Dollar Powers Ahead as US Rates Still Rising

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  • Both CAD and MXN trading yesterday was choppy on NAFTA concerns 
  • UK reported mixed labor market data 
  • During the North American session, the US will report September housing starts and building permits 
  • South Africa September CPI rose 5.1% y/y vs. 5.0% expected 

The dollar is mostly firmer against the majors, supported by higher US rates. Loonie and sterling are outperforming, while the yen and Kiwi are underperforming. EM currencies are mostly weaker. KRW and HKD are outperforming, while ZAR and TRY are underperforming. MSCI Asia Pacific was down 0.1%, with the Nikkei rising 0.1%. MSCI EM is flat, with the Shanghai Composite rising 0.3%. Euro Stoxx 600 is up 0.5% near midday, while S&P futures are pointing to a higher open. The 10-year US yield is up 3 bp at 2.33%. Commodity prices are mixed, with Brent oil up 0.7%, copper down 0.2%, and gold down 0.3%.

Higher US rates continue to support the dollar. The 10-year yield is up 3 bp to 2.33%, while the 2-year yield is up 2 bp to 1.56%. The 2-year premium over Germany is at 228 bp, a new cycle high. Bloomberg’s WIRP page has the odds of a Fed hike on December 13 at 84%. Break of the 1.1750 area for the euro sets up a test of the October low near 1.1670.

During the North American session, the US will report September housing starts and building permits. Weekly jobless claims will also be reported for the BLS survey week. However, disruptions from the storms are likely to impact the data. The Fed’s Dudley and Kaplan speak during the morning, while the Fed’s Beige Book will be released in the afternoon.

The Fed guessing game continues. President Trump said he will likely choose the next Fed chair from the five “finalists”: Yellen, Warsh, Taylor, Powell, and Cohn. Betting site PredictIt has Powell at 38 cents, Warsh at 26 cents, Taylor at 21 cents, Yellen at 19 cents, and Cohn at 7 cents. Those are the payouts for a dollar bet.

Both CAD and MXN trading yesterday was choppy on NAFTA concerns. Initial selling on news that Mexico and Canada rejected US demands was then countered by news that NAFTA talks will be extended past the end-2017 deadline and into Q1 2018. Pessimism regarding NAFTA had been weighing on these currencies, and so the news caught the market wrong-footed. These two are the best performing currencies today as the US dollar continues to gain against most others.

UK reported mixed labor market data. September job claims rose 1.7k -2.8k in August, while employment rose 94k vs. 148k expected. The unemployment rate was steady at 4.3%, as expected, while average weekly earnings rose 2.2% y/y vs. 2.1% expected. Retail sales will be the next key reading tomorrow, which are expected to fall -0.1% m/m (-0.2% m/m ex-auto fuel). With inflation running around 3%, real wages are falling and likely to hurt consumption.

The market has almost fully priced in a hike by the BOE November 2. Sterling has been trading a bit soft since yesterday’s testimony in parliament by BOE MPC members. Governor Carney stuck to his view that rates would be adjusted in the coming months, but Deputy Governor Ramsden and new MPC member Tenreyro leaned more dovish.

South Africa September CPI rose 5.1% y/y vs. 5.0% expected and 4.8% in August. This is still within the 3-6% target range. It will be a tough call, but we think the SARB will resume cutting rates with a 25 bp move at its November 23 meeting. The wild card is the rand. If it continues to weaken and underperform, SARB will be reluctant to cut. August retail sales will also be reported today, and are expected to rise 2.7% y/y vs. 1.8% in July.