Dollar Firmer As Markets Await Fresh Drivers

Dollar Firmer As Markets Await Fresh Drivers

  • New reports suggest that the US Congress is close to reaching a deal to avert the debt ceiling
  • UK Q3 GDP came in on the soft side, dragged lower by manufacturing and construction
  • The batch of economic data out of Sweden today is unlikely to alter the odds for easing by the Riksbank tomorrow
  • US-China relations are in focus again after a US warship sailed through disputed waters in the South China Sea
  • During the North American session, the US has a fairly heavy data calendar but none are expected to be market-moving
  • Brazil reports September PPI; Mexico reports September trade

Price action:  The dollar is firmer against the majors, but is trading mostly within narrow ranges.  The exceptions are the yen, which is outperforming, and the Norwegian krone, which is underperforming.  The euro is trading flat near $1.1045, while sterling is trading lower near $1.5340 after slightly weaker than expected UK Q3 GDP.  Dollar/yen is lower at around 120.50 after testing the 200-day MA near 121.  EM currencies are mostly weaker.  KRW, IDR, and TWD are outperforming while RUB, MYR, and PHP are underperforming.  MSCI Asia Pacific fell 0.5%, with the Nikkei down nearly 1%.  China markets were higher, with the Shanghai Composite up 0.1% and the Shenzen Composite up 0.7%.  The Dow Jones Euro Stoxx 600 is down 0.3% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is flat near 2.05%, while European bond markets are firmer.  Commodity prices are mixed, with oil down modestly.

  • New reports suggest that the US Congress is close to reaching a deal to avert the debt ceiling. The agreement would extend the government’s borrowing authority until March 2017 and would include a two-year deal on spending.  While few observers were considering the worst case scenario as realistic, the news helps to remove a major risk event.  Still, there has been little market reaction to the news.  US 10-year yields were a few basis points lower yesterday and today, now around 2.05%
  • The UK reported Q3 GDP at 2.3% y/y vs. 2.4% consensus and 2.4% actual in Q2.  UK data has been coming in a bit soft recently, and has pushed market expectations for BOE lift-off further and further out.  Today’s data confirms this.  Manufacturing contracted for a third quarter and construction fell the most since 2012.  The data had a small negative impact on the pound, bringing it back below the $1.5350 level, but not breaking any new ground. The EUR/GBP cross is stabilizing near .7200.
  • Sweden reported October consumer confidence as well as September trade, PPI, and household lending.  Overall, the data came in close to expectations, with the exception of the trade balance.  This surprised on the upside at SEK3.3 bln, nearly double expectations for a surplus of SEK 1.7 bln.  The data will likely have little impact on the Riksbank meeting tomorrow.  Of the four major central banks meeting this week, we believe the Riksbank is the most likely to ease further.  It may expand its bond purchase program to SEK40 bln while maintaining a negative 35 bp deposit rate.  The prospects of further ECB action in December would seem to increase the likelihood.
  • New Zealand’s September trade deficit widened by far more than expected to -NZD 1.22 bln. The widening came from a combination of higher imports and lower exports.  In addition, the revisions to the last month’s data was in the same direction: lower exports and higher imports. In contrast, a sharp decline in imports in the Philippines led to a narrowing of the trade balance for August to around -$0.95 bln vs. expectations for a deficit of -$1.33 bln.
  • US-China relations are in focus again after a US warship sailed through disputed waters in the South China Sea.  China said it will take “all necessary measures” to defend its territory.  The USS Lassen passed within 12 nautical miles of Subi Reef, which is the territorial distance recognized under international law.  During the recent US-China summit, President Obama warned China about its territorial claims in the region.  Other countries may become emboldened by the US, and so this bears watching.
  • During the North American session, the US has a fairly heavy data calendar.  It reports September durable goods, August CaseShiller house prices, October Markit Services and Composite PMIs, October Richmond Fed survey, and October consumer confidence.  None are expected to be market-moving.  With the pre-FOMC embargo in place, there are no Fed speakers until the day after the October 28 FOMC meeting.
  • Brazil reports September PPI today, followed by October IGP-M wholesale inflation (10.2% y/y consensus) on Thursday.  COPOM minutes will also be released Thursday, and should provide some more information on why convergence with the inflation target was pushed out to 2017 at that meeting.  September fiscal data will be reported Thursday (central government) and Friday (consolidated).  Market expectations are mixed, with the 12-month primary deficit seen narrowing but the 12-month nominal deficit seen widening.
  • Mexico reports September trade, and is expected at -$1.4 bln vs. -$2.8 bln in August.  The central bank meets Thursday and is widely expected to keep rates steady at 3%.  Mid-October inflation came in at another record low of 2.47% y/y, supporting our view that Banxico should not be in any hurry to tighten.