Dollar Soft as Markets Await Fresh Drivers

  • We will get some more manufacturing readings for November; Fed Chair Powell appears before the Senate Banking Committee today along with Treasury Secretary Mnuchin; Senate Majority Leader McConnell advanced the nomination of Christopher Waller to the Fed’s Board of Governors
  • Eurozone preliminary November CPI and final manufacturing PMIs were reported; the euro may encounter a bit of trouble breaking above the $1.2010 high from September 1; BOE MPC member Tenreyro remains open to negative rates
  • Japan reported October labor market data and November vehicle sales; RBA kept policy unchanged, as expected; Caixin November manufacturing PMI came in stronger than expected; Korea reported solid November trade data
  • OPEC+ talks were delayed for two days, underscoring deep divisions regarding January’s planned output increase

Dollar weakness has resumed.  After recovering slightly yesterday, DXY has resumed its slide.  After trading at a new cycle low, weakness should persist and so we are left looking at the February 2018 low near 88.253.  The euro may have trouble breaking above the September 1 high near $1.2010 ahead of next week’s ECB meeting. Sterling has been somewhat rangebound, unable to break above $1.34 in recent days as Brexit talks continue.  However, a successful deal should see cable break above the September high near $1.3480 and perhaps make some good headway towards the April 2018 high near $1.4375.  USD/JPY could not sustain the break below 104 yesterday but remains heavy. We look for a clean break below 104 eventually that would set up a test of the November low near 103.20.



We will get some more manufacturing readings for November. ISM manufacturing PMI is expected to ease to 58.0 from 59.3 in October. Auto sales will also be reported and are expected at an annualized rate of 16.1 mln vs. 16.21 mln in October. Yesterday, November Chicago PMI came in at 58.2 vs. 59.0 expected and 61.1 in October. This is the lowest reading since August. Dallas Fed manufacturing activity index came in at 12.0 vs. 14.3 expected and 19.8 in October. October construction spending (0.8% m/m expected) will also be reported.  Elsewhere, Canada reports Q3 GDP and November Markit manufacturing PMI. GDP is expected to surge 47.7% SAAR vs. -38.7% in Q2.

Fed Chair Powell appears before the Senate Banking Committee today along with Treasury Secretary Mnuchin. The hearing is part of the oversight mechanism required by the CARES Act from March. His prepared remarks were released yesterday, where he noted “Recent news on the vaccine front is very positive for the medium term” but added that “For now, significant challenges and uncertainties remain, including timing, production and distribution, and efficacy across different groups.” Powell pointed to the impact of past stimulus but warned that the economic recovery was moderating, adding “Although we welcome this progress, we will not lose sight of the millions of Americans who remain out of work’”

Treasury Secretary Mnuchin’s prepared remarks were also released. He said the Trump administration hopes to support the economy by the using funds that Treasury clawed back from the Fed. Mnuchin said “I strongly encourage Congress to use the $455 bln in unused funds from the Cares Act to pass an additional bill with bipartisan support.” This is the first appearance together for these two officials since the recent spat about ending five of the Fed’s emergency programs. As such, the Q&A will likely prove to be quite interesting. The two will appear before the House Financial Services Committee tomorrow. The Fed’s Brainard, Daly, and Evans also speak today.

Senate Majority Leader McConnell advanced the nomination of Christopher Waller to the Fed’s Board of Governors. His actions Monday clear the way for a confirmation vote later this week. Waller was nominated at the same time as Judy Shelton but is a more conventional choice and much less controversial. As such, Waller should easily be confirmed. By not taking any action on Judy Shelton’s nomination, it appears that McConnell has given up on her. Once Senator-elect Kelly is sworn in as the second Democratic Senator from Arizona tomorrow, the Republican advantage will narrow to 52-48. With three Republicans (Collins, Romney, and Alexander) opposing Shelton, Shelton would be rejected by a 51-49 vote.



Eurozone preliminary November CPI was reported.   Headline inflation was steady at -0.3% y/y vs. -0.2% expected. There were clear downside risks after German headline CPI inflation was reported yesterday at -0.7% y/y vs. -0.4% expected and -0.5% in October (EU Harmonized). The ECB meets next Thursday and is widely expected to increase its asset purchases. New macro projections will be released then and the bank may have to acknowledge deflationary risks. September forecasts were little changed from June and saw inflation of 0.3% this year, 1.0% next year, and 1.3% in 2022.

