Greenback Softer but Dollar-Bloc Momentum Fades

 Greenback Softer but Dollar-Bloc Momentum Fades

  • The US dollar has eased to new lows for the week against the euro and yen
  • The German trade surplus narrowed sharply in August while Japan’s core machine orders fell 5.7% in August
  • Central banks dominate the remainder of the session, with the BOE meeting, the ECB’s “account” of the last policy meeting, and the FOMC minutes
  • On the EM side, China’s markets reopened, Hungary’s CPI surprised on the downside, and Turkish IP was much higher than expected; Mexico and Chile report CPI late

Price action:  The dollar is mostly weaker against the majors.  The Swiss franc and the euro are outperforming, while the Antipodeans and the yen are underperforming.  The euro is testing the upper end of its recent range just above $1.13 despite soft German trade data.  Sterling is building on its recent gains, trading at its highest level since September 23 just above $1.5350.  Dollar/yen is edging lower, but remains just below the 120 area.  EM currencies are mixed.  RUB, KRW, and PHP are outperforming, while TWD, IDR, and MYR are underperforming.  MSCI Asia Pacific fell 0.4%, with the Nikkei down 1% on the day.  China markets reopened after a week-long holiday, with the Shanghai Composite up 3% and the Shenzen Composite up 4%.  The Dow Jones Euro Stoxx 600 is down 0.1% near midday, while S&P futures are pointing to a lower open.  The US 10-year yield is down 3 bp to 2.04%, while European bond markets are mostly firmer.  Commodity prices are mostly lower, though oil is up modestly. 

  • The US dollar has eased to new lows for the week against the euro and yen.  There does not seem to be a big fundamental driver.  If anything, the weakness in German exports (following the soft orders and industrial output data) warns that the European locomotive may be slowing, and would seem to be euro negative.
  • The next target for the euro is in the $1.1330-1.1350 area.  It is moving above the trendline drawn off the August 24 (~$1.1715) and September 18 (~$1.1460) and October 2 (~$1.1320) highs.  It comes in today near $1.1290. From a technical point of view, the close is important.  A close above $1.1330 opens the door to $1.1400.
  • The German trade surplus narrowed sharply in August.  July’s surplus of 25 bln euros fell to 15.3 bln euros in August.  Exports plunged 5.2%.  The Bloomberg consensus was for a -0.9% decline.  It is the biggest decline since January 2009.  Imports slumped 3.1%, the most since April 2012.  The consensus was for a 0.6% decline.
  • Separately, news that Germany’s largest bank will eliminate its dividend rather than raise more capital in the market to cover what may be the largest quarterly loss in at least a decade was warmly greeted by the market.  Not only are its shares higher, but despite the small loss in the DAX near midday, financials as a whole are higher (0.35%).
  • The symmetrical triangle the dollar had been carving out against the yen is at risk of morphing into a rectangle consolidation as the apex of the triangle draws near.  Initial support for the dollar is seen in the JPY119.30-JPY119.50 area.  Regaining a foothold above JPY120 would keep the technical setting neutral.
    The soft US bond yields (~2.03% on 10-year Treasury) and the heavier stock markets may be bolstering the yen.  Nevertheless, the unexpectedly sharp decline in machine orders, ostensibly a leading indicator of capex, keeps many looking for the BOJ to do more when it meets again at the end of the month.
  • Japan’s core machine orders fell 5.7% in August.  The consensus was for a 2.3% rise.  It was the third consecutive monthly decline.  On a year-over-year basis, machine orders are off 3.5%.  In July they were up 2.8%.  This is the first decline year-over-year since last November.  It provides more evidence, it would appear, that the economy has not found much traction.  The economy has contracted in four of the past seven quarters, and many economists project a contraction in Q3 GDP.  This coupled with core inflation (excludes fresh food) moving back into deflationary territory underpins the expectation for the BOJ to step up its efforts.
  • Central banks dominate the remainder of the session.  The BOE is not going to do anything, but the immediate release of the minutes may pose some headline risk.  The ECB releases its “account” of its recent policy meeting.  The market will look for some hint of where the bar is for the ECB to extend, expand and/or change the composition of the asset purchases.
  • The FOMC minutes from the September meeting will be released in the NY afternoon.  There are two key issues that have preoccupied investors.  First, how close was the decision not to raise rates?  Yellen seemed to suggest it was not close while comments from others suggest it was.  Both are right.  It was not a close vote overall.  There was only one dissent in favor of a hike.  It was a close vote in the sense that it was a finely balanced decision for individual members.  This leads to the second issue.  What is needed to shift the balance toward a hike?  Do market-based measures of inflation expectations have to rise?  Does China’s equity market need to stabilize?
  • Some believe that the Fed’s decision to stand has already been redeemed by the weakness of the US jobs data.  However, we note that the Fed did not cite concerns about the labor market in their decision.  They were likely as surprised as the market was by the September jobs data.  Moreover, that argument also presumes that the Fed will see the softer jobs data as a particularly worrisome sign instead of focusing on the cumulative improvement in the labor market.
  • This argument also assumes certain judgements about the business cycle.  The expansion is mature.  As the economy approaches full employment, 200k+ gains a month are going to be more difficult to achieve.  Other measures of the labor market, like weekly jobless claims and ADP, did not show such deterioration in the labor market either.
  • China’s markets reopened from the extended holiday.  The Shanghai Composite rallied 3%, and the Shenzhen Composite tacked on 4%.  The Hong Kong China Enterprise Index (tracks H-shares) fell 1% after rallying more than 10% during the holiday.  The yuan itself strengthened slightly and remained in the upper end of the range seen before in late-September.  The gap between the onshore and offshore yuan remained tight.
  • Hungary September CPI came in weaker than expected at -0.4% y/y.  Data this week surprised on the downside, especially IP and retail sales.  With deflation risks building, we would not rule out resumption in the easing cycle.  However, the next meeting on October 20 is too soon.  August trade will be reported Friday.
  • Turkey reported August IP that was a huge upside surprise, rising 7.2% y/y vs. expectations for 2.1%.  September CPI came in higher than expected, rising 7.95% and moving further above the target range.  Yet the central bank is under pressure not to tighten due to the sluggish economy.  Next policy meeting is October 21, but no moves are expected ahead of the November 1 election.  If inflation pressures continue to rise, we think more conventional measures will likely be needed.
  • South Africa reports August manufacturing production shortly and it is expected to rise 1.4% y/y vs. 5.6% in July.  September CPI won’t be reported until October 21, but inflation could fall further from 4.6% y/y in August.  The SARB kept rates steady in September after resuming the tightening cycle in July.  The sluggish economy is likely to keep this cycle a mild one.  The next policy meeting is November 19, and the decision then will depend on upcoming data and the performance of the rand.
  • Chile reports September CPI, and is expected to rise 4.9% y/y vs. 5.0% in August.  Like Peru and Colombia, Chile’s central bank has tilted more hawkish and appears likely to hike rates too.  Next policy meeting is October 15, and markets are looking for a 25 bp hike to 3.25% then.
  • Mexico reports September CPI, and is expected to rise 2.55% y/y vs. 2.59% in August.  With inflation below the 3% target (but within the 2-4% target range) and growth sluggish, there is no need for the central bank to consider tightening policy.  Next policy meeting is October 29 and no change is seen then.