Dollar Extends Losses Post-FOMC
<div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjvUhuGahsViNz_YKZxQJgmPDYk5sz6hO7hXIzAbjP3yuFvngs0BL1qRkBYg2L705dzp0oL5C1rqAnpQJ4GVK6-LEn1t9ZVB1GVM5Hm_ekmvE1a_QKPUi-tklCiAwsN7CwEObSoduF1w-8LPEr29kkD8vfVLQL-FGNyev7MdUO505k-K2oGBIOqpZ6RxzsA/s632/Bailey.jpg"><img alt="" border="0" data-original-height="468" data-original-width="632" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjvUhuGahsViNz_YKZxQJgmPDYk5sz6hO7hXIzAbjP3yuFvngs0BL1qRkBYg2L705dzp0oL5C1rqAnpQJ4GVK6-LEn1t9ZVB1GVM5Hm_ekmvE1a_QKPUi-tklCiAwsN7CwEObSoduF1w-8LPEr29kkD8vfVLQL-FGNyev7MdUO505k-K2oGBIOqpZ6RxzsA/s400/Bailey.jpg" width="400" /></a></div><p><b><span>Overview: </span></b><span>We suspect that if Martians read the FOMC
statement, which was nearly identical to the September statement and listened
to Chair Powell, they would conclude there was nothing new. Yet, the market
habitually hears Powell as dovish and this has weighed on rates and the dollar,
while lifting risk appetites. Follow-through selling of the greenback has
dragged it lower against all the major currencies, with the Antipodean leading
the way, and nearly all the emerging market currencies (but the Chinese yuan,
Russian ruble, and Turkish lira). Further dollar losses may be limited by the
stretched intraday momentum and the proximity of tomorrow 's US employment
report. <o:p></o:p></span></p><p><span>Asia Pacific equity markets
except China advanced today, with several bourses up over 1%. Europe's Stoxx
600 is rising for the fourth consecutive session and its 1.5% gain, if
sustained would be the most in nearly four weeks. US equities are also poised
to extend yesterday's gains. Bonds are rallying, driving down yields, three
basis points in Japan, and around 5-9 bp in Europe. The 10-year US Treasury
yield is off a couple of basis points to around 4.71%, the lowest since October
17. It settled yesterday below the 20-day moving average for the first time in
two months. Given the dollar's setback and the lower yields, one might have
expected gold to be higher. The yellow metal is firm but below yesterday's high
near $1992. </span><span> </span><span>December WTI tested support near $80 yesterday and has come back better bid today and is hovering around $82 in the European morning.</span></p><p><b><span>Asia Pacific</span></b><span></span><o:p></o:p></p><p><b><span>Without putting a fine point
on it, Japan is in a pickle. </span></b><span>The economy appears to have contracted in Q3. The Bank of Japan is
trying to softly exit its extraordinary monetary policy but appears clumsy with
a milquetoast adjustment to 1.0% cap on the 10-year JGB. It is now regarded as
a reference rate. This seems to have signaled a more flexible approach, but the
central bank stepped into the market to buy JGBs yesterday. Reports suggest
that the BOJ could set a record this year in annual bond purchases. The current
record of JPY119 trillion (~$790 bln) was set in 2016. <o:p></o:p></span></p><p><b><span>The yen clearly sold off on
the BOJ's move, but the MOF seemed unable to link the currency's slide to
fundamental considerations and renewed its threat to intervene in the foreign
exchange market. </span></b><span>Ironically,
the BOJ created the jump in volatility that the MOF could use to justify
intervention. The unpopular prime minister announced a fiscal package that the
cabinet estimates is worth about JPY21.8 trillion (~$144 bln) to help cushion
the inflation, which apparently is not high enough or for long enough to get
the Bank of Japan to hike its overnight rate from -0.10% and support the
economy. Optimistically, the extension of energy subsidies will suppress
inflation by an estimated 1% and may boost growth by one percentage point a
year for the next three years, according to reports. Ironically, in other
countries, such as Australia, Canada, and the US, some economists link the
government's accommodative fiscal stance to price pressures. Still, some view
Prime Minister Kishida's push for temporary cuts income and residence tax as a
cynical effort to boost support, and at least, initially, it does not seem to
be working. Also, while this year's spring wage round was regarded as a
success, next week's report will likely show that real wages have fallen for
the 18th consecutive month in September. <o:p></o:p></span></p><p><b><span>Australia reported a much
smaller trade surplus in September. </span></b><span>The A$6.79 bln surplus was about a third smaller than
expected and was the smallest surplus since February 2022. Exports fell 1.4%
month-over-month, while imports surged 7.5%. The market seemed to largely shrug
it off as the focus is on next week's central bank meeting. The odds of a
rate hike have doubled since the slightly firmer than expected Q3 CPI (5.4% vs.
