Narrowly Mixed Dollar Conceals Resilience

Gold dollar key

  • China data suggest the economy is finding better traction
  • European economic data featured Italian IP, German CPI and ZEW, and UK prices
  • The news stream in North America will be subdued today, with only US import prices on tap
  • India reports November CPI; Chile central bank is expected to keep rates steady at 3.5%

The dollar is mostly firmer against the majors, albeit in very narrow ranges. Sterling and the Loonie are outperforming, while the yen and the euro are underperforming. EM currencies are mostly weaker. IDR, KRW, and THB are outperforming, while ZAR, TRY, and BRL are underperforming. MSCI Asia Pacific was up 0.3%, with the Nikkei rising 0.5%. MSCI EM is up 0.3%, even with Chinese markets falling 0.1%. Euro Stoxx 600 is up 0.8% near midday, while S&P futures are pointing to a flat open. The 10-year UST yield is down 1 bp at 2.46%. Commodity prices are mixed, with oil up 0.6%, copper down 0.7%, and gold down 0.4%.

The US dollar little changed against most of the major currencies. The dollar finished yesterday’s North American session on a soft note, but follow through selling has been limited. After rallying to near 10-month high above JPY116 yesterday, the greenback finished at session lows near JPY115.00. Initial potential seemed to extend toward JPY114.30, but dollar buyers reemerged near JPY114.75, and the pair rose back to the middle of the two-day range (~JPY115.40 area).

The Nikkei gapped higher yesterday, and despite the lower opening, the gap was not entered, and Japanese stocks recovered. The Nikkei closed 0.5% higher, extended its advance to the sixth consecutive session. The Topix gained a little more, and also extended its streak to six sessions.

China eclipsed Japan in terms of news. The data suggest the economy is finding better traction. November industrial output rose 6.2%. The median expected no change to the 6.1% pace seen in both September and October. It matches the 11-month average. Retail sales rose 10.8%, the most since last December. The Bloomberg consensus was for a 10.2% increase. Fixed asset investment was steady at 8.3%, as expected.

Chinese shares recovered from early losses. The Shanghai Composite fell 1.1% before recovering to eke out less than a 0.1% gain. Telecom, consumer staples, and energy led the way. Financials were the weakest sector, losing 1.2%. Some reports suggested that the PBOC, operating through a couple of major banks, may have intervened to sell US dollars around CNY6.9, but of course, confirmation remains elusive.

European economic data featured Italian industrial output, Germany CPI and ZEW, and UK prices. Like France and Germany, Italy’s October industrial production disappointed. The median forecast was for a 0.2% increase after a 0.8% decline in September. Instead, output was flat, with the year-over-year pace slipping to 1.3% from a revised 1.9% (from 1.8%).

Although Italian banks bad loan situation and the need to raise capital is the main focus outside of Italian politics, stronger and sustained growth could ease many of Italy’s problems. Among the banks, Monte Paschi has been the focus as its tries to raise five bln euros, including a debt for equity swap. Today it was Italy’s largest bank, Unicredit who announced plans for 13 bln euros in a rights offering next year as part of a larger restructuring effort. Note that the amount it wants to raise is almost as much as the present market value. In earlier capital raising exercises in 2008, 2009 and 2012, the bank raised 15.5 bln euros.

Italian bank shares opened lower after yesterday’s gains were reversed. However, the FTSE Italia All-Share Banks Index quickly recovered and is up nearly 2.8% near midday in Italy, putting the index near the three-day high. The broader Italian equity market is leading the major bourses higher with a 1.4% gain today. Over the five-day advance is 4.8%, matching the Nikkei’s advance over the same period. The Dow Jones Stoxx 600 is up 0.6% today and is up 3.3% over the past five sessions. Most sectors are higher, except for energy and materials.

Italy’s 10-year benchmark yield is off nine bp and is leading the decline in European bond yields today. Germany’s is off three basis points, while Spain is off two. Germany’s CPI matched the preliminary estimate, leaving the year-over-year rate at 0.7%. The ZEW survey showed a rise in the assessment of the current situation (63.5 from 58.8), while the expectation component was unchanged at 13.8%.

The euro was unable to extend yesterday’s recovery that carried it to about $1.0650. It has held above $1.06 so far but looks vulnerable to a push into the $1.0580 area. Sterling is the strongest of the majors, up about 0.2% and extended yesterday’s gains. Last week’s highs are a half a cent higher at $1.2775. However, we suspect that additional gains above the $1.2725 area will require a broader dollar pullback.

The UK reported CPI readings a little firmer than expected. The year-over-year headline rate rose to 1.2%, the highest in two years. The core rate rose to 1.4% from 1.2%. The decline in sterling is adding to the inflation pressures. UK import prices rose almost 15% in the year through November, the quickest pace in five years. ONS reported that clothing, motor fuels, and electronic equipment prices rose the most.

Output prices rose 2.3%, which is also a bit quicker than expected. It is the strongest rise since April 2012. Input prices fell 1.1% on the month, but the year-over-year pace quickened to 12.9% from a revised 12.4% (was 12.2%). The Bank of England meets this week. It is expected to tolerate upward pressure on prices, though its tolerance is not infinite. Base effects and sterling may obfuscate the underlying signal until H2 17.

The news stream in North America will be subdued today, with only import prices on tap. A soft report is expected. Things pick up tomorrow with the retail sales, PPI, and industrial production data, and, of course, the FOMC meeting.

India reports November CPI, which is expected to rise 3.9% y/y vs. 4.2% in October. It reports November WPI Wednesday, which is expected to rise 3.1% y/y vs. 3.4% in October. The RBI delivered a hawkish surprise last week and kept rates steady. Most were looking for another 25 bp cut. Next RBI meeting is February 8. A lot can happen between now and then, but if inflation continues continue to fall, then a cut then seems likely.

Chile central bank is expected to keep rates steady at 3.5%. CPI inflation ticked higher to 2.9% y/y in November. While this is still below the 3% target, we do not see easing until Q2 2017, if at all. The economy remains very weak, but policymakers will have to be cautious in cutting rates if the Fed is raising rates.