December 2nd, 2014 6:44 am
Via Marc Chandler at Brown Brothers Harriman:
Dollar Gains on Turnaround Tuesday
– After yielding ground yesterday, the US dollar has come back bid today
– The Reserve Bank of Australia was the first of four major central banks that meet this week
– Prime Minister Abe cannot be happy with today’s data, which underscore why the LDP is likely to lose seats at the December 14 election
– As expected, the Reserve Bank of India keep rates unchanged, for now; Brazil reports IP today
Price action: The dollar is stronger against most major currencies. The euro is back near $1.2435 and sterling is trading just above $1.5700. The dollar is especially stronger against the Norwegian krone, at just under NOK7.00, while dollar/yen is trading at just under ¥119.0. The dollar is mixed against EM, gaining against the RUB (new highs again) and most Latin American currencies, but weakening against KRW and PHP. The MSCI Asia Pacific index rose 0.5%. Euro Stoxx is up 0.5% near midday, while S&P futures are pointing to a flat open. Oil is down again, with Brent trading below $72.0 per barrel.
After yielding ground yesterday, the US dollar has come back bid today. The main driver is the divergence that favors the US. Specifically, yesterday two people that we have identified as part of the troika at the Federal Reserve (where we believe the true policy signals emanate) played down the disinflationary threat of the fall in oil, saying it would likely be temporary.
Instead, both Fischer and Dudley discussed the stimulative aspects of drop in energy prices. At the same time, Dudley explicitly reaffirmed his belief that the pricing in of a rate hike in mid-2015 is reasonable. For his part Fischer also seemed to indicate that it was undesirable for interest rates to stay near zero for any longer than necessary.
This stands in stark contrast to Asia and Europe. The PBOC refrained from draining funds from the banking system today. This served to heighten speculation that a cut in reserve requirements is likely in short order. The ECB meets Thursday. Following last week’s lower flash CPI, the weakness in Germany’s PMI (below the 50 boom/bust level), and a continued decline in market measures of inflation expectations, many expect some sort of policy response.
The market has all but ignored Moody’s downgrade of Japan that was announced yesterday. The generic 2- and 5-year bond yields fell to record lows today. The 10-year yield was more volatile, but also finished lower on the day, despite the poor reception to the new 10-year bond sale. The bond auction saw a weak bid-cover ratio (3:1 which is the lowest in nearly 1.5 years) and a large tail. Moody’s also downgraded five Japanese banks, but the financial component of the Nikkei gained slightly, sufficient to outperform telecoms and consumer staples.
Prime Minister Abe cannot be happy with today’s data, which underscore why the LDP is likely to lose seats at the December 14 election. Wage growth remains miserly. Wages, when adjusted for inflation, have been falling for 16 months through October, when they were 2.8% below year-ago levels. Total cash earnings are up 0.5% year-over-year. It is the third consecutive month that the pace of increase as slowed. In July it stood at 2.4%, which marked a peak. In September, it was 0.7%. The consensus expected a small improvement.
The Reserve Bank of Australia was the first of four major central banks that meet this week. The Bank of Canada meets tomorrow, followed by the BOE and ECB on Thursday. There are two elements of its statement that are important for investors. First, it continued with its forward guidance for a period of stability on rates. This is important because the market had been feeling more confident about a rate cut next year. After today’s statement, market expectations eased, which means interest rates backed up sharply (up 7.5 bp in the 2-year yield and 11 bp in the 10-year yield). Second, the RBA stepped up its rhetoric about the exchange rate, saying that a lower exchange rate may be necessary for the adjustment process.
Today’s data suggests perhaps that the RBA is putting too much emphasis in the need for a weaker currency. It reported today a smaller Q3 current account deficit. It was A$12.5 bln, down from A$13.9 in Q2 and expectations for an A$13.5 bln shortfall in Q3. In terms of Q3 GDP, which will be reported tomorrow, net exports increased to 0.8% from -0.9% in Q2. Separately, Australia reported October building approvals rose 11.4%, more than twice the consensus forecast and offset in full the September decline. The Aussie initially rose just above $0.8540. It stopped shy of last Friday’s high before reversing lower. A break of $0.8450 would likely target $0.8400.
The UK’s construction PMI was disappointing. It slipped to a still strong 59.4 from 61.4 in October. The consensus was for 61.0. Of the three PMIs, this is the least important as it represents the smallest sector. Tomorrow’s service PMI is the most important of the PMI reports. It is expected to rise to 56.5 from 56.2. Sterling is trading in the upper end of yesterday’s range. In the second half of last week, sterling had frayed the 20-day moving average, but yesterday and today it has contained the upticks. It comes in today near $1.5745. It has not closed above the 20-day moving average since October 28.
News from the euro area is light. The only economic data was the October PPI report. PPI was off 1.3% year-over-year, in line with expectations and a small improvement from September’s -1.4% reading. Meanwhile, Dow Jones Stoxx 600 is up 0.3% near midday in London, having traded at new two-month highs. The energy sector is leading the way, snapping a six session losing streak to rise almost 2% today. This benchmark has rallied 12% since the mid-October low, partly in anticipation of further easing by the ECB.
The economic calendar for North America is light too. October construction spending is expected to rise 0.6%, offsetting the 0.4% decline in September. It tends not to be a market mover. The US will also report auto sales. Spurred by auto loans and cheaper fuel, auto sales are expected to have risen. It is noteworthy that the increase in vehicle sales this year has been led by light truck and SUVs. That said, on a sales-weighted basis, the average miles per gallon of gasoline has risen from 20.8 in 2008 to 25.3 last year. In terms of Fed speakers, we note that Yellen and Fischer speak in the North American morning and Brainard (on paperwork reduction) near midday.
As expected, the Reserve Bank of India keep rates unchanged, for now. The communication by the RBI indicates that, if the current price trends continue, they will be ready to cut rates soon. We believe the easing cycle could start in Q1. But like Indonesia and Malaysia, cuts in fuel subsidies will put upward pressure on headline inflation and so should keep all these central banks in cautious mode. Political developments in India have also been mostly positive indicating that, at least, Modi will show some constrain on the fiscal side. For USD/INR, support seen near 61.50, resistance seen near 62.00 and then 62.50.
Korea’s November CPI came in slightly lower than expected at 1.0% y/y. With inflation below the 2.5-3.5% target band, the central bank has leeway to cut rates in 2015 if the slowdown intensifies. Easing is more likely if JPY/KRW continues to drop, as it is making new lows for this move near 9.33. Korea trade data for November came in much weaker than expected. Exports -1.9% y/y, imports -4.0% y/y. While it may be too early to fully reflect the impact of the weak yen, we expect regional trade data to get even worse. Between the weak yen and slowing China, Asian exporters will continue to get squeezed. A BOK policy response seems likely in 2015. For USD/KRW, support seen near 1100 and then 1080, resistance is seen near 1120 and then 1140.
Brazil reports October IP, expected at -3.0% y/y vs. -2.1% in September. The central bank then meets Wednesday and is expected to hike rates 25 bp to 11.5%. However, the market is split. Of the 39 analysts polled by Bloomberg, 17 are looking for a 50 bp hike to 11.75%. November IPCA inflation will be reported Friday, expected to remain steady at 6.59% y/y. For USD/BRL, support seen near 2.55 and then 2.50, resistance seen near 2.60 and then 2.65.
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