US Dollar Weighed Down by Dovish Fed Governors

US Dollar Weighed Down by Dovish Fed Governors

  • Yesterday’s mostly counter-trend moves ended abruptly after a second Fed governor voiced opposition to a rate hike this year
  • The Japanese government lowered its assessment of the economy, including industrial production
  • Speculation is also increasing that China will ease further too
  • RBNZ Governor Wheeler warned that further easing may be necessary, but his caveats were such that mitigate any sense of urgency
  • Singapore MAS “slightly” reduced the slope of S$NEER appreciation with no change to the center or width of the policy band
  • Poland reports trade and current account data, Brazil reports retail sales

Price action:  The dollar is mostly weaker against the majors.  The Kiwi is outperforming on less dovish RBNZ comments, while the Aussie and the Swiss franc are underperforming.  The euro made another marginal new high for this cycle just above $1.1425, the highest since September 18, while sterling has recouped most of its recent losses after firmer jobs data to trade back above $1.5350.  Dollar/yen is edging further below 120, currently trading near 119.50, the lowest since October 2.  EM currencies are mostly firmer.  SGD is the best performer after Q3 GDP data came in stronger than expected and the MAS eased policy “slightly.”  MYR and CNY are underperforming.  MSCI Asia Pacific fell 1.1%, with the Nikkei down 1.9%.  China markets fell, with the Shanghai Composite down 0.9% and the Shenzen Composite down 1.2%.  The Dow Jones Euro Stoxx 600 is down 0.4% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is down 1 bp to 2.04%, while European bond markets are mostly firmer.  Commodity prices are mostly lower, with oil down nearly 1% on the day.

