Greenback Flexes Muscles

The prospect of the Fed rate hike next month while many other countries consider providing more stimulus continues to underpin the dollar

A tick up in the UK core CPI offset news of the second consecutive sub-zero reading on the headline, the German ZEW was mixed, and Norway reported an unexpectedly strong Q3 GDP

There were no surprises in the minutes of the recent RBA, but speculation of a rate cut this year have been fully unwound in the derivatives market

On the EM side, Singapore’s October trade data surprised on the upside and Hungary’s central bank meets soon

 Price action: The dollar is mixed against the majors, but trading in very narrow ranges. The Aussie and the Norwegian krone are outperforming, with the latter helped by stronger than expected GDP data. The Swiss franc and the euro are underperforming. Indeed, the euro made a new low for this move today near $1.0645, while sterling is trading flat right around $1.52 after firm UK core CPI data. The EUR/GBP cross is moving lower. The euro had traded near GBP0.7500 in the middle of October and GBP0.7200 at the end of October. Today it approached GBP0.7000, a level it has not traded below since early August. Dollar/yen is edging further above 123, now around 123.30. EM currencies are mixed as well. TRY and ZAR are outperforming, while RUB and IDR are underperforming. MSCI Asia Pacific rose 1.1%, with the Nikkei up 1.2%. China markets were lower, with the Shanghai Composite down 0.1% and the Shenzen Composite down 0.9%. The Dow Jones Euro Stoxx 600 is up 2.1% near midday, while S&P futures are pointing to a higher open. The 10-year UST yield is up 1 bp to 2.28%, while European bond markets are mostly firmer. Commodity prices are mixed, with oil mixed but copper down and still making new cycle lows.


The prospect of the Fed rate hike next month while many other countries consider providing more stimulus continues to underpin the dollar.  Corrective downticks remain shallow and brief.  The euro slumped to near seven month lows just below $1.0645.  The greenback posted a big outside up day against the yen yesterday, and follow through buying today is putting it within spitting distance of a three-month high.

A tick up in the UK core CPI offset news of the second consecutive sub-zero reading on the headline.  This has helped steady sterling near $1.5200. Many economists expect UK CPI to bottom out with this October reading. As the base effect kicks in, the headline rate may rise toward 0.3-0.4% by the end of the year.  That the core rate is at 1.1%, up from 1.0%, is also seen as a favorable sign.  The June 2016 short-sterling futures contract is trading a little heavier, but participants do not want to get ahead of themselves.  Retail sales, to be reported on Thursday are expected to be soft as the rugby-related sales unwind.

The German ZEW survey was mixed.  Despite a sharp rise in the DAX over the month, the assessment of the current situation unexpectedly deteriorated to 54.4 from 55.2.  It is the second consecutive decline and is the lowest reading since February.  On the other hand, the expectations component rose more than expected.  The 10.4 reading compares with 1.9 in October.  It is the first increase since March.  Of course, it is difficult to know precisely what the logic is, but the survey results are consistent with perceptions of near-term challenges (immigration?) coupled with growing confidence that Germany will rise to the occasion.

Norway reported an unexpectedly strong Q3 GDP reading. This takes pressure off the central bank to cut rates next month.  Q3 GDP rose 1.8% (quarter-over-quarter), and the Q2 0.1% contraction was revised to flat.  Mainland GDP rose 0.2% on the quarter, a little better than expected and the Q2 pace was revised to 0.3% from 0.2%.  The euro has been trading for the most part in a NOK9.20-NOK9.40 range this month.  It tested the upside in the second half of last week, as oil was moving lower.  It slipped through the middle of the range yesterday, and with the GDP figures, is moving closer to the bottom of the range.  However, the move looks over for the day and a push back toward the NOK9.28-9.30 area looks reasonable.

After the krone, the Australian dollar is the strongest of the major currencies, gaining about 0.2% against the US dollar. The minutes of the recent RBA meeting were released, and although there were no surprises, speculation of a rate cut this year have been fully unwound in the derivatives market. The market is nearly evenly divided on whether this is the bottom of the Australian interest rate cycle. The Australian dollar has been holding below a downtrend line drawn off the mid-October highs. It has caught 3-4 highs since then. It comes in today near $0.7140.

In contrast, the slightly softer New Zealand 2-year inflation expectations, ahead of the global dairy auction, keep the door open to further easing by the RBNZ. The contrast between Australia and New Zealand has seen the Ausssie rally from NZD1.05 at the start of the month to NZD1.10 today. A move above NZD1.1020, a 61.8% objective of the downdraft from the NZD1.1350 September high, would signal stronger gains ahead.

Greece reached an agreement with the official creditors over home foreclosures. This is expected to free up the next tranche of funds. Greece’s 10-year bond yield is off 18 bp today to 6.75%, a 12-month low. Greek stocks are also higher after the Athens Stock Exchange had fallen to two-month lows yesterday.

The highlights for the North American session include the October CPI and industrial output reports from the US. These reports are unlikely to change anyone’s mind about what the Fed will do next month. Therefore, outside of some headline risk, the impact is likely to be minor. Core CPI is expected to be unchanged at 1.9%. The headline pace is forecast to tick up to 0.1% from zero. Industrial output is expected to snap a two-month contraction to post a small increase. Industrial output has fallen every month this year, except July. Manufacturing output has fared better, but it too fell in August and September. It is expected to have risen slightly in October. Fed Governors Powell and Tarullo speak today. Tarullo may be the more interesting of the two. He speaks late in the last half hour of the trading session. Last month, he was not inclined to support a rate hike this year.

Singapore’s October trade data surprised on the upside. Non-oil exports came in at +1.1% vs. -2.7% m/m expected, bringing the y/y rate to -0.5%. The economy is still slowing, however, and we think the MAS will ease policy at its April meeting by adjusting its S$NEER trading band again. No date has been set yet. The MAS reduced the rate of S$NEER appreciation at the October meeting, which was more timid than many expected. MAS had been on hold since the last emergency intra-meeting easing move back in January.

Bank Indonesia kept rats on hold at 7.5%, as expected. One lone analyst saw a 25 bp cut, but we agreed with the majority in that it’s too soon to ease. CPI rose 6.25% y/y in October, the lowest since November 2014 but still above the 3-5% target range. Easing in 2016 is possible if disinflation continues. The bank is primarily focused in currency stability at the moment, and it has taken some macro prudential steps to boost lending. The last rate move was a 25 bp cut to 7.5% in February.

Hungary central bank meets and is expected to keep rates steady at 1.35%. However, the bank has been getting more dovish. The bank recently moved the horizon for steady rates out to the end of 2017. Central bank Vice President Nagy later said it could hold rates steady into 2019. He then said earlier this week that the bank will ease policy further with “non-conventional” tools rather than rate cuts. Deflation risks continue, even with CPI coming in at +0.1% y/y in October vs. -0.4% y/y in September.

Colombia reports September IP and retail sales. The former is expected to rise 1.9% y/y vs. 2.6% in August, while the latter is expected to rise 3.2% y/y vs. 5.4% in August. The next policy meeting is on November 27, and another hike seems likely. The last move was a bigger than expected 50 bp hike to 5.25% in October. Inflation was higher than expected at 5.89% y/y October, a new cycle high and further above the 2-4% target range. Indeed, inflation has been above the target range since January 2015.