Dollar Firms, Equities Rally

  • Global equity markets are rallying today, taking their cue from the strong US performance yesterday 
  • Eurozone CPI rose 2.2% y/y, as expected
  • During the North American session, October ADP jobs and Canada August GDP will be reported
  • Bank of Japan left overall policy unchanged whilst tweaking its forecasts and bond-buying plan
  • China official October manufacturing PMI came in at 50.2 vs. 50.6 expected
  • Turkey central bank revised its inflation forecasts up sharply; Poland October CPI is expected to rise 1.8% y/y
  • Congressional ally of Brazil President-Elect Bolsonaro downplayed the chance of passing pension reforms anytime soon

The dollar is mostly firmer against the majors as equity markets rally, at least for now.  Sterling and yen are outperforming, while the Antipodeans are underperforming.  EM currencies are mostly weaker.  THB and IDR are outperforming, while TRY and ZAR are underperforming.  MSCI Asia Pacific was up 1.6%, with the Nikkei rising 2.2%.  MSCI EM is up 1.7% so far today, with the Shanghai Composite rising 1.4%.  Euro Stoxx 600 is up 1.4% near midday, while US futures are pointing to a higher open.  The US 10-year yield is up 2 bp at 3.14%.  Commodity prices are mixed, with Brent oil up 0.7%, copper flat, and gold down 0.5%.

Global equity markets are rallying today, taking their cue from the strong US performance yesterday.  US Treasury yields are rising whilst gold is falling, suggesting risk-off sentiment is ebbing.  The dollar continues to build on its recent gains, with the Dollar Index trading at a new high for the year just above 97.  The May 2017 high near 100 is the next big target, with an intermediate target seen near 98.

Eurozone CPI rose 2.2% y/y, as expected and up from 2.1% in September.  Core inflation was 1.1% y/y, also as expected and up from 0.9% in September.  Yet it’s worth noting that the higher than expected German CPI reading of 2.5% y/y yesterday had little lasting impact on the markets or on the euro.  We think this is because markets perceive the ECB as being more concerned about growth than inflation right now, and that it will probably err on the side of dovishness.  Elsewhere, September German retail sales rose only 0.1% m/m vs. 0.5% expected.  As a result, y/y sales contracted -2.6% instead of rising the expected 1.0%.

The euro continues to edge lower, making a marginal new low for this move.  However, the expected break of the August low near $1.13 has yet to materialize.  It seems to be only a matter of time, however, and then markets are likely to look ahead to a test of the June 2017 low near $1.1120.  Likewise, sterling is approaching its August low near $1.2660.  After that is its June 2017 low near $1.2590 and then the April 2017 low near $1.2350.

During the North American session, ADP reports its estimate of private sector jobs created in October.  Consensus sees 187k.  US also reports Q3 Employment Cost Index, seen rising 0.7% vs. 0.6% in Q2.  Chicago PMI for October will also be reported, with consensus at 60.0 vs. 60.4 in September.

Canada reports August GDP and growth expected to remain steady at 2.4% y/y.  Despite the hawkish BOC decision last week, the Loonie has been caught up in the dollar rally.  The September 6 high for USD/CAD near 1.3225 is the next target and after that is July 19 high near 1.3290.  Next BOC meeting is December 5, and no change is expected so soon after this last hike.

Late yesterday, BOC Governor Poloz and Deputy Governor Wilkins testified before the House of Commons.  Comments were balanced, with Poloz saying that the BOC wants people to understand that 3% are a normal thing.  However, he added that rising rates won’t be a rapid process and that “gradual” was dropped to signal data dependency.  The two testify before the Senate today, and we expect the same balanced approach.

Bank of Japan left overall policy unchanged whilst tweaking its forecasts and bond-buying plan.  It noted that risks in the current fiscal year are now skewed to the downside rather than “generally balanced” previously.  Its forecasts now show that inflation will remain below the 2% target until at least 2021, implying that current unconventional policies won’t end anytime soon.  As with other central bankers, Kuroda expressed concern about the impact of a protracted US-China trade war.

The BOJ reduced the number of days in which it buys 1- to 5-year bonds but increased the amount it can buy.  It also spread out bond purchases and debt auctions for all tenors except 5- to 10-yenar bonds to curb the so-called “BOJ trade” where buyers at the auction immediately sell the bonds back to the BOJ at a premium.  Ahead of the meeting, Japan September IP was reported at -2.9% y/y vs. -2.1% expected.

USD/JPY continues to move higher and is grabbing a toehold above the 113 area.  The pair is trading at the highest level since October 9.  Break of the 113.35 area would set up a test of the October 4 high near 114.55.

China official October manufacturing PMI came in at 50.2 vs. 50.6 expected and 50.8 in September.  Non-manufacturing PMI was also weaker than expected at 53.9, dragging down the composite PMI to 53.1 from 54.1 in September.  Caixin reports its China manufacturing PMI Thursday, which is expected to remain steady at 50.  Clearly, there are risks of a sub-50 reading.  Policymakers are clearly concerned about the slowing economy and so further stimulus measures are likely if softness continues in Q4.

Australia Q3 headline CPI rose 1.9% y/y vs. 2.1% in Q2, as expected.  The trimmed mean measure rose 1.8% y/y vs. 1.9% expected.  AUD has been outperforming in recent days, but we’d look to fade this move whenever it gets above .7100.  With the China slowdown continuing and price pressures under control, we don’t think the RBA is in any hurry to hike.

Turkey central bank released its quarterly inflation report today and revised its inflation forecasts sharply.  End-2018 inflation is now seen at 23.5% vs. 13.4% previously, while end-2019 is seen at 15.2% vs. 9.3% previously and end-2020 is seen at 9.3% vs. 6.7% previously.  Yet the strong lira allowed the bank to stand pat last week even though inflation is now seen remaining above target until at least 2021.

October CPI will be reported Monday, but Governor Cetinkaya declined to predict if inflation has peaked yet.  Indeed, he did not give any hints about the near-term inflation outlook.  Next policy meeting is December 13.  Much will depend on how the lira is trading but we think it’s likely to stand pat then.

Poland October CPI is expected to rise 1.8% y/y vs. 1.9% in September.  If so, inflation would remain well below the 2.5% target and near the bottom of the 1.5-3.5% target range.  Next policy meeting is November 7, and we think it’s likely to stand pat then.  EUR/PLN continues to edge higher, trading at its highest level since the September 6 high near 4.34, Note that a break of 4.35 is needed to set up a test of the July high near 4.4140.

A congressional ally of Brazil President-Elect Bolsonaro downplayed the chance of passing pension reforms anytime soon.  Indeed, Sergio Olimpio Gomes added that as proposal stands, it would not pass and that he would vote against it.  Bolsonaro said this week that he wants to pass parts of the pension reform this year.  These latest developments support our view that markets have gotten too bulled up about Bolsonaro.  USD/BRL staged a sharp reversal this week after being unable to stay below 3.60.  However, the pair needs to trade back above 3.90 to signal potential for an even larger upside move.