  • Yesterday’s mostly counter-trend moves ended abruptly. A second governor of the Federal Reserve voiced opposition to the intimation by Yellen and Fischer, and several regional presidents, that a rate hike is still appropriate this year. This helped renew the downside pressure on the dollar. It is lower against all the majors and most emerging market currencies today.
  • Global equities had enjoyed gains since the start of the month. Advancing streaks were snapped yesterday, and follow through selling is being seen today. Equity market weakness and lower bond yields are helping to lift the yen. Of note, the Nikkei gapped lower and closed below 18000. It completed a 38.2% retracement of the rally from late September. The 50% retracement is found near 17670. An old gap (October 5 higher opening) extends to 17775.
  • The Japanese government lowered its assessment of the economy, including industrial production. Although it says the recovery is continuing, it recognized that it was experiencing “weak pockets.” Still, the assessment fanned speculation that pressure is mounting on the BOJ to ease policy further when it meets at the end of the month.
  • Speculation is also increasing that China will ease further too. The focus today was on inflation, or the lack thereof. Specifically, September CPI eased to 1.6% y/y. The Bloomberg consensus was for a 1.8% pace after 2.0% in August. Food prices moderated (2.7% from 3.7%) and non-food prices edged lower (1.0% from 1.1%). Producer prices fell 5.9% y/y, in line with expectations and continuing the deflationary streak that is approaching four years in duration.
  • Separately, we note that China continues to make reforms that may enhance its chances of joining the SDR. Reports suggest China is planning on extending the hours of its onshore yuan trading, perhaps by the end of next month. It would allow an overlap with Europe by extending the Shanghai session to 11:30 pm, seven hours later than current hours.
  • The Australian dollar had approached $0.7400 at the start of the week. It dipped below $0.7250 yesterday and to $0.7200 today before recovering. China’s weak import data yesterday (despite an increase in iron ore), weighed on the Aussie. News that one of Australia’s largest banks increased the variable rate mortgage rate by 20 bp fanned speculation that the RBA would likely counter such tightening by cutting rates again. The derivatives market is now pricing in about a 50% chance of a cut next month. Amid the generally weaker US dollar, the Aussie recovered to almost $0.7280, but European dealers seem happy to sell it on the bounce. A break of $0.7200 targets $0.7160, and possibly $0.7100.
  • RBNZ Governor Wheeler warned that further easing may be necessary, but his caveats were such that they mitigate any sense of urgency. Wheeler expressed concern about fuelling a property boom just as the Real Estate Institute of NZ reported that house sales rose 38.3% year-over-year and the median price has risen 15.4% year-over year in September. Auckland median prices are up more than a quarter from a year ago. The Kiwi is trading at its best levels since early July.
  • Sterling posted a potential key reversal yesterday, trading on both sides of Tuesday’s range, and then finished the 24-hour session below Tuesday’s low. The weaker US dollar and an unexpected fall in UK unemployment have helped sterling recoup the lion’s share of yesterday’s losses. The $1.5380 remains technically important. Sterling has flirted with this area in recent sessions but has not managed to close above it. The claimant count rose 4.6k. The market was looking for a small decline. It is the third increase in the past four months. The market focused on the decline in the ILO measure of unemployment, which unexpectedly fell 5.4% from 5.5%. It is the lowest level since mid-2008. Weekly earnings growth excluding bonuses rose 2.8% in the three months through August. It had been expected to firm to 3.0%.
  • The market seemed to shrug off the 0.5% decline in the euro zone’s August industrial output. This matched the consensus expectation, but the year-over-year rate (workday adjusted) fell to 0.9%, half of what the consensus expected. The July data was revised to show a 0.8% monthly rise (from 0.6% previously) though the year-over-year rate was revised to 1.7% from 1.9%. The euro edged higher to almost $1.1430, its best level since September 18. A break of $1.1460, the high from then, could spur a move toward $1.1500, around where barrier options are believed to have been struck.
  • The North American session features US retail sales, PPI, and the Fed’s Beige Book. Retail sales are the most important. It picks up about 40% of US consumption, which in turn is around 2/3 of US GDP. The key measure here excludes autos, gasoline, and building materials. It is used directly for GDP calculations. Consumer spending was the main reason why Q2 GDP was revised up. Consumption in Q3 appears to be holding up. With practically no one looking for an October move by the Fed, barring a significant surprise, it is unlikely to have more than a momentary impact.
  • Singapore MAS “slightly” reduced the slope of S$NEER appreciation with no change to the center or width of the policy trading band. The decision was not as dovish as many had expected, but the MAS did suggest a risk of additional easing. This is the second time it has eased this year. The Singapore dollar is outperforming today by a wide margin, up 1% against the US dollar. Q3 GDP was slightly better than expected, rising 1.4% y/y (0.1% seasonally adjusted q/q). The MAS said the Singapore economy is projected to expand at a modest pace for the rest of 2015, at around 2-2.5%. Core inflation is expected to stay subdued in 2015, but should pick up gradually over 2016, largely due to the dissipation of the disinflationary effects of lower oil prices as well as budgetary and other one-off measures.
  • Turkey’s August current account data came in close to expectations but fell short of the balanced reading that was expected. The deficit improved to -$0.16 bln vs. -$3.19 bln in July. This is a significant improvement, but driven largely by imports declining faster than exports. The trade deficit for August came in as expected at -$4.9 bln, and that 12-month total narrowed to the lowest since January 2011. While the external accounts are improving, other fundamental and political risks warrant caution for investors.
  • India reported September WPI near expectations at 4.5% y/y. On Monday, it reported CPI inflation at 4.41% y/y, close to consensus but above the revised 3.74% (was 3.66%) rate in August. Price pressures remain low, and certainly gave the RBI cover to cut by a bigger than expected 50 bp last month. Further easing is likely, but the pace is likely to remain modest in light of faster CPI inflation. August IP was stronger than expected, rising 6.4% y/y.
  • Poland reports August current account and trade data. The external accounts have improved this year, but are starting to worsen again, albeit modestly. The current account gap is still expected at only -0.5% of GDP this year vs. -1.5% last year. This is very zloty-supportive. However, deflation risks persist and suggest further easing may be needed ahead. It might not be seen until 2016, when virtually the entire MPC will be replaced as their terms expire.
  • Brazil reports August retail sales, and is expected at -5.8% y/y vs. -3.5% in July. On Thursday, it reports August GDP proxy and is expected at -4.2% y/y vs. -4.25% in July. GDP contracted -2.6% y/y in Q2, and is still getting worse in Q3. The economy remains in freefall, yet price pressures continue to rise and suggest more tightening is needed. The next COPOM meeting is October 21, and a move then is unlikely, especially given the firmer real.