The Table is Set, the Dollar Consolidates

Dollar (4)

 

– The US dollar remains firm, even if it has eased from its seven-month high against the euro and five-year high against the Swiss franc recorded yesterday

– The immediate focus is on the ECB

The Reserve Bank of Australia meets next week too. The dreadful capex figures released earlier today sparked some talk that the RBA could deliver another rate cut

– The UK’s Autumn Statement had many surprising elements to it

– Brazilian asset prices sold off yesterday on the back of the latest developments in the corruption investigation and monetary policy

Price action: The US dollar remains firm, even if it has eased from its seven-month high against the euro and five-year high against the Swiss franc recorded yesterday. The euro fell to almost $1.0565 yesterday before quickly bouncing back above $1.06.   Short-term participants seem to recognize the large positions that have been established, and appear to be quick to take some profits when seeing new lows. However, bounces are shallow and now seem limited to the $1.0640-$1.0660 area. The Australian dollar is underperforming on the disappointing capex news, and off 0.5% it is the weakest of the majors today, but its 0.3% rise over the past five sessions keeps it at the top of the performance table against the greenback.   Still, the adjustment is not over. A break of $0.7200 could see a move toward $0.7150 before the weekend. In the EM space, ZAR and TRY are underperforming, but move have been generally modest. Asian indices were mostly higher, with the Nikkei up 0.5%, but the Shanghai Comp closed down slightly. EuroStox is up 0.9%. US markets are closed for Thanks Giving.

The immediately focus for markets is squarely on the likely ECB action next week. The pickup in money supply growth and lending reported today is unlikely to impact next week’s decision. M3 growth re-accelerated in October after a soft September. The 5.3% year-over-year pace was more than expected after a 4.9% pace previously. Lending to the private sector rose to 0.8% from 0.4%. This reflected improvement in lending to non-financial businesses (0.6% year-over-year) while the 1.2% increase in lending to households was sustained.

Recent data is not seen deterring the Federal Reserve from hiking rates next month. The US October personal consumption expenditure was disappointing, and prompted some downward revision to Q4 GDP forecasts. The Atlanta Fed estimates that Q4 GDP is tracking 1.8% rather than 2.3%. However, the decline in the weekly jobless claims, the rise in the flash service (Markit) PMI, and better durable goods orders helped mitigate the impact.

The Reserve Bank of Australia meets next week too. The dreadful capex figures released earlier today sparked some talk that the RBA could deliver another rate cut, but this is a volatile series and given Governor Stevens recent comments, a rate cut early next year seems more likely. Capex in Q3 collapsed a record (since 1989) 9.2%. The consensus was for a 2.9% decline. The Q2 figure was revised down to -4.4% from -4.0%. Within the data, the RBA is likely to find some comfort in the transition that is underway. Investment in the mining sector fell 10.4% while manufacturing investment rose by nearly 7%.

The UK’s Autumn Statement had many surprising elements to it. The government will rely more on tax increases than spending cuts, making this budget look a lot less fiscally austere. One of the main talking points was a U-turn on the £4.4 bln tax credits, which will now be maintained, and there will be no cuts to the police budget. On the other hand, the tax on buy-to-let properties and second homes will be increased by 3%, which is thought to bring in £21 bln by 2021. Many have interpreted the statement as a move towards the centre, and a fiscal plan that would look more Labour than Conservative. Still, the government has maintained the target of achieving a £10 bln surplus by the end of the Parliament in 2020. Keeping the surplus target was made easier by the updated forecasts by the Office for Budget Responsibility which brought a surprise £27 bln improvement in its 5-year forecast from higher tax revenues and lower debt interest payments. As such, we don’t expect any significant impact on UK sovereign debt or the pound. However, short-sterling interest rates continue to fall, suggesting the market has not done adjusting to the later lift off by the BOE. Sterling cannot get out of its own way and may slip below $1.50.

Brazilian asset prices sold off yesterday on the bank of the latest developments in the corruption investigation and the monetary policy developments. On the former, in short, police arrested three important figures: the leader of ruling PT in the senate, Delcidio Amaral; an agribusiness baron, Jose Carlos Bumlai, who is very close to former president Lula; and Andre Esteves, CEO of the investment bank BTG Pactual. There are two possible consequences from this that could concern markets. First, the arrest of such a powerful figure in the PT could create headwinds and reverse the relatively favourable political moment the government is experiencing, curbing its chances to push through fiscal measures. Second, some could grow concerned about systemic risks stemming from the BTG story. We think there are some grounds for concluding the first, but very little to support the second. Either way, it’s too soon to tell.

Turning to the central bank, the COPOM kept rates on hold at 14.25%, as expected, but two members called for a 50 bp hike. This split vote substantiates the shift by investors towards less easing/more hikes reflected in the swaps curves and recent surveys (see our recent report here). But the statement provided no new information or discussion on the topic, so we will have to wait for the minutes on December 3. The net result for this busy day was that the real fell 1.2% against the dollar, rates increased as much as 27 bp in the back end of the local swaps curve, and the Bovespa fell 3%, with BTG shares down 21%.