Dollar Quietly Bid, Market Skeptical of OPEC Deal

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  • Japanese data were poor
  • Most, like us, seem skeptical about the OPEC deal
  • There a several US economic reports today; no fewer than five Fed officials are on tap
  • Indian markets slumped on reports that its armed forces attacked terrorist camps in the Pakistani portion of Kashmir

The dollar is mostly firmer against the majors in narrow ranges. The Swiss franc and the euro are outperforming while Aussie and the yen are underperforming. EM currencies are mostly weaker. MYR and TWD are outperforming while ZAR, TRY, and INR are underperforming. MSCI Asia Pacific was up 0.4%, as the Nikkei rose 1.4%. MSCI EM is up 0.5%, as Chinese markets rose 0.4% and Indian markets fell 1.6%. Euro Stoxx 600 is up 0.7% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is up 1 bp at 1.58%. Commodity prices are mixed, with oil down 0.5%, copper up 0.2%, and gold flat.

The US dollar has firmer against most major and emerging market currencies. It remains well within its well-worn ranges, which continue to be narrow. A notable exception today is the yen’s weakness.

While the majors are mostly off marginally and no more than 0.3%, the yen is 0.75% lower. That puts the greenback at a six-day high (~JPY101.75) at its best. Yesterday’s sharp rally in oil prices, the backing up of global yields, and rising equities encouraged yen selling, especially given that the dollar’s downside momentum had stalled in front of the psychologically important JPY100 level.

Also, the Japanese data were poor. Retail sales fell twice as much as expected in August (-1.1%), which brought the year-over-year rate to -2.1% from -0.2% in July. Poor weather and payback from the 1.4% monthly increase in July were important considerations. Nevertheless, it warns of downside risks to tomorrow’s more comprehensive measure of consumption (overall household spending). Japan also reports industrial output, employment, and CPI tomorrow.

Separately, we note the MOF weekly portfolio flow report showed foreign investors sold JPY2.8 trillion of Japanese bonds last week. This appears to be a record amount. It was the second consecutive week of sales. We’ll be watching the time series closely in the coming weeks. It is possible that it reflects quarter-end portfolio adjustments, but it reflects a change in assessment post-BOJ shift from targeting the monetary base to targeting the yield curve.

In Europe, both Spain and Germany are reporting preliminary September inflation data. Both show deflationary forces ebbing. In fact, Spain’s harmonized measure of CPI rose to 0.1% from minus 0.3%. This is the first reading above zero in two years. German states have reported an increase in the year-over-year rates, and this leaves the countrywide report (due shortly) poised to rise to 0.5% from 0.3%. The eurozone aggregate flash reading will be released tomorrow and is expected to double to 0.4% from 0.2%. That would match the year’s high, and it has not been higher since mid-2014. The core rate is also expected to tick higher (to 0.9% from 0.8%).

Price pressures remain modest but moving in the right direction. The real sector data has been mostly stable, though today’s data suggests that both Germany and Spain may be slowing. Spain reported August retail sales rose 3.4% year-over-year (seasonally adjusted) down from 5.1%, and is the second consecutive month of slowing. Germany unexpectedly reported a 1k increase in unemployment in September. The median expectation was for a 5k decline. It is the first increase since June 2014. Recall last week; the German PMI also pointed to the loss of economic momentum, and the Bundesbank recently warned that the economy slowed in Q3.

There are two other main talking points today. First is the OPEC deal. Most, like us, seem skeptical. It is a bit like Woody Allen’s complaint about the poor restaurant, where the food wasn’t good, and the portions were small. The supposed cut to 32.5-33.0 mln barrels is a drop in the bucket, so to speak, given that August output was estimated at 33.24 mln barrels. Also, how the “cuts” will be distributed will not be decided for two months, leaving current production unaffected by the decision.

