Dollar Firmer as Markets Await Fresh Drivers

Dollar Firmer as Markets Await Fresh Drivers

  • The dollar is broadly firmer as markets await fresh drivers
  • The Bank of Canada meets today and no change in policy is expected
  • The ECB meets tomorrow, and some market participants may be disappointed by the tempered dovishness
  • The big jump in the US 4-week T-bill yield reflects growing anxiety of the US debt ceiling issue
  • Japan’s trade balance was worse than expected in September
  • Turkey and Brazil central banks meet; both are expected to keep rates steady
  • The PBOC issued its first offshore renminbi note in London today

Price action:  The dollar is mostly firmer against the majors.  The Swedish krona and the euro are outperforming, while the Antipodeans are underperforming.  The euro is trading flat near $1.1350 ahead of the ECB meeting tomorrow.  Sterling is trading near $1.5450 after earlier testing the $1.54 level, while dollar/yen is trying to break above the 120 level after weak trade data.  EM currencies are broadly weaker.  CZK and TRY are outperforming, while RUB, ZAR, and MYR are underperforming.  MSCI Asia Pacific rose 0.6%, with the Nikkei up nearly 2%.  China markets were lower, with the Shanghai Composite down 3.1% and the Shenzen Composite down nearly 6%.  The Dow Jones Euro Stoxx 600 is down 0.8% near midday, while S&P futures are pointing to a flat open.  The 10-year UST yield is down 2 bp to 2.04%, while European bond markets are mostly firmer.  Commodity prices are mostly lower, with oil down around 1%.

  • The dollar is broadly firmer as markets await fresh drivers.  We note that the dollar is stronger against all the major currencies over the past week.  Sterling and the loonie have held up the best, while the Swedish krona and the euro have fared the worst.  The dollar’s gains are even more impressive in light of continued uncertainty regarding Fed lift-off.  As we have noted before, the first stage of the dollar rally is being driven by easing outside of the US, with the second stage to be driven by Fed lift-off.
  • The ECB meets tomorrow.  While the flexibility of QE will likely be emphasized, some market participants may be disappointed by the tempered dovishness.  Narrow ranges have prevailed since last Thursday’s reversal.  However, the risk of disappointment may favor the upside near-term.  Specifically, the $1.1320-1.1330 area may offer a springboard to retest the $1.1400-1.1425 area.  On the other hand, continued euro gains are not helpful to the Eurozone, and one should expect some verbal pushback if it moves closer to the $1.15 area.
  • The Bank of Canada meets today.  It is widely expected to maintain its neutrality.  The BOC has cut rates twice already this year in response to the disappointing economic activity, yet Canada is still struggling and growth is fragile.  Unemployment has steadily risen over the past year.  Last month it stood at 7.1%, which matches the highest level since the end of 2013.  It was 6.6% in January. The new Liberal government’s platform suggests greater fiscal support will be forthcoming.  This too may take off some of the residual pressure on the central bank to ease monetary policy further.  While many expect the Bank of England to follow the Federal Reserve as the major bank to raise rates, there is beginning to be talk that Canada could be third, but not until 2017.  A break of the CAD1.30 area may set the tone for the next week or two.
  • The big jump in the US 4-week T-bill yield reflects growing anxiety of the US debt ceiling issue.  At the end of last week, the 4-week T-bill had a negative yield, but it shot up to 13 bp at its worst yesterday before settling near 6.5 bp.  Even at 13 bp, the yield is of course still very low.  Nevertheless, the importance is that the debt ceiling debate could still have an adverse market impact in the coming days.
  • During the North American session, there is only weekly mortgage applications data from the US.  The Fed’s Powell moderates a panel discussion in New York.  After that, the pre-FOMC embargo kicks in and we will get no more official statements until the October 28 FOMC meeting.
  • Japan’s trade balance was worse than expected in September.  It posted a JPY114 bln deficit.  A small surplus was expected.  Exports rose a mere 0.6% compared with expectations for a 3.8% increase.  In volume terms, exports have fallen nearly 4%.  It is hard to see how so many people think a 3.5% decline in the Chinese yuan will help boost their exports while a much larger decline in the yen has failed to boost the volume of Japanese exports.  It is also noteworthy that the volume of Japan’s oil imports rose 1.1%, despite the weakness in the domestic economy.  In value terms, oil imports are off 44%.  These trade figures do not alter our expectation that the BOJ stands pat next week.
  • South Africa reported September CPI steady at 4.6% y/y vs. the expected 4.7%.  It reports August retail sales shortly, which are expected to rise 2.8% y/y vs. 3.3% in July.  The government will also release its medium-term budget policy statement today.  The deficit target may have to be raised, which would likely require some fiscal tightening as well.  This would add to the headwinds on the economy, which along with the low inflation reading should keep the SARB on hold again at its next meeting on November 19.
  • Turkey central bank meets and is expected to keep rates steady at 7.5%.  CPI rose 8% y/y in September, well above the 3-7% target range.  With the lira vulnerable ahead of November 1 elections, we think the central bank is on hold for the time being.  Latest polls show the ruling AKP with 40.5% support, barely changed from the 40.9% support it saw in the June vote.  As such, political uncertainty may continue well past November 1.
  • Brazil central bank meets and is expected to keep rates steady at 14.25%.  Earlier today, Brazil reports mid-October IPCA inflation, which is expected to rise 9.79% y/y vs. 9.57% in mid-September.  Analyst expectations are universally seeing steady policy this month, but market pricing shows some tightening expected at the November and January meetings.  Current account and FDI data for September will be reported Friday.  The current account is expected at -$2.2 bln, which would see the 12-month total fall to around -4% of GDP.
  • The PBOC issued its first offshore renminbi note in London today. The note due next year is worth RMB5 bln ($786 mln) and yields 3.1%.  The move comes amid a state visit by the Chinese President Xi Jinping, which, amongst other talking points, saw an increase in the bilateral local currency swap agreement from RMB200 bln to RMB350 bln and extension of the agreement for another three years.  The two countries should also seal a deal for China’s involvement in the construction of a nuclear plant in the UK.