Dollar Softens in Consolidative Trade

Index on a screen. Looping.

  • The US dollar is trading softer though largely within yesterday’s ranges against the majors
  • The Reserve Bank of Australia kept rates on hold today, as widely expected
  • German factory orders disappointed
  • During the North American session, the US reports August trade; Canada reports September Ivey PMI
  • It was a tale of two EM countries in terms of inflation
  • Poland central bank met and kept rates steady at 1.5%, as expected

Price action: The dollar is broadly weaker against the majors but remains in recent trading ranges. The Aussie is the best performer after the RBA left rates steady but issued a less dovish than expected statement. The Scandies are also outperforming, while the Kiwi and the Loonie are underperforming. The euro is trading just above $1.12, up slightly despite weaker than expected German orders. Sterling is trading heavy and continues to have trouble clearing the $1.52 area, while dollar/yen is still trading just above 120. EM currencies are mixed. IDR, KRW, and the CEE currencies are outperforming while RUB, TWD, and ZAR are underperforming. MSCI Asia Pacific rose 0.8%, with the Nikkei up 1% on the day. China markets remain closed until October 8. The Dow Jones Euro Stoxx 600 is up 0.2% near midday, while S&P futures are pointing to a lower open. The US 10-year yield is down 1 bp to 2.04%, while European bond markets are mostly softer. Commodity prices are mixed, though oil prices are hanging on to most of the Monday gains.

The US dollar is trading softer though largely within yesterday’s ranges against the major currencies. The rally in equities carried over into Asia but European markets are narrowly mixed, and US shares are trading lower. Bond yields are mostly higher though US Treasury yields are paring yesterday’s push higher.

The dollar bloc continues to firm. Some attribute this to new carry plays in the wake of the Fed’s decision to stand pat last month. However, as the positioning of futures suggest, the gains are not simply participants going long these currencies, but shorts are being covered.

The Reserve Bank of Australia kept rates on hold today, as widely expected. The statement was not particularly dovish, suggesting the bar is high to a rate cut this year. The RBA cited improvement in the labor market. Separately, Australia reported a larger-than-expected trade deficit (exports flat, imports up 1%). This shows Australia is still struggling with the terms of trade shock. The $0.7150 area is the next major hurdle.

The New Zealand dollar is slightly firmer as the market awaits the global dairy auctions amid expectations of higher prices. The $0.6530-0.6550 area caps the upside. Elsewhere, sentiment toward the Canadian dollar was helped by recent economic data indicating the economy has returned to a growth track (in June and July) after contracting for the first several months of the year. Today’s news may challenge its ability to recover much more. The trade deficit is expected to widen sharply in August and the IVEY survey is expected to soften to 54.0 vs. 58.0 in August. Initial support for the US dollar is seen near CAD1.3050. The nearby cap is seen in the CAD1.3100-1.3120 region.

German factory orders disappointed. They fell 1.8% in August. The market had expected a 0.5% increase. Adding insult to injury, the July series was revised to a 2.2% decline rather than a 1.4% fall. Domestic orders fell 2.6% in August. Foreign orders fell 1.2%, but this was mitigated by a strong 2.5% increase in orders from the eurozone. The euro eased less than a quarter of a cent on the news.

In addition to the Canadian data, the North American session features the US trade figures and two Fed officials (George, a hawk, and Williams–after the markets close). The newly introduced flash merchandise trade report last week warns of a large shortfall, with weak exports leading to a downgrade in the Q3 growth “Nowcast” by the Atlanta Fed’s model from 1.8% SAAR to 0.9% SAAR. Confirmation may pose headline risks but not contain much new information. It will support the consolidative tone.

It was a tale of two EM countries in terms of inflation. Colombia reported higher than expected inflation, while the Philippines reported lower than expected inflation. The monetary policy trajectories are also divergent. Colombia reported inflation at 5.35% y/y, well above 5.0% consensus and even further above the 2-4% target range. We did not think an aggressive tightening cycle would be seen, but the data may push the central bank into front-loading it more. On the other hand, Philippine inflation of 0.4% y/y is well below the 2-4% target range. Even though the bank has been on hold since its last 25 bp hike in September 2014, rising deflation risks suggest the bank may have to tilt more dovish in the coming months.

Poland central bank met and kept rates steady at 1.5%, as expected. The bank has been on hold since March. September CPI came in lower than expected at -0.8% y/y vs. -0.6% in August. Deflation remains persistent and should prevent the central bank from tightening until well into 2016. And if the downside risks to the economy increase enough, we would not rule out a resumption of the easing cycle. The monetary policy outlook will get a bit cloudier, however, as 8 out of 9 MPC members will see their terms end in early in 2016. President Duda will name two replacements, while the lower and upper houses will each name three replacements. The late October elections could see a shift in the balance of power in parliament, and so the MPC could take on a more dovish bent if the populist Law and Justice party wins.