Moreover, there is not an agreement on the output figures to use and shifting from one calculation to another could account for the proposed cut in output. In addition, Saudi Arabia, who is one of the few countries that burns oil for electricity, typically trims the summer output increase, which could also account for most of the anticipated fall in output.

The other talking point is Germany’s largest bank. Deutsche Bank shares are off (~0.7%) today after advancing 3.2% yesterday and 0.65% on Tuesday. There is much talk about the need the bank to raise capital and the possibility of some role for the state. However, the rules for state aid have changed since the 2008-2009 government support efforts. The controlling document is the Bank Recovery and Resolution Directive (BRRD).

It is the same set of rules that limited what Italy could do for its banks. There are, of course, nuances and exceptions, but in general, two principles stand out. First, most use of taxpayers’ money (government aid) requires participation by shareholders and junior creditors. Second, a government stake, which was speculated about yesterday is possible under certain conditions, but cannot be done on discriminatory terms that give the state an advantage of show preferential treatment for the bank.

There a several US economic reports today. For Q3 GDP purposes, the advance look at the August merchandise trade balance and wholesale inventories are the most important. For the real time read on the labor market, ahead of next week’s national report, the weekly jobless claims will attract attention. The four-week moving average slipped below 260k for the first time in nearly two months last week. The US also provides a revision to Q2 GDP. It is expected to rise to a still disappointing 1.3% annualized rate from 1.1%.

No fewer than five Fed officials are on tap for today. Harker has spoken already today from Dublin, leaving four for the North American session. Yellen speaks after the markets close. In terms of policy yesterday, Yellen simply confirmed the dot plot and noted that a majority of officials anticipate one hike this year.

The euro remains quiet, well within the one cent range see this week. Sterling initially advanced to almost $1.3060 but has been unable to sustain even modest upticks and has returned to straddled $1.30. The dollar’s upside momentum against the yen faded in the European morning. Intraday support is seen in the JPY101.00-JPY101.20 range. The dollar-bloc currencies are heavy. The Australian dollar poked through $0.7700 but met a wall of offers. It looks set to challenge yesterday’s low near $0.7745. A close below yesterday’s low would suggest a near-term high is in place. The US dollar extended yesterday’s losses against the Canadian dollar, falling to CAD1.3050. It has recovered to CAD1.3100, where the better two-way action is seen.

Czech central bank is expected to keep policy steady. July data came in soft, and so it will be important to see if activity rebounds in August and September. For now, we see steady policy. If data remain weak, the first step for the central bank would likely be to extend forward guidance again.

Taiwan’s central bank kept rates steady at 1.375%. The market was split. Of the 26 analysts polled by Bloomberg, 14 saw steady rates and 12 saw a 12.5 bp cut. The decision to stand pat breaks a string of four straight quarterly cuts of 12.5 bp. While the mainland economy is stabilizing, Taiwan’s economy remains weak. We view this as a pause in the easing cycle, and would not rule out further easing ahead.

Indian markets slumped on reports that its armed forces attacked terrorist camps in the Pakistani portion of Kashmir. This is the biggest military operation since 1999, as Prime Minister Modi responds to a deadly on Indian soldiers earlier this month. Tensions are likely to remain high near-term, but we hope that diplomacy eventually wins out. RBI meets next week and the market is split. Of the 24 analysts polled by Bloomberg, 12 see steady rates, 11 see a 25 bp cut, and 1 sees a 50 bp cut. We favor no move, especially if the rupee remains under pressure.

Banxico meets today and the market is truly split. Of the 24 analysts polled by Bloomberg, 11 see no move, 1 sees a 25 bp hike, 11 see a 50 bp hike, and 1 sees a 75 bp hike. We lean towards a 50 bp hike to 4.75% coupled with discretionary FX intervention. Market conditions are very similar to February, when they last acted aggressively to support the peso. USD/MXN made a new marginal low just below 19.33 after Wednesday’s 2.5% drop. The pair had been drifting higher, but the oil rally helped the peso gain some traction.