Dollar Mixed Ahead of US Retail Sales

  • The US dollar is confined to narrow ranges against the euro and sterling after pushing higher yesterday
  • Weak commodity prices and the loss of upside momentum has seen profit-taking in AUD and NZD
  • The price of oil has fallen about 8% this week, its worst week since March; CAD remains under pressure
  • We have argued that emerging market economies that have compromised political institutions are even more vulnerable during this challenging time
  • Another theme has been the continued decline of the Chinese yuan
  • US retail sales, PPI, business inventories and the University of Michigan’s consumer confidence (and inflation survey) will be reported
  • Russia’s central bank met and kept rates steady at 11.0%, as expected; India and Mexico report October IP

 Price action: The dollar is mixed against the majors ahead of US retail sales data. The euro and the Swedish krona are outperforming, while the Aussie and the Norwegian krone are underperforming. The euro is trading near $1.0970, while sterling is trading softer near $1.5135. Dollar/yen is trading flat near 121.50 after earlier pushing above 122. EM currencies are mostly weaker. KRW and TWD are outperforming, while ZAR, TRY, BRL, and RUB are underperforming. The rand remains under pressure after the firing of Finance Minister Nene, with USD/ZAR making a new all-time high today near 16.05. MSCI Asia Pacific was down 0.3% on the day, with the Nikkei up 1%. MSCI EM is down for the eighth straight day at -1.6%, with the Shanghai Composite down 0.6% and the Shenzen Composite down 0.7%. Euro Stoxx 600 is down 1.5% near midday, while US futures are pointing to a lower open. The 10-year UST yield is down 1 bp at 2.22%, while European bond markets are mostly firmer. Commodity prices are mixed, with oil down 1.5%, iron ore down 0.6%, and copper up 2%.

 

The US dollar is confined to narrow ranges against the euro and sterling after pushing higher yesterday. The greenback is staging stronger upticks against the yen but is struggling to resurface above previous support in the JPY122.25 area.

Weak commodity prices and the loss of upside momentum has seen profit-taking in the Australian and New Zealand dollars. The Canadian dollar remains heavy. The US dollar has extended its gains to new multi-year highs. It began the week near CAD1.3360 and is currently trading near CAD1.3660.

The price of oil has fallen about 8% this week, its worst week since March. OPEC’s decision last week not to provide a new quota coupled with news yesterday that OPEC output rose in the lead-up to that meeting have pushed prices lower. The 230k barrel per day increase in OPEC output to 31.695 mln barrels is about 900k more than its projected 2016 demand. It also marks a three-year high. And this does not appear to be the peak in output. Iranian production appears to account for most of the increase, which more than offset a slight decline in Saudi Arabian output, according to OPEC data.

The continued fall in oil prices and this week’s comments by Bank of Canada Poloz increased the risk of additional easing. Disappointing domestic data and the fall in petrol have also spurred expectations that Norway will cut rates next week. Iron ore prices also remain under pressure. It is poised to extend its losing streak into the ninth week. It is off about 4% this week. The Australian dollar peaked last week below $0.7400. It fell to nearly $0.7170 at mid-week. After yesterday’s bounce it has come back off today, as the correction to the rally that began in mid-November near $0.7020 continues. A break of $0.7160 could see a push toward $.0.7100 rather quickly.

We have argued that emerging market economies that have compromised political institutions are even more vulnerable during this challenging time. The South African rand’s slide is a case in point. The fall in commodity prices was taking a toll on the rand, but the dismissal of the finance minister earlier this week is crushing it. The rand is off over 9% this week, with a little more than 2% being delivered today alone. The Mexican peso is the second worst performing emerging market currency this week, off 3.8% coming into today. It has fallen every day this week. There is some speculation that the Mexico may follow the Fed to hike rates next week, even though the peso’s decline this year (~14.7%) is not feeding into price pressures. We are less sanguine.

In addition to the continued downtrend in commodity prices, the rand, peso, and other emerging market currencies, another theme has been the continued decline of the Chinese yuan. Encouraged by the higher fix, the dollar was bid above CNY6.45, which was the high from August. This is the weakest the yuan has been since July 2011. This leg lower in the yuan began in early November. Earlier, China reported higher than expected aggregate financing in November, though new loans were slightly lower than expected. Money growth was mixed, with M0 slowing and both M1 and M2 accelerating.

An important consideration appears to be the anticipated Fed rate hike next week. The PBOC still is in an easing mode. As the monetary cycles diverge, the tight relationship between the yuan and the dollar poses a challenge. However, it is important to keep in mind the magnitude of the moves we are talking about. The yuan has fallen about 0.8% this week. Year-to-date, it has depreciated by about 3.8%, making it the fourth best Asian currency performer this year, behind the Hong Kong dollar (pegged), Japanese yen (-1.6%) and Taiwanese dollar ( -3.6%).

It has been a relatively light week for US economic data. That ends today, as retail sales, PPI, business inventories and the University of Michigan’s consumer confidence (and inflation survey) will be reported. These reports will likely have no bearing on expectations for next week’s FOMC meeting, however.

It is possible that the Fed funds futures (which Bloomberg estimates reflect a 78% chance of a rate hike) is providing different information than the surveys that show around a 90% expectation. The discrepancy may be accounted for by the assumption of where Fed funds will trade after lift-off. If one assumes that Fed funds may trade a little softer than the mid-point of the range, say at 31.5 bp instead of 37.5 bp, the discrepancy disappears.

That said, the retail sales and business inventories will impact estimates for Q4 GDP, which the Atlanta Fed says is tracking about 1.5% as of December 4. Headline retail sales are expected to rise 0.3%, but for GDP purposes, the measure excluding auto, gasoline and building materials is used. It is expected to have risen by 0.4%, which would be the strongest in four months. It has been remarkably stable. The 12-month average is 0.24%, and the 24-month average stands at 0.27%.

News earlier this week that import prices fell 0.4%, which was half the pace the market consensus expected, warns of some upside risk for today’s PPI. The consensus is for a flat headline or up 0.1% when food and energy are excluded. The 10-year break-even shows inflation expectation at an average 1.53%, which is the lowest since late-October. Surveys show inflation expectations fared considerably higher than the market-based measures. In November, the University of Michigan’s survey found a 2.6% inflation expectation for the five- to ten-year time horizon.

Russia’s central bank met and kept rates steady at 11.0%, as expected. However, the market was split. Of the 36 analysts polled by Bloomberg, 22 saw no change and 14 saw a 50 bp cut to 10.5%. The last move was a 50 bp cut to 11% back in July. For this meeting, we were in the steady policy camp, especially with the ruble weakening to levels not seen since early September. The bank noted that inflation has not slowed as much as it expected, and sees it ending 2016 near 6% and reaching the 4% target in 2017. Russia also reports November trade later today.

India reports October IP, and is expected to rise 7.6% y/y vs. 3.6% in September. The economic recovery continues, but price pressures are rising and so we think further RBI easing will be modest. Late last Friday, a government panel proposed a unified sales tax in the 16.9-18.9% range, which also includes a “sin, demerit rate” of around 40% on luxury goods and tobacco products. This would put more upward pressure on inflation. This Monday, India reports November CPI and WPI. CPI is seen rising 5.4% y/y vs. 5.0% in October, while WPI is seen at -2.5% y/y vs. -3.8% in October

Mexico reports October IP, and is expected to rise 1.0% y/y vs. 1.7% in September. There is a big debate in the markets over whether Banxico will hike rates December 17 if the Fed hikes December 16. We do not think so, not with CPI inflation making new historic lows of 2.21% y/y in November.