of note, exports to China have fallen for three consecutive months.

The dollar had risen to its best level against the yen since August 20 (~JPY123.75) yesterday but is also falling on profit-taking today.  It has found support in the JPY123.10-123.20 area.  Technical indicators warn the correction may not be over.  The risk extends toward JPY122.60-122.80.

As widely anticipated, the BOJ left policy as it is at today’s meeting.  BOJ chief Kuroda shows no indication that he is about to change his assessment.  We argued against claims that two quarters of contraction in the Japanese economy signal a recession or the end of the economic expansion.  And this is precisely what the BOJ said:  the economy continues to recover moderately.  Growth is expected to return in the current quarter.  Many, who do expect the BOJ to ease again, see it happening early next year after the supplemental budget is passed.

The second data point today was UK retail sales.  It was slightly disappointing.  The headline slipped 0.6%.  The market expected a 0.5% decline.  The strong Rugby World Cup induced 1.9% jump in September sales were marked down to 1.7%.  Clothing/footwear and household goods saw the biggest declines (1.8% and 0.8% respectively).

Sterling reached almost $1.53 before the report, a two-week high.  It slipped to about $1.5240 on the news, but quickly recovered, and looks poised to challenge the $1.53 level again in North America.  Sterling’s 0.2% gain in late-morning London activity makes it the weakest of the major currencies today against the dollar.

The Australian dollar is the strongest of the major currencies, gaining a little more than 0.8% against the greenback. Like the euro, it was initially sold on the FOMC minutes to new session lows (~$0.7070) but quickly rebounded. The inability to break it forced a bout of short-covering, which accelerated when the downtrend from the October highs was violated. It has hardly backed off of its session highs set in European morning near $0.7080. Although the $0.7200 area offers resistance, we suspect there is scope toward $0.7250. Barring a strong reversal, the Aussie will close above its 20-day moving average for the first time since October 26, and the 5-day average looks poised to cross above the 20-day average, if not tomorrow then early next week.

The market is almost evenly split about whether the South African Reserve bank will hike rates today; we think they can wait a bit longer. Of the 26 analysts polled by Bloomberg, 16 see no hike and 10 see a 25 bp hike to 6.25%. Analysts are also looking for a tightening cycle roughly at a pace of 25 bp per quarter. This strikes us as too aggressive, and we see a much more cautious approach. October CPI came in as expected at 4.7% y/y vs. 4.6% in September, while September retail sales were weaker than expected at 2.7% y/y vs. a revised 4.0% (was 3.9%) in August.

Brazil reported mid-November IPCA inflation close to expectations at 10.28% y/y vs. 9.77% in mid-October. This is the highest rate since November 2003, and would move further above the 3-7% target range. The second preview of November IGP-M wholesale inflation was also reported, and came in higher than expected at 1.45% m/m. If sustained for the entire month, the y/y rate would rise to 10.6% y/y from 10.1% in October. The next COPOM meeting is on November 25. No change is expected, despite rising price pressures.

Russia reports October retail sales, and are expected at -10.0% y/y vs. -10.4% in September. The next central bank policy meeting is on December 11. The central bank has kept rates steady at 11.0% since the last 50 bp cut in July. CPI inflation has decelerated two straight months, but remains too high at 15.6% y/y in October. We think steady policy is the right decision in light of rising inflation and the weak ruble. The central bank suggested at its last meeting that easing could be seen in 2016 if the inflation trajectory improves as it expects.

Poland reports October real retail sales and industrial output. The former is expected to rise 3.0% y/y while the latter is expected to rise 2.5% y/y. The central bank will also release its minutes, and the next policy meeting is on December 2. No change is expected, and it has kept rates at 1.5% since the last 50 bp cut in March. While the bank is on hold for now, it will likely get more dovish next year when virtually the entire MPC will be replaced as their terms expire in Q1. The incoming Law and Justice government has already expressed a desire to stack the MPC with a more growth-oriented staff.