Dollar Stalls as Equity Markets Gain Some Traction

  • Geopolitical tensions continue to rise, this time surrounding Taiwan; market sentiment remains iffy
  • Stimulus talks really are dead now; US manufacturing surveys for October will continue to roll out
  • The rebellion within the UK Tory party continues; eurozone September M3 growth surged; Turkey is back in the usual vicious cycle
  • PBOC tweaked how it determines the daily yuan fixing; we think other clues suggest discomfort with the stronger yuan; Korea reported firm Q3 GDP; Hong Kong reported strong September trade data

Geopolitical tensions continue to rise, this time surrounding Taiwan. The country’s Défense Ministry stated that a Chinese military aircraft entered its Air Defense Identification Zone yesterday. Though this has happened many times before, background tensions are rapidly rising. Recall that the State Department said it would approve a $2.4 bln anti-ship missile system to Taiwan, following a previous deal worth $1.8 bln in arms sales. This led China to impose sanctions against Lockheed Martin and Raytheon. Needless to say, we are entering a highly uncertain policy moment for the US with incentives even more distorted by the upcoming elections.

Market sentiment remains iffy.  Asian and European stock markets are in the red, but US equity futures are pointing to a modest open higher. The lack of a big move higher in the dollar in the midst of this week’s risk-off environment is telling. Each subsequent risk-off period is leading to lower and lower highs for DXY and we think that will continue. That means DXY is unlikely to move into the 93-94 range that held for most of October.  The euro continues to test support near $1.18 while sterling is testing support near $1.30.  USD/JPY is lower today after testing the 105 level yesterday and feels heavy.



Stimulus talks are dead now. Really. Treasury Secretary Mnuchin and House Speaker Pelosi spoke by phone Monday for the first time since last Wednesday. Pelosi said she remains “optimistic” about a deal before election day but who is she kidding? The two sides remain far apart on far too many issues to resolve quickly. Indeed, these are the same issues that have bedeviled talks all along. White House Chief of Staff Meadows sees the writing on the wall, admitting that he’s not sure whether 13 Republican Senators (the bare minimum needed if every Democratic Senator voted yes) would support a deal of that size.

Manufacturing surveys for October will continue to roll out.  Richmond Fed is expected at 18 vs. 21 in September. Yesterday, Dallas Fed came in at 19.8 vs. 13.5 expected and 13.6 in September. Before that, Kansas City came in at 13 vs. 11 in September, Empire survey came in at 14.0 vs. 17.0 in September, and the Philly Fed came in at 14.8 vs. 15.0 in September.  Manufacturing appears to be holding up well so far in Q4. September durable goods (0.5% m/m expected), October Conference Board consumer confidence (101.9 expected), and August S&P CoreLogic house price indices will also be reported.

The September Chicago Fed National Activity Index reading of 0.27 is the lowest since April and shows the economy clearly losing momentum. We expect further slowing in October and beyond. Of note, the NY Fed’s Weekly Economic Index (WEI) suggests the economy contracted -6.0% y/y in Q3, a bit worse than the Bloomberg consensus of -3.5% y/y. As such, we see downside risks to the advance Q3 GDP number out Thursday.

Consensus sees Q3 GDP growth of 32.0% SAAR vs. -31.4% SAAR in Q2. If the y/y rate were to come in at -6.0%, this would likely take the SAAR down to around 16% or half the consensus. Of note, the Atlanta Fed’s GDPNow model suggests Q3 growth of 35.3% SAAR while the NY Fed’s Nowcast model suggests 13.75% SAAR. The truth is likely somewhere in between but in truth, this is old news. Looking ahead, the NY Fed’s Nowcast model suggests Q4 growth is tracking around 3.46% SAAR while Bloomberg consensus sees 4.0% SAAR. The NY Fed’s WEI is currently tracking around -5.3% y/y through the week ended October 17.



The rebellion within the UK Tory party continues. After the Internal Market Bill rebellion shook the ruling party, now the anti-lockdown rebellion is gaining traction. Reports claim that over 50 Tory members signed a letter demanding an exit path from the restrictive measures in the north of the country. This is a becoming a global phenomenon, with popular protests cropping up in Italy and Germany. The UK rebellion can be likened to what we are seeing here in the US, with pushback against restrictive measures by some US elected officials. Covid-related hospitalization rates in the UK continue to steadily rise since early September, which just about ensures that the near-term direction is towards stronger restrictions. Of note, UK CBI will report the results of its distributive trades survey for October shortly and Q4 is likely to soften as restrictions take effect.

Eurozone September M3 growth surged. Growth accelerated to 10.4% y/y vs. 9.6% expected and 9.5% in August. This is the fastest rate since April 2008 and reflects aggressive ECB balance sheet expansion and liquidity provisioning via TLTROs and PELTROs. This is certainly welcome, but rising virus numbers across Europe point to strong headwinds in Q4. The ECB meets this Thursday and while no policy changes are expected, we believe the bank will set the table for further stimulus at the December meeting. We will be putting out an ECB preview later today.

Turkey is back in the usual vicious cycle of falling behind the curve, currency depreciation, then policy overreaction. Lira weakness could even accelerate from here until we go full circle again. A hawkish surprise hike by the central bank could happen at any minute, but for now officials are relying on backdoor tightening, administrative measures, and using state banks to provide dollar liquidity (some $800 mln yesterday, according to Bloomberg estimates). When the inevitable policy shock comes it will probably lead to a near-term reversal, but we cannot see anything to alter broader trend of a weaker currency.


The PBOC tweaked how it determines the daily yuan fixing. Reports claim that the central bank has “neutralized the counter-cyclical factor” in its fixing, to get contributing banks to adjust their models to better reflect market forces in determining the exchange rate.  That counter-cyclical factor was introduced to give the PBOC some wiggle room to lean against currency moves. With USD/CNY rising, neutralizing it would seem to suggest the PBOC is not going to lean against the weaker yuan. Now, banks would have more room to submit quotes for a weaker fixing and guide the currency weaker in the spot market.

While it can be tricky to determine the motives of China’s policymakers, we think other clues suggest discomfort with the stronger yuan. Former SAFE official wrote in official press of “self-fulfilling” expectations for yuan appreciation , warning that excessive gains are typically followed by declines. Elsewhere, China’s securities regulator is asking underwriters to hold off on new IPO applications on Shenzen’s ChiNext Index. While this is ostensibly meant to clear up a growing backlog, we think the hidden message is that policymakers want to cool off foreign investment inflows that are boosting the yuan.

Korea reported firm Q3 GDP.  It rose 1.9% q/q vs. 1.3% expected and -3.2% in Q2, with the y/y rate improved to -1.3%  vs. -1.8% expected and -2.7% in Q2.  Much of the improvement has been driven by the external sector. October trade data will be reported Sunday local time.  Exports are expected to contract -5.9% y/y vs. +7.6% in September, while imports are expected to contract -2.2% y/y vs. +1.6% in September.  However, there are distortions due to fewer working days this year compared to last year.

Hong Kong reported strong September trade data.  Exports rose 9.1% y/y vs. 0.2% expected and -2.3% in August, while imports rose 3.4% y/y vs. -1.9% expected and -5.7% in August.  Q3 GDP will be reported Friday.  It is expected to rise 0.5% q/q vs. -0.1% in Q2, with the y/y rate improving to -5.9%  from -9.0% in Q2.  Investment inflows into the mainland via Hong Kong continue to keep USD/HKD pinned to the strong end of the 7.75-7.85 trading band.  The HKMA continues to buy USD and can do this indefinitely with an endless supply of HKD.  We see no change to the peg for the foreseeable future.