Dollar Softer as Eventful Week Ends

Dollar Softer as Eventful Week Ends

  • The monetary policy divergence theme remains in place
  • Although we see the BOJ on hold for now, we see scope for some action on the fiscal side
  • Data out of Europe was mixed on the day
  • Reports suggest that China is considering a trial program to allow individual investors to directly buy overseas assets
  • Both Caixin and official China PMIs will be reported over the weekend; so will Korea trade Russian and Colombian central banks meet

Price action:  The dollar is mostly softer against the majors as the week draws to a close.  The Kiwi and the yen are outperforming, with the former helped by firm NZ confidence readings and the latter by the BOJ decision to stand pat.  The Norwegian krone and the Swiss franc are underperforming.  The euro is trading back above $1.10 area despite generally soft Eurozone data, while sterling is trading around the 200-day MA near $1.5340.  Dollar/yen is lower and trading near 120.50 after the BOJ meeting overnight.  EM currencies are mostly firmer.  ZAR and TRY are outperforming while IDR and MYR are underperforming.  MSCI Asia Pacific rose 0.5%, with the Nikkei up 0.8%.  China markets were mixed, with the Shanghai Composite down 0.1% and the Shenzen Composite flat.  The Dow Jones Euro Stoxx 600 is down 0.1% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is down 2 bp near 2.15%, while European bond markets are mostly firmer.  Commodity prices are mixed.

  • The monetary policy divergence theme remains in place.  The 2-year US-German spread remains near the cycle high of 105 bp, and should ultimately support the dollar.  Next Friday’s jobs report is the next key data release, with market consensus at 180k vs. 142k in September.  The December FOMC meeting remains live, though we need to see stronger US data in order to give the Fed confidence to begin lift-off.  Still, other central banks are still easing policy, or perceived to have further easing in the pipeline.
  • In that regard, the BOJ left policy unchanged last night.  Most (like us) were expecting no move, though some thought it would add more stimulus in light of weak economic data recently.  The bank attributed much of the decline in CPI to oil prices.  It now sees inflation converging to the target around the six-month period through March 2017, from fiscal year ending in March 2016.  Data ahead the decision today was mixed.  Inflation measures were slightly firmer, with national CPI flat as expected.  September core CPI (ex-food and energy) ticked higher to 0.9% y/y. Household spending disappointed at ¥0.9 mln.
  • Although we see the BOJ on hold for now, we see scope for some action on the fiscal side. There have been some references to a ¥3 trln supplemental budget if Q3 GDP disappoints – which it probably will.  The next BOJ meetings are November 19 and December 18, and will be closely watched.  Disappointment with the BOJ decision saw dollar/yen test the 120 area.
  • On the data front, German reported September retail sales, 0.0% m/m vs. 0.4% expected.  France also reported September consumer spending, 0.0% m/m vs. 0.3% expected.  Spain reported preliminary Q3 GDP growth right on expectations at 3.4% y/y, up from 3.1% in Q2.  On the inflation side, the Eurozone reported October headline CPI right at the expected 0.0% y/y.  The next ECB meeting is December 3, where it is widely expected to announce further stimulus measures.
  • Elsewhere, the Antipodeans are faring well.  NZD jumped on positive ANZ Business confidence numbers and was mirrored across the Tasman Sea with PPI from Australia that was on the firm side, boosting AUD through 0.7100.  Yet here too, both the RBNZ and RBA are perceived to have a dovish slant, with ongoing currency strength still a concern for these central banks.
  • During the North American session, the US reports September personal income and spending, core PCE, Q3 Employment Cost Index, October Chicago PMI, and final October Michigan consumer confidence.  With the pre-FOMC embargo now ended, Fed speakers have started making public appearances again.  Today, Williams and George will speak.  Elsewhere, Canada reports August GDP, which is expected to rise 1.0% y/y vs. 0.8% in July.
  • Reports suggest that China is considering a trial program to allow individual investors to directly buy overseas assets.  The regulatory change would be established for the Shanghai free trade zone.  The move towards greater capital account liberalization comes ahead of the IMF’s decision on whether to allow the yuan to join the SDR basket – which many now see as a done deal.  The yuan appreciated sharply overnight, gaining 0.6% to $6.3174.
  • Both Caixin and official China PMIs will be reported over the weekend.  In the past, China flash PMI from Caixin (formerly HSBC) was released on the same day as the eurozone flash readings (reported last Friday).  The China flash reading has been discontinued.  Official PMI is seen at 50 vs. 49.8 in September, while Caixin PMI is seen at 47.6 vs. 47.2 in September.  China seems to be neutral/positive for global market sentiment, with risk of some more positive spillover if and when the PBOC eases again (which we expect).
  • The Russian central bank meets and is expected to cut rates 50 bp to 10.5%.  However, the market is split.  Of the 39 analysts polled by Bloomberg, 19 see no cut and 20 see a 50 bp cut to 10.5%.  We think the easing cycle will be resumed, but this month may be too soon in light of resumed RUB weakness.
  • The Colombian central bank meets and is expected to hike rates 25 bp to 5%.  The central bank started the tightening cycle with a 25 bp hike to 4.75% in September.  Two straight months seems aggressive, but perhaps the bank would prefer to front-load its tightening.  Recent firmness in the peso suggests a small chance of a dovish surprise this week.
  • Also coming out over the weekend is Korea October trade data, the first snapshot for last month.  Exports are seen at -14.5% y/y, and imports at -13.5% y/y.  We think downside risks will move the BOK to a more dovish stance in 2016, and the next rate cut becomes even more likely if the JPY/KRW cross resumes moving lower.  After poking above 10 in August and September, that key cross moved back down to test its 200-day MA near 9.32 before bouncing to near 9.50 currently.