Dollar Remains Bid

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  • The dollar is bid and an important driver is the backing up of US rates
  • Japan reported a larger than expected August trade and current account figures
  • Sterling cannot find any traction
  • Minneapolis Fed President Kashkari is the only Fed speaker today
  • South Africa’s Finance Minister Gordhan has been summoned to appear in court to face charges; South Africa reports August manufacturing production
  • Mexico reports September ANTAD retail sales

The dollar is broadly firmer against the majors. The Loonie and the euro are outperforming, while Kiwi and the Swedish krona are underperforming. EM currencies are broadly weaker. MXN, RON, and CNY are outperforming while ZAR, KRW, and RUB are underperforming. MSCI Asia Pacific was down 0.6%, even as the Nikkei rose 1%. MSCI EM is down 1.1%, with Chinese markets up 0.4% after returning from a week-long holiday. Euro Stoxx 600 is down 0.1% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is up 5 bp at 1.77%. Commodity prices are mostly lower, with oil down 0.5%, copper down 0.4%, and gold down 0.2%.

The US dollar is bid against all the major and most emerging market currencies. An important driver is the backing up of US rates. The two-year yield, which is particularly sensitive to Fed policy is at its highest level since early June (~86 bp). The US 10-year yield is five basis points higher today at 1.77%, which is the highest in four months.

In comparison, Europe’s two-year yields are mostly lower today. Germany’s two-year yield is minus 68 bp and Japan’s stands at minus 27 bp. The UK two-year yield is below 20 bp.

Germany’s ZEW survey handily beat expectations, but this has not deterred the euro from being sold back to the pre-US jobs low near $1.1100. The assessment of the current situation rose to 59.5 from 55.1 in September. It is the highest since January. The expectations component rose to 6.2 from 0.5. The median forecast was for a 4.0. It is the best reading since June. A break of the $1.1100 area would target the early-August low near $1.1045.

Japan reported a larger than expected August trade and current account figures. The dollar’s rally that began on September 22 has seen only two losing sessions: September 26 and October 7. The dollar recovered its post-job data losses yesterday and returned briefly poked through JPY104 earlier today. Last week’s high was recorded near JPY104.15 and last month’s high was closer to JPY104.35.

Japan’s August current account surplus was a JPY2 trillion. The median guesstimate was JPY1.5 trillion after JPY1.94 trillion in September. This represents a nearly 25% increase from a year ago. The trade surplus was reduced as it typically is in August from July. However, it was more than twice as big as expected at JPY243 bln.

Sterling cannot find any traction. It is extending its losses against the dollar for the fourth consecutive session. It has fallen in eight of the past 10 sessions. The euro has risen against sterling for four consecutive sessions also and in nine of the past 10 sessions. The general direction has been set in motion, not by UK economic data, which continues to surprise on the upside, but by fears that the UK will cut its nose to spite its face. The newest wrinkle is a potential constitutional challenge as Parliament is insisting that it play a larger role in the Brexit decision than Prime Minister May is prepared to concede.

A hard exit is thought to be more negative for sterling for a number of reasons, including a greater burden on prices (weaker sterling, higher domestic inflation to adjust the external deficit rather than volume (trade and capital flows). That said, the selling pressure appears to have abated as the London morning got under way. Upticks from $1.2280 may extend toward $1.2330-$1.2350. Note that the low since the flash-crash low was near $1.2230.

US political developments and news that Russia may cooperate with OPEC producers to stabilize the market sent the Canadian dollar sharply higher Monday. Canadian markets were closed yesterday, and it was a partial holiday in the US. The US dollar fell nearly 1% against the Canadian dollar; its biggest drop since late-July. Oil prices are consolidating yesterday’s advance, while the US dollar climbed from CAD1.3140 yesterday to almost CAD1.3235 today. Initial support is seen near CAD1.3180.

The Federal Reserve’s new Labor Market Conditions Index is the main economic report today. The highlight of the week is the retail sales report on Friday. After taking August off, consumers went shopping again in September. The FOMC minutes from the September meeting will be reported tomorrow. Canada reports housing starts today and existing home sales at the end of the week.

Minneapolis Fed President Kashkari is the only Fed speaker today. He appears to lean toward the dovish size of the spectrum at the Fed, but with Chicago Fed’s Evans, a notable dove, acknowledging a rate hike is likely this year, what it means to be a dove may be changing. Also as we have noted before, Kashkari favors breaking up the banks to address the too-big-to-fail concerns as opposed to the current approach of increased regulation (limits on activity and higher capital requirements).

South Africa’s Finance Minister Gordhan has been summoned to appear in court to face charges. This matter had died down but continued to simmer. It has now boiled over. Reports suggest Gordhan will be charged with committing fraud when he was heading up the tax authority, but most see it as a politically motivated by President Zuma. Investors have been buying the rand in recent weeks, ignoring political risk at their own peril. We think these developments will cement a downgrade to sub-investment grade, and keep downward pressure on the rand.

South Africa reports August manufacturing production, which is expected to rise 1.3% y/y vs. 0.4% in July. The economy remains weak, while inflation is finally turning lower. SARB next meets November 24. A lot can happen between now and then, but we think the major factor will be the exchange rate. SARB is reluctant to hike rates further, but a weaker rand would lead to inflation pass-through and may not allow the bank to remain on hold.

Mexico reports September ANTAD retail sales, which is expected to rise 5.2% y/y vs. 1.7% in August. Despite what we see as nebulous links between Trump and the peso, the currency did firm nearly 2% on Monday after a damaging video was released late Friday. This was followed on Sunday by what many perceived as another poor debate showing for the Republican candidate. The next Banco de Mexico policy meeting is November 17, and much will depend on how the peso is trading. Our base case is steady Mexico rates in November, followed by a hike to match the US if the Fed hikes in December.