Dollar Mixed as Markets Await Fresh Incentives

  • The US dollar continues its mixed performance
  • Another talking point today is the Chinese yuan; separately, China reported November inflation readings
  • Brazil reported November IPCA consumer inflation, which rose 10.48% y/y vs. the expected 10.42%; the political situation in Brazil remains fluid
  • Mexico reports November CPI, and is expected to rise 2.27% y/y vs. 2.48% in October


Price action: The dollar is mostly softer against the majors. The Scandies and the euro are outperforming, while the dollar bloc is underperforming. The euro is trading around $1.0930, while sterling is trading near $1.5060. Dollar/yen is trading near 122.65. EM currencies are mixed in very narrow ranges. BRL and MXN are outperforming, while MYR, CNY, and THB are underperforming. MSCI Asia Pacific was down 0.7% on the day, with the Nikkei down 1%. MSCI EM is down for the sixth straight day at -0.4%, with the Shanghai Composite up 0.1% and the Shenzen Composite down 0.3%. Euro Stoxx 600 is down 0.6% near midday, while US futures are pointing to a lower open. The 10-year UST yield is up 2 bp to 2.23%, while European bond markets are mixed. Commodity prices are mostly higher, with oil up over 1% and copper up 1%.


The US dollar continues its mixed performance. The fragile stability of commodity prices today is not lending much support to the Australian and New Zealand dollars though the Canadian dollar is flat after yesterday’s slide.

The euro has pushed above $1.09 for the first time this week. We had suggested a $1.08-1.10 range would likely dominate this week. Technically, it appears poised to test the upper end of that range. Stops above the $1.1010 retracement objective could carry the euro toward $1.11.

Sterling had a deeper retracement of last week’s gains but is also recovering today after finishing the North American session yesterday above $1.50. The recent high near $1.5155 is the next technical target, which corresponds to last week’s highs and the downtrend off the early-November highs.

The dollar has been mostly confined to a JPY122.25-123.75 range since early November. Soft equities are taking a toll and pushing the dollar toward the lower end of the range. Japanese economic news also may have encouraged some buying of yen on fading ideas that the BOJ will expand its asset purchase program.

Not only was Q3 GDP revised higher, to show a modest expansion rather than a modest contraction, but earlier today Japan reported a much stronger than expected core machinery orders report. It indicates that capex is off to a strong start in Q4. Core machinery orders, which excludes ships and electricity generators rose 10.7%. This is the largest increase in 18 months. A Reuters poll found a median forecast for a 1.5% decline, after a 7.5% rise in September.

Another talking point today is the Chinese yuan. The PBOC fixed the dollar higher again today.   At CNY6.4140, it was the highest fix since August 2011. The yuan had fallen about 0.5% since a week ago Monday when the IMF announced the inclusion of the yuan in the SDR basket. Many observers see the two as linked. With the SDR decision behind it, China feels more comfortable continuing the depreciation strategy begun over the summer.

On the other hand, in the two weeks before the IMF’s decision, the yuan fell by 0.4%. This suggests that rather than the SDR decision being some kind of inflection point, the strategy that being pursued previously is continuing.

A less sinister explanation is that Chinese officials understand that the tight link with the dollar will exacerbate its economic challenges as the Fed begins to tighten. Just as the decision to devalue and change the fixing mechanism in August was likely linked to the anticipation of a Fed hike in September, so too does the prospect of the Fed’s lift-off next week inform the PBOC’s tactics.

Separately, China reported November inflation readings. Consumer prices ticked up to 1.5% from a year ago. This compares with a 1.3% pace in October. Food prices rose 2.3%. Disinflation in the non-food category has gradually reversed over the course of the past several months. At 1.1% year-over-year, it is nearly twice the low point of 0.6% seen in January.   Service prices rose (2.3%) but some of this seems to be related to poor weather that raised transportation costs.   Poor weather may have also helped lift some fresh food prices.

Meanwhile, China’s producer prices continued to fall by the 5.9% y/y pace that has been sustained since August.  This is largely a function of a nearly 20% decline in mining prices and a nearly 11% decline in raw material prices.

The slow news week picks up tomorrow with the RBNZ, SNB and BOE meetings. Friday brings US retail sales. Today’s US wholesale trade report may be used by Q4 GDP trackers because of the information on inventories. There are no Fed speakers until after next week’s FOMC meeting. Late yesterday, the API estimate suggest that US crude oil inventories fell 1.9 mln barrels last week, though Cushing inventories rose 600k barrels. Some are linking Cushing inventories to producers selling product to get it off their books for tax purposes before the end of the year. EIA reports its estimate later today. It is expected to show a 1.3 mln barrel increase.

Brazil reported November IPCA consumer inflation, which rose 10.48% y/y vs. the expected 10.42%. This was the highest since November 2003. Brazil reports the first preview for December IGP-M wholesale inflation Thursday, and is expected to rise 0.95% m/m. If sustained for the month, this would translate into 11% y/y vs. 10.7% in November. The most recent COPOM minutes suggest that rate hikes may resume. We agree, as the inflation trajectory is likely to worsen in the coming months. Next COPOM meeting is January 20, and a rate hike then is very possible.

The political situation in Brazil remains fluid. The Supreme Court yesterday suspended for a week the creation of the congressional impeachment committee. The move came after the government lost its bid to make the process of appointing committee members public. Justice Fachin was appointed to the top court by Rousseff, and so the move has bad optics. We still believe that the impeachment process is a net negative for Brazil assets, further delaying and/or preventing much-needed fiscal adjustments.

Mexico reports November CPI, and is expected to rise 2.27% y/y vs. 2.48% in October. It then reports October IP Friday, 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 the economy still sluggish and inflation still making new historic lows.