Corrective Forces Emerge, but Underlying Trend is Evident

Businessman Looking For Dollar Sign With Binocular

  • The dollar’s losses are minor, and the forces that drove it higher remain intact
  • In Europe, the UK provided details about its Q3 GDP that rose 0.5%.
  • The US economic calendar includes the new advance look at merchandise trade
  • Turkey’s central bank surprised markets with a 50 bp hike in its benchmark repo rate to 8.0% yesterday; Colombia is expected to stand pat today

The dollar is mostly softer against the majors. The yen and the Antipodeans are outperforming, while the Loonie and sterling are underperforming. EM currencies are mostly firmer. The CEE currencies are outperforming, while ZAR, THB, and TWD are underperforming. MSCI Asia Pacific was up 0.7%, with Japan markets rising 0.3% after returning from holiday. MSCI EM is up 0.4%, with Chinese markets rising 0.9%. Euro Stoxx 600 is flat near midday, while S&P futures are pointing to a flat open. The 10-year UST yield is up 2 bp at 2.37%. Commodity prices are mixed, with oil down nearly 1%, copper up 2%, and gold up almost 1%.

The US dollar’s recent gains are being trimmed today, and it is down against all the major currencies. Many emerging market currencies, including the Turkish lira, Indian rupee, and Hungarian forint are firmer today.

The dollar’s losses are minor, and the forces that drove it higher remain intact. One of the most important of these drivers has been the increase in US interest rates, and US yields are 2-3 bp higher today. The recent string of economic data leaves the Fed set to hike rates next month. Next week’s November employment report is seen as the last potential hiccup on the way to a rate hike. However, most are looking for an improvement in job creation after the 161k increase in October.

The other important driver has been the anticipation that the populist-nationalist rise will be expressed shortly in Europe. The Italian referendum and the Austrian presidential election next week may be a dress rehearsal for the French Presidential election next spring. The center-right Republicans will have a run-off between a self-styled Thatcher-esque candidate (Fillon) and the old guard (Juppe). Perhaps obscured by the pressure on Italian bonds, the French premium over Germany continues to trend higher. It is near 54 bp today, the widest since Q1 2014. As recently as July, the premium was near 20 bp.

There has been no fundamental news development that is spurring today’s modest correction. The main data has come from Japan. At the headline level, Japan’s CPI rose to 0.1% y/y from -0.5%. It is the first reading above zero since February. However, it exaggerates improvement. What the BOJ calls the core rate (excluding fresh food) remained steady at -0.4% y/y. It has been negative for eight months, which is the longest deflation steak since 2009-2011.

What happened in October is that because of the typhoon and poor weather, fresh food prices roses by nearly 11.5%. We are fairly confident that the upward pressure on fresh food prices will not be sustained. At the same time, there was another encouraging sign that deflation may be ebbing. The measure of Japanese inflation that comes close to the US core rate (excluding both food and energy) rose from its lowest pace since September 2013 (zero) to 0.2%.

The dollar’s gains were initially extended to almost JPY114 in Asia, but corrective forces quickly emerged and the greenback fell to JPY112.50 by late in the session. Europe has seen some consolidation, but there is scope for additional near-term losses that could extend toward JPY111.85-JPY112.00 and still not do much technical damage to the charts.

Meanwhile, Japan’s Topix advance was extended for an 11th session. It has rallied for three consecutive weeks, the longest streak since May. The MSCI Asia-Pacific Index rose 0.6%, the fourth gain this week, and managed to snap a four-week losing streak with a 1.3% advance.   European bourses are slightly higher in a mixed session that is seeing health care and utilities post small gains. However, energy, materials, and information technology sectors have eased.

In Europe, the UK provided details about its Q3 GDP that rose 0.5%. The surprise was the 0.9% increase in business investment. Household spending increased by 0.7%, a little slower than recent averages. The external sector added 0.7 percentage points to GDP growth, the most since 2014. Exports rose 0.7%, while imports fell 1.5%. After the Autumn Statement in the middle of the week, the Office of Budget Responsibility slashed its forecast for 2017 growth to 1.4% from 2.2% (in March).

The US economic calendar includes the new advance look at merchandise trade. The October shortfall is expected to rise to $59 bln from $56.5 bln in September. Wholesale and retail inventories for October will also be reported, but are not market moving data. Markit issues its preliminary estimate for the November US services PMI and composite. Little change is expected. With yesterday’s US holiday, many will take today off as well. The US bond market closes early. There is some speculation that China could announce the long-anticipated the Hong Kong-Shenzhen link later today.

The euro’s high in early Asia near $1.0620 brought in sellers in Europe. We look for initial support near $1.0560. For its part, sterling could not make it back to yesterday’s high near $1.25. Nearby support is pegged by $1.2420. The Australian dollar has moved higher for the fourth session this week, but hit a wall of offers near $0.7470 that knocked it back toward $0.7430 in the European morning. Chart support is found between $0.7400 and $0.7420 today. The Canadian dollar is little changed, with the US dollar in the middle of its CAD1.34-CAD1.36 range.

During the North American session, the US reports advance October trade, inventories, and November Market services and composite PMI. There are no Fed speakers today. FOMC minutes released Wednesday contained no surprises, as the Fed appears set to hike rates on December 14.

Turkey’s central bank surprised markets with a 50 bp hike in its benchmark repo rate to 8.0%. A small handful looked for tightening, but most analysts saw no change. The central bank noted that “Exchange rate movements due to recently heightened global uncertainty and volatility pose upside risks on the inflation outlook.” Yet the lira failed to hold on to early gains, ending the day down to record new all-time lows. Tightening was certainly warranted, but it seems to be too little too late.

Colombia’s central bank is expected to keep rates steady at 7.75%. Earlier in the day, Colombia reports Q3 GDP. Growth is expected to slow to 1.5% y/y vs. 2.0% in Q2. For the full year, growth is seen at 2.1%, but the risks are to the downside. Inflation is falling, but remains above the 2-4% target range and so easing is likely to be a 2017 story.