Pressure on the Dollar Resumes

  • Gilead’s remdesivir got the go-ahead from the FDA; pressure on the dollar has resumed; faint hopes for a stimulus deal are fading; resistance from the Republicans is building
  • The final US presidential debate was far more civil, but probably inconsequential; Markit preliminary US October PMI readings will be reported
  • Eurozone preliminary October PMI readings were mixed; UK reported weak preliminary October PMI readings and firm September retail sales; TRY remains under pressure after yesterday’s dovish surprise
  • Japan reported September national CPI and preliminary October PMI readings; BOJ is not expected to change policy next week; Australia reported solid preliminary October PMI readings; NZ reported low Q3 CPI

On the virus front, Gilead’s remdesivir got the go-ahead from the FDA. This was the first drug to get approval. The FDA found that the drug reduced recovery time from Covid-19 by five days. Remdesivir was part of President Trump’s treatment, though a recent study by the WHO showed it has not been effective in reducing mortality. Gilead rejected the study’s findings, of course.

Pressure on the dollar has resumed.  DXY was unable to sustain a move back into the 93-94 range that held for most of October and is softer as the week draws to a close.  It is down against every major currency this week and it’s noteworthy that the greenback is softening even as UST yields rise.  We still target the low for the cycle near 91.746 from September 1.  The euro was boosted by firm PMIs (see below) and break above $1.1860 sets up a test of its cycle high near $1.2010.  Sterling remains above $1.30 on Brexit optimism, though today’s data were mixed (see below). USD/JPY remains heavy after being unable to break above 105 and appears to be on track to test its cycle low near 104 from September 21.



Faint hopes for a stimulus deal are fading. Yesterday, markets were buoyed when House Speaker Pelosi said the two sides were “just about there” on a deal and stressed that “The president wants a bill. And so that’s part of the opportunity that we have.” Pelosi said that she and Mnuchin are close to agreement on the terms of a national testing strategy but admitted that difference remain on aid to state and local governments and liability protections for businesses.

Resistance from the Republicans is building. Indeed, Senate Majority Leader McConnell still holds all the cards. It really doesn’t matter what Pelosi and Mnuchin agree to except for the pre-election optics. Press reports suggest Senate Republicans are fuming that Mnuchin is giving away the store to Pelosi in agreeing to a topline number of $1.9 trln with at least $300 earmarked for state and local governments. Both are deal-breakers in the Senate.

Senate Majority Whip Thune has been quite blunt. He is responsible for rounding up the votes and enforcing party discipline and has said publicly that it would be difficult to get 13 Senate Republicans to support a deal along the lines of what Pelosi and Mnuchin are negotiating. 13 is the bare minimum needed to pass the legislation if all Democrats voted in favor. Multiple Senators and aides agree that 13 votes will not be possible.

The final US presidential debate was far more civil, but probably inconsequential. First, debates rarely make a material difference in outcomes, especially at this late stage. Second, there are very few undecided voters out there. Third, a huge number of Americans have already voted (over 45 mln, according to some estimates). For what it’s worth, an instant poll conducted by CNN showed that 53% of debate watchers thought Biden won the debate. National polls have, on average, remained relatively stable with Biden leading by around 10%. Betting odds have swung back in favor of Biden from a recent low of 60% to 65% currently.

Markit preliminary US October PMI readings will be reported. Manufacturing PMI is expected to rise three ticks to 53.5 while services PMI is expected to remain steady at 54.6. These are the first broad-based snapshots for October and will help set the tone for other US data to come. Of note, the regional Fed manufacturing surveys have come in relatively firm, with Kansas City reporting yesterday at 13 vs. 11 expected and actual in September.

Weekly jobless claims reported yesterday are worth mentioning. Regular initial claims came in at 787k vs. a revised 842k (was 898k) the previous week. The drop in weekly claims reflects the revisions and cleared backlog in California, which resumed reporting actual unemployment claims data. PUA initial claims rose slightly to 345k and the two together total around 1.1 mln, which remains elevated. Regular continuing claims fell to 8.373 mln and have fallen by around 1 mln per week for the past three weeks but PUA continuing claims remain stuck above 10 mln. Still, the labor market overall appears to be improving again after a stall in much of Q3. The only negative is that extended claims are rising, meaning that many unemployed workers cannot find a job and have exhausted normal unemployment benefits. This week’s initial claims data was for the BLS survey week containing the 12th of the month.  There’s no consensus yet for the October jobs report November 6.

