Dollar Ending the Week on a Soft Note, Stocks on a Strong One

Dollar Ending the Week on a Soft Note, Stocks on a Strong One

  • The US dollar is on its back foot, helped by a dovish interpretation of the FOMC minutes by many market participants
  • Recent developments have rekindled the upside momentum in the dollar-bloc currencies
  • Canada reports September jobs data today and we suspect the risks are to the downside
  • Momentum continues intact for the recovery in European equities, EM assets, and commodity prices

Price action:  The dollar is mostly weaker against the majors in the wake of dovish FOMC minutes.  The Aussie and the Scandies are outperforming, while sterling and the yen are underperforming.  The euro is making new highs for this cycle near $1.1350, the highest since September 18 and helped by firmer than expected French IP data.  Sterling is lagging after disappointing construction and trade data, unable to break above $1.54.  Dollar/yen is little changed near 120.  EM currencies are mostly firmer.  IDR, MYR, and KRW are outperforming, while TRY and RUB are underperforming.  MSCI Asia Pacific rose 1.9%, with the Nikkei up 1.6% on the day.  China markets rose too, with the Shanghai Composite up 1.3% and the Shenzen Composite up 1.5%.  The Dow Jones Euro Stoxx 600 is up 0.7% near midday, while S&P futures are pointing to a lower open.  The US 10-year yield is down 1 bp to 2.09%, while European bond markets are mostly softer.  Commodity prices are mostly higher, with oil up 1-2%. 

  • The US dollar is on its back foot.  It was already sporting a softer bias and the FOMC minutes were read with a dovish twist.  A Wall Street Journal poll found 64% of economists expect a hike in December, and while the minutes might not substantively change that, the confidence is weak.
  • While most Fed officials see the conditions for lift off having been met or soon to be, the concern is that the downside risks increased as well.  One surprise contained in the minutes was the repeated references to the dollar.  According to Bloomberg, the dollar was mentioned at least two dozen times in the September minutes, twice as much as it was mentioned in the minutes from the July meeting.
  • There was never a very strong chance of an October hike.  In fact, only one of 64 economists participating in the Wall Street Journal survey envisioned an October hike.  In order to boost confidence in a December move, many economists want to see stronger jobs data, easing of the dollar’s momentum (which seems to be happening), and greater stability in China and emerging markets.  It may take some time for these conditions to materialize. That said, the Fed continues to view the impact of the dollar’s strength and the decline in oil prices to have a temporary impact on inflation.  The dollar is posting new lows for the week against the major currencies (except for the yen) and many emerging market currencies as well.  
  • The less hawkish signal from the Fed, coupled with the rally in oil and commodities more broadly, rekindled the upside momentum in the dollar-bloc currencies, which we had flagged near mid-week.  The Canadian dollar has gained about 1.6% this week against the US dollar, nearly a third is being recorded today.  Higher oil prices, a smaller Canadian interest rate discount to the US, and the generally weaker tone for the greenback is taking its toll.
  • Canada reports September jobs data today and we suspect the risks are to the downside.  The consensus expects a 10k increase in jobs, leaving the unemployment rate at 7.0%.  Given the weak growth of the Canadian economy, the 54.4k full-time positions created in August is unsustainable.  In addition, like the US, the participation rate in Canada is low.  The consensus forecast is for it to slip back to 65.8% from 65.9%, keeping it bouncing along the trough, but also warning of upside risks to the unemployment rate.   Afterwards, the Bank of Canada will release its senior loan officer survey.   Separately, Bank of Canada Governor Poloz is speaking over the weekend.
  • The US dollar is at its lowest level against the Canadian dollar since late July.  It is approaching the 100-day average (~CAD1.2890), which it has not traded below since late-June.  It also corresponds with the retracement objective of the rally since the May lows (~CAD1.2870). A break of this level could spur a move toward CAD1.2700.
  • European stocks are up for the 7th consecutive session today, with commodity-related sectors leading the way. The German DAX, for example, is up about 5.5% over the last five trading sessions, bringing its year-to-date performance back to positive territory at 2.5%.  But this is still well below the performance of other indices.  After this week’s gains, the Italian MIB IBEX is up 17.5% year-to-date and the French CAC is up 10.5% over the same period.  Despite the solid 4.5% gain this week, the UK FTSE is one of the worst performing indices year-to-date, down 2.5%.  On a currency adjusted basis (say assuming a US investors), the FTSE’s performance is in line with that of the EuroStoxx index, both down about 3.5% year-to-date given the fall in the euro-sterling cross.
  • Similarly, the commodity price rebound is keeping the momentum. For example, iron ore futures trading in China opened over 5% higher once markets came back from holiday. WTI crude futures are back up above $50 dollars per barrel for the first time since July and rubbing against the 100- and 200-day MAs.  Copper futures are up 3% this morning, rapidly approaching the September highs.
  • And of course, the rally in EM has been dramatic.  Although we think much of the move has been short-covering driven, anecdotal reports suggest that some new money is coming back into battered EM assets, including Brazil.  On the FX side, IDR has been the main outperformer (up 9% against the USD), with RUB and MYR close behind.  USD/BRL, often seen as a barometer for EM, broke below the 3.79 level yesterday, nearly 10% below its peak close in late September.  Also, the Chinese yuan has made some notable gains, trending higher since the last week of September and now over 1% stronger than its weakest level in August.  With a few notable exceptions, the moves in EM equities has been in line with those in developed markets this week – most gaining 3-6% not adjusted for currency moves.  However, MSCI EM is up nearly 12% from its late September trough, outpacing the 8% gain for MSCI World.
  • Brazil releases the first preview for October IGP-M wholesale inflation, and is expected to rise 9.1% y/y vs. 8.4% in September.  September IPCA inflation came in slightly higher than expected at 9.49% y/y vs. 9.53% in August.  Higher fuel prices recently announced by Petrobras should put upward pressure on inflation ahead, and so further tightening may be needed.  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 is unlikely.