Dollar Softer in Another Turnaround Tuesday

  • US Treasury’s report on foreign exchange and international economics highlighted Chinese outflows and Taiwan’s intervention
  • Justin Trudeau’s Liberal Party won a surprise majority in Canada’s election
  • San Francisco Fed President John Williams added to the timing debate yesterday, saying that the cycle should start in the “near future”
  • The Fed speaker schedule is quite heavy today, with Dudley, Powell, and Yellen all appearing
  • RBA minutes came out overnight, sounding somewhat upbeat
  • Hungary central bank meets and is expected to keep rates steady at 1.35%


Price action: The dollar is mostly weaker against the majors. The Antipodeans and the Swiss franc are outperforming, while the Norwegian krone and the yen are underperforming. The euro is seeing a slight bounce, currently near $1.1375 after yesterday trading at its lowest level since October 9. Sterling is holding just below $1.55, while dollar/yen is trading near the 119.50 level after weak Japan sales data. EM currencies are mixed. The CEE currencies and ZAR are outperforming, while MYR, IDR, and KRW are underperforming. MSCI Asia Pacific fell 0.1%, with the Nikkei up 0.4%. China markets were higher, with the Shanghai Composite up 1.1% and the Shenzen Composite up 2%. The Dow Jones Euro Stoxx 600 is down 0.7% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is up 1 bp to 2.04%, while European bond markets are mostly softer. Commodity prices are mostly higher.

  • US Treasury’s report on foreign exchange and international economics was released yesterday. Of course, much attention is being paid to its estimates of China’s capital outflows: $250 bln in H1 and another $270-280 bln in July and August. Treasury also appears to have stepped up its criticism of Taiwan. US Treasury confirmed what many have suspected. Taiwan frequently intervenes in the last hour of trading. It claimed Taiwan has done this 75% of the time in the first 7 months of the year. It has intervened by $1.3 bln, US Treasury estimates. Taiwan appears to have intervened by $900 bln all of last year. The currency has weakened by 0.46% on average in the last hour compared with 0.2% last year. The US wants Taiwan to limit its interventions to disorderly markets, and be more transparent in its reserves and interventions. This is interesting color for clients who transact in Taiwanese dollars.
  • Justin Trudeau’s Liberal Party won a surprise majority in Canada’s election. With 99% of polls reporting, the Liberals were elected or leading in 184 of the 338 seats in the House of Commons, with the Conservatives on pace to take 99 and the New Democratic Party 44. Note that the Canadian dollar was sold ahead of the election results amid reports of the likelihood of a minority Liberal govt. Now the Liberals have won a majority. The Conservatives have been in power for almost a decade. The Liberals platform is a moderate anti-austerity stance – more infrastructure spending and middle class tax cuts. Trudeau is projecting a somewhat larger budget deficit and higher taxes on wage income of more than C$200k. He wants to pull in from Harper-led military participation in Syria and Iraq. He will cancel the purchases of F-35 fighter planes.
  • San Francisco Fed President John Williams added to the timing debate yesterday, saying that the cycle should start in the “near future.” It’s unclear what exactly this that means, but it most likely suggests he favors a hike this year. “My own view is that the economy is still on a good trajectory,” he stated. He also minimized the recent string of weak data by saying that the Fed should be forward-looking.
  • During the North American session, the US reports September housing starts and building permits. The Fed speaker schedule is quite heavy today, with Dudley, Powell, and Yellen all appearing. After Williams yesterday, markets will be focused on the important duo of Dudley and Yellen today. Canada reports August wholesale trade.
  • Japan reported weaker September department store sales overnight. Nationwide sales rose 1.8% y/y vs. 2.7% in August, while Tokyo sales rose 4.9% y/y vs. 6.1% in August. This continues a string of weak data. Yet despite softness in the economy, the BOJ seems reluctant to add to its already very aggressive and open-ended program. The government seems to accept this, and there have been no reports that we have seen suggesting that Prime Minister Abe or Finance Minister Aso are objecting or pressuring the BOJ for more action.
  • RBA minutes came out overnight, sounding somewhat upbeat. This helped to underpin the strength in the Aussie today. The bank noted that recent easing is supporting demand while the weakness in the currency is helping rebalance the economy away from mining activities. It also expects the economy to strengthen in the third quarter, driven by resource exports and housing investment. Still, we think that a rate cut by the Reserve Bank of Australia came back into play following last week’s news that one of the country’s largest banks raised the rate of variable rate mortgages, citing tightening of financial conditions. The RBA could act to offset this.
  • Hungary central bank meets and is expected to keep rates steady at 1.35%. Deflation risks are persistent, with CPI at -0.4% y/y in September. If the economy continues to slow, we think the easing cycle could be restarted. The bank has been on hold since the last 15 bp cut to 1.35% back in July, but real interest rates have been rising since June. Minutes to this meeting will be released November 4.