Final eurozone manufacturing PMIs were reported. The headline reading improved a couple of ticks from the preliminary to 53.8. Looking at the country breakdown, German fell a tick from the preliminary to 57.8 and France rose half a point to 49.6. Spain came in at 49.8 vs. 52.5 in October, while Italy came in at 51.5 vs. 53.8 in October. Final services and composite readings will be reported Thursday, where the bite from widening lockdowns will be felt even more sharply.

It seems the euro may encounter a bit of trouble breaking above the $1.2010 high from September 1. Euro longs are likely a little nervous taking the euro higher ahead of next week’s ECB meeting.   Recall that the ECB started pushing back harder against euro strength at the September 10 meeting and since then, it’s basically traded sideways. When all is said and done, we believe the ECB is more worried about the pace of euro gains rather than any specific level. That said, what can the ECB really do about the exchange rate besides jawbone? We don’t think the ECB will take rates more negative and so it is left with ramping up QE as the only tangible policy lever. While that $1.20 area may hold for now, we think it’s only a matter of time before it eventually goes. After that, there’s really not much in terms of chart points until the February 2018 high near $1.2555.

Bank of England MPC member Tenreyro remains open to negative rates. She noted that there is evidence that negative rates have been effective. We would disagree with this, as the evidence has been decidedly mixed. She added that bank profitability really isn’t an obstacle to negative rates. Tenreyro is an external member of the MPC and is one of the uber-doves. A recent Bloomberg article points out that the split about negative rates in the MPC goes along the external/internal member line, with the former much more dovish and willing to go negative than the latter is. We still don’t think they go negative but renewed chatter may push the Gilt curve down regardless. Elsewhere, final UK manufacturing PMI rose a few ticks to 55.6. The gain was driven in part by orders being brought forward ahead of a potential hard Brexit.



Japan reported mixed data. Unemployment in October rose a tick to 3.1%, as expected, while the job-to-applicant ratio unexpectedly rose a tick to 1.04. Vehicle sales rose 6.0% y/y in November vs. 31.6% in October, while Q3 capital spending fell -10.6% y/y vs. -11.3% in QQ2. Lastly, final manufacturing PMI improved to 49.0 from 48.3 preliminary. Recent data continue to show a sluggish and uneven recovery and today’s readings were no different.

Reserve Bank of Australia kept policy unchanged, as expected. The bank eased at its last meeting November 2 and so it was clearly too soon to expect any further measures now. The bank warned that the economy will need “significant gains” in employment that leads to a tighter labor market and higher wages in order to see inflation move back to its 2-3% target range. Governor Lowe reiterated his forward guidance that “Given the outlook, the board is not expecting to increase the cash rate for at least 3 years.” He added that “The board will keep the size of the bond purchase program under review, particularly in light of the evolving outlook for jobs and inflation. The board is prepared to do more if necessary.”

Caixin November manufacturing PMI came in stronger than expected. It rose to 54.9 vs. 53.5 expected and 53.6 in October. This was the highest reading in ten years and the improvement mirrored the official PMI yesterday, which came in at 52.1 vs. 51.5 expected and 51.4 in October. These are all the first snapshots of the mainland economy for November and so far show continued recovery.

Korea reported solid November trade data.  Exports rose 4.0% y/y vs. 7.5% expected and -3.8% in October, while imports fell -2.1% y/y vs. -2.2% expected and -5.6% in October.  Korea continues to benefit from the regional recovery that’s being led by China. Indeed, exports to China rose 1% while semiconductor exports rose 16%. Final Q3 GDP growth was revised up to 2.1% q/q from 1.9% preliminary. BOK kept rates steady at 0.50% last week whilst boosting its 2020 and 2021 GDP forecasts modestly.  Next policy meeting is December 17 and no change is expected then.



OPEC+ talks were delayed for two days, underscoring deep divisions regarding January’s planned output increase.  Ministers will now meet on Thursday rather than today to allow time for “further consultations” in the hopes of reaching a deal.  While a compromise is expected in terms of extending current output levels for another couple of months, the uncertainty is likely to continue weighing on oil prices near-term.