Brazil reports mid-October IPCA inflation and September current account and FDI data.  Inflation is expected to accelerate to 3.41% y/y from 2.65% in mid-August.  If so, inflation would be the highest since February and would move back towards the center of the 2.5-5.5% target range.  The central bank issued new and dovish forward guidance at its last meeting, as it views the recent acceleration in inflation as temporary.  Yet the CDI market is pricing in a 25 bp hike in December followed by more tightening in 2021.



Eurozone preliminary October PMI readings were mixed. Headline manufacturing PMI came in at 54.4 vs. 53.0 expected and 53.7 in September, services PMI came in at 46.2 vs. 47.0 expected and 48.0 in September, and composite PMI fell to 49.4 vs. 49.2 expected and 50.4 in September. This is the first sub-50 composite reading since June. Germany’s readings showed a similar pattern, with a solid manufacturing reading of 58.0 vs. 55.0 expected offset by the services component that slipped to 48.9 vs. 49.4 expected and 50.6 in September. This led Germany’s composite PMI to fall to 54.5 from 54.7 in September. We expect this pattern to continue across most of the eurozone as lockdowns weigh on the services sector but exports (especially to Asia) remain buoyant.

The UK reported weak preliminary October PMI readings and firm September retail sales. Manufacturing PMI came in at 53.3 vs. 53.1 expected and 54.1 in September, services PMI came in at 52.3 vs. 53.9 expected and 56.1 in September, and composite PMI fell to 52.9 vs. 54.0 expected and 56.5 in September. Retail sales posted a big upside surprise, rising 1.5% m/m including auto fuel and 1.6% m/m excluding it. Food sales were the main driver. In any case, the data are likely to take a dive from here, even with the growing fiscal effort, as the employment outlook darkens.

The lira remains under pressure after yesterday’s dovish surprise from the central bank. Recall that officials refrained from hiking rates, opting to widen the rates corridor instead of across the board hikes of 175 bp. This was a poor choice, in our view, showing that they will continue to use backdoor tightening, forgoing the powerful signaling device of trying to get ahead of the curve. The lira is down 25% against the dollar this year and 3.5% over the last month. Of note, equity markets have performed relatively well, with the BIST 100 up 5% on the year (in local currency terms, of course). Local banks have lagged the recovery, but this has been a global phenomenon.


Japan reported September national CPI and preliminary October PMI readings. Headline inflation came in flat y/y vs. 0.2% in August, while ex-fresh food improved a tick to -0.3% y/y from -0.4% in August. Manufacturing PMI rose to 48.0 from 47.7 in September, services PMI fell to 46.6 from46.9 in September, and composite PMI rose to 46.7 from 46.6 in September.

The Bank of Japan is not expected to change policy next week. However, its updated macro forecasts in its Outlook Report will be of great interest. According to its July forecasts, the 2% target for inflation ex-fresh food won’t be reached until well after FY2022 (where it sees inflation at 0.7%).  At the September meeting, the bank upgraded its economic assessment slightly to “severe” vs. “extremely sever” previously. We not expect any change in assessment next week. Note that the Cabinet Office maintained its monthly assessment, saying conditions remain “severe” despite signs of some improvement.

Australia reported solid preliminary October PMI readings. Manufacturing PMI fell to 54.2 from 55.4 in September, services PMI rose to 53.8 from50.8 in September, and composite PMI rose to 53.6 from 51.1 in September. Despite the firm PMI data, a cut at the November 3 RBA meeting still seems very likely at this point. The futures market is implying nearly an 85% chance, according to the Bloomberg WIRP model.

New Zealand reported low Q3 CPI. Headline inflation eased to 1.4% y/y vs. 1.7% expected and 1.5% in Q2. This is the lowest since Q1 2018 and nearing the bottom of the 1-3% target range, and feeds into notions of further RBNZ easing. Earlier this week, Governor Orr pushed back against criticism of negative rates, stressing that the RBNZ is developing a suite of instruments “that can be highly effective and highly efficient” and is actively talking to lenders about what to expect.  Orr reiterated that the RBNZ will update markets on its plans for its Funding for Lending program at the November 11 policy meeting, which many see as the precursor for negative rates in 2021.  Orr added there is still “plenty of room” to ease within the current QE framework.