US Dollar Weighed Down by Dovish Fed Governors

Dollar Weakness Continues as the US Returns from Holiday

  • Dollar weakness continues; US Congress returns from recess with a lot of wood to chop; we will get some important manufacturing readings for November; Brexit talks will hopefully wind up this week
  • Germany reports November CPI; the ECB is well aware of the downside risks that are building ahead of its policy meeting next Thursday; The row regarding the EU’s rule of law clause continues; Israel is expected to keep policy unchanged
  • Japan reported mixed data; Suga’s sliding popularity will impact the election timeline and boost odds of further fiscal stimulus; China reported firm official November PMI readings
  • OPEC+ ministers so far cannot agree on whether to delay January’s planned output increase

Dollar weakness continues.  DXY has given up all of its short-covering gains and traded at a new low for this year near 91.55 today.  Weakness should persist and so we are left looking at the February 2018 low near 88.253.  With regards to the euro, its September 1 high near $1.2010 is nearing and a break above sets up a test of the February 2018 high near $1.2555.  Sterling has been somewhat rangebound, unable to break above $1.340in recent days. 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 remains heavy and we look for a clean break below 104 that would set up a test of the November low near 103.20 and then the March low near 101.20.

 

AMERICAS

The US Congress returns from recess with a lot of wood to chop. The Senate returns today and the House Wednesday. Much of the work will be done behind the scenes as lawmakers work to pass the spending bills by December 11 that would avert a government shutdown. It is possible that Congress will be forced to pass another continuing resolution that would keep the government temporarily funded as negotiations continue. Further complicating things is the need for another round of fiscal stimulus, which many hope will be attached to the wider spending bills. Further complicating matters will be the arrival of Arizona Democratic Senator-elect Kelly. His victory will be certified today and he will likely be sworn in this week, which changes the balance of power in the current Senate to 52-48 in favor of Republicans.

We will get some important manufacturing readings for November. Chicago PMI kicks things off and is expected to ease to 59.0 from 61.1 in October. Dallas Fed manufacturing activity index will also be reported and is expected at 15.8 vs. 19.8 in October. October pending home sales (1.0% m/m expected) will also be reported. The Fed’s Barkin speaks. Canada reports Q3 current account data and October building permits.

 

EUROPE/MIDDLE EAST/AFRICA

Brexit talks will hopefully wind up this week. Face to face talks will be held in London today and UK officials say this is the “last week.” Tomorrow is the ostensible deadline, but this is just the latest in a long string of deadlines. If enough progress is seen, talks could easily be extended. UK Foreign Secretary Raab said “there’s a deal to be done” if the EU compromises on fishing, which he said remained the major obstacle. Raab added that he sees a “landing zone” for a level playing field. Elsewhere, Irish Foreign Minister Coveney also said he thinks a deal can be struck this week. EC President von der Leyen sent one of her top officials to London to assist Barnier, raising hopes for a compromise. Sterling is trading just above $1.3350 on Brexit optimism but if a skinny deal is struck as we expect, it could easily break above the September high near $1.3480.

Germany reports November CPI. Headline inflation is expected at -0.4% y/y vs. -0.5% in October (EU Harmonized). State data reported so far suggest downside risks to the national reading. Elsewhere, Spain CPI’s fell -0.9% y/y vs. -0.8% expected and Italy’s fell -0.3% y/y vs. -0.5% expected (EU Harmonized). These readings come ahead of eurozone preliminary November CPI out tomorrow. Headline inflation is expected at -0.2% y/y vs. -0.3% in October.

The ECB is well aware of the downside risks that are building ahead of its policy meeting next Thursday. New macroeconomic projections will be released and President Lagarde has all but promised more stimulus then. We expect this will take the form of increased asset purchases. The market is pricing in very low odds of another rate cut that would take rates more negative. Will the ECB push back against the strong euro? Perhaps we will see some jawboning but we believe the pace of gains back in September was more of an issue than the level.

The row regarding the EU’s rule of law clause continues. Both Poland and Hungary continue to threaten to veto the spending package. While we expect an eventual face-saving compromise that leads to unanimous approval, EU officials have been told that next Monday December 7 is the deadline to set the long-term budget. If a deal has not been struck, the EU will operate under monthly emergency budgets as of January 1 that will force partial shutdowns and suspension of some program payments. The start of the recovery fund would also be delayed and this is something that will be concerning to the ECB.

Bank of Israel is expected to keep policy unchanged.  CPI fell -0.8% y/y in October, the worst deflation since June and well below the 1-3% target range.  At its last policy meeting October 22, the bank boosted its asset purchases by ILS35 bln ($10.3 bln) and extend ILS10 bln of four-year loans to local banks at a fixed -0.1% to help small businesses.  As such, it’s probably too soon to expect any further stimulus so soon.  However, it’s possible that the bank pushes back against recent shekel strength, which is trading at its strongest level since July 2008.

 

ASIA

Japan reported mixed data. October IP, retail sales, housing starts, and construction orders were reported. Of note, IP rose 3.8% m/m vs. 2.4% expected and 3.9% in September, while retail sales rose 0.4% m/m vs. 0.5% expected and -0.1% in September. With the lockdowns widening, the recovery is likely to weaken as we go into year-end and into 2021. Next BOJ meeting is December 18 and no change is expected then. We think the burden of stimulus will continue to fall on the fiscal side for now.

Suga’s sliding popularity will impact the election timeline and boost odds of further fiscal stimulus. With the recovery sluggish and the nation heading into another period of lockdowns, it’s no surprise that Prime Minister Suga’s popularity continues to fall for a second straight month. At 58%, his support is at a new low. 48% disapproved of his handling of the virus, up from 35% a month earlier. This trend will be important as it will likely impact when the next election is called. One must be called by late 2021 and Suga’s fading popularity suggests it will be called later rather than sooner. Elsewhere, a key LDP lawmaker said the third supplemental budget may not be the last, which we think will also be ultimately determined by the polls.

China reported firm official November PMI readings.  Manufacturing rose to 52.1 vs. 51.5 expected and 51.4 in October, while non-manufacturing rose to 56.4 vs. 56.0 expected and 56.2 in October.  Caixin reports its November manufacturing PMI reading Tuesday, which is expected to fall a tick to 53.5.  This will be followed by its services (56.4 expected) and composite PMI readings Wednesday.  These are all the first snapshots of the mainland economy for November and should show continued recovery. PBOC injected cash into the system to address potential year-end funding pressures, offering CNY200 bln from its medium-term lending facility at the current 2.95%.

 

ALTERNATIVE ASSETS AND COMMODITIES

OPEC+ ministers so far cannot agree on whether to delay January’s planned output increase. Remote talks were held over the weekend ahead of a 2-day meeting that starts today. Reports suggest most members were in favor of maintaining current production levels into Q1 but was opposed by the UAE and Kazakhstan. Unless the increase is postponed, oil output will increase about 1.9 mln bbl/day in January. Talks resume today in Vienna, with negotiations likely to lead to some sort of extension of current output levels. Reports suggest a 3-month extension is being discussed, but something shorter will be considered in order to get all nations on board.