5.3% median forecast in Bloomberg's survey, from 6.0% in Q2) to almost 55%. The
futures market shows a little more than an 80% chance of a hike by year-end. It
was around 45% before the CPI.<o:p></o:p></span></p><p><b><span>The sharp drop in US rates,
encouraged by the soft manufacturing ISM and smaller than expected US quarterly
refunding next week, helped pull the dollar lower against the yen. </span></b><span>It fell to new session lows around
JPY150.65 in the North American afternoon at the tail end of Fed Chair Powell's
press conference. Follow-through selling today has brought the greenback to
about JPY150.15. A (61.8%) retracement of this week's gains is found near
JPY149.90. One-month implied volatility peaked near 9.0%, settled yesterday
close to 8.0%, and is near 7.5% now. <b>The Reserve Bank of Australia is seen
to be among the most likely of the G10 central banks to hike rates, and a move
could come as early as next week. </b>The contrast with the Fed, which is
assumed to be done, helped lift the Australian dollar to nearly $0.6400 late
yesterday in North America. It has overcome the optionality struck there to
rise toward $0.6440, its best level in more than three weeks. As we have noted
there are options there: A$1.12 bln expire today and another A$1 bln on
Monday. The next formidable resistance is seen around $0.6500. <b>The
Chinese yuan has made no headway in the weaker greenback environment. </b>The
dollar traded inside yesterday's narrow range to trade below CNY7.32 and above
CNY7.3150. Of note, the PBOC set the dollar's reference rate above a bit
stronger at CNY7.1797, while the average projection in the Bloomberg survey
fell to CNY7.3030. <o:p></o:p></span></p><p><b><span>Europe</span></b><span></span><o:p></o:p></p><p><b><span>The eurozone's final October
manufacturing PMI was in line with the preliminary reading of 43.0, rising to
43.1 but still below September's 43.4. </span></b><span>It is the lowest reading since the pandemic. It has not
been above the 50 boom/bust level since June 2022. Germany's manufacturing PMI
rose for the third month in October but at 40.8 (40.7 flash), it is still
contracting at a rigorous pace. It was at 47.1 at the end of last year.
France's final manufacturing PMI is 42.8 up from the 42.6 initial estimate but
down from 44.2 in September. It was at 49.2 at the end of 2022. Italy's
manufacturing PMI fell to 44.9 (from 46.8) to end three months of improvement.
Spain's manufacturing PMI slumped to 45.7 from 47.7, a new low for the year. Separately,
German reported unemployment rose last month to 5.8% from 5.7%, where it was
for the past four months. It was at 5.5% at the end of last year. The number of
unemployed rose by 30k, twice the anticipated increase. In the coming days,
France, Italy, and Spain will report on the labor market. <o:p></o:p></span></p><p><b><span>Norway's central bank left
the deposit rate at 4.25% as widely anticipated. </span></b><span>The Bank of England is next. Its decision
will be announced shortly. The market thinks that the BOE is finished with its
tightening cycle. Judging from public comments, a few members may still be
inclined to hike again, but they do not seem to be in a majority. The central
bank will update its forecasts and a case can be made to shave this year's 0.5%
GDP forecast. The swaps market begins to price in a cut starting next June, but
it is not fully discounted until September 2024. A UK national election needs to
be called by late January 2025, but many expect it to be in late 2024. <o:p></o:p></span></p><p><b><span>The euro reversed lower from
$1.0675 on Tuesday and bottomed Wednesday slightly ahead of $1.0515. </span></b><span>It may have formed a bullish hammer
candlestick. Follow through buying today has lifted the single currency back to
almost $1.0630 in the European morning. The intraday momentum indicators are stretched and
gains from here are likely to be limited ahead of tomorrow US jobs data. <b>Sterling's
range yesterday was set in North America between roughly $1.2095 and
$1.2165. </b>And it basically covered the range three times. The range has
been extended today to almost $1.2200. Above there, the $1.2240-50 may offer
the next hurdle. Lastly, note that many expect Czech to deliver its first rate
cut in the cycle later today. The two-week repo has been at 7% since the middle
of last year. Most economists expected a quarter-point cut. <o:p></o:p></span></p><p><b><span>America</span></b><span></span><o:p></o:p></p><p><b><span>The Fed said little and did
less. </span></b><span>As widely
anticipated, the Federal Reserve stood pat for the second consecutive meeting.
As is its habit, the market heard a dovish Chair. Judging from the swaps and
futures market, most think that the Federal Reserve is done. More than that,
the market moved toward discounting a third cut next year on top of the two the
Fed signaled with its dot plot in September. It had been near a 50/50
proposition. Now it is almost 90%. The accompanying statement was hardly
changed from September, though that did not stop some from saying it was
dovish. The statement acknowledged the strength of Q3 GDP. It also noted that
although job growth has slowed, it remains strong. Lastly, it added
"financial" to the "credit tightening" cited in September
that will slow economic activity. Indicative pricing in the swaps and futures
market reflects expectations that the monetary tightening cycle is over, even
as the unwinding Fed's balance sheet continues. <o:p></o:p></span></p><p><b><span>The ADP private sector jobs
estimate may not be very helpful as a last-minute input to nonfarm payroll
projections, but the wage data seems to confirm the slowing of what some
economists see as a source of price pressures (but is debatable). </span></b><span>ADP estimates that wages for those staying
at their jobs slowed to 5.7% year-over-year from 5.9%. It is the slowest pace
since September 2021. Those who changed jobs saw an increase of 8.4%, down from
8.8% It peaked last June at 16.4%, and now is the lowest since June 2021.
Separately, earlier this week, the Q3 labor costs rose slightly more than
expected (1.1%) and today's data is likely to show that the increased labor
costs was covered by the increase in productivity. The median forecast in
Bloomberg's survey sees a 4.3% increase in Q3 productivity, which, if true,
would be the best since Covid-distorted surge Q2-Q3 2020 (17.3% and 6.5%,
respectively). This translates to a 0.4% increase in unit labor costs.
Separately, with Q3 GDP in hand, September factory orders, and a final look at
durable goods orders, are unlikely to move markets. And weekly jobless claims
are overshadowed by tomorrow national jobs report.<o:p></o:p></span></p><p><b><span>The modest uptick in
Canada's manufacturing PMI (to 48.6 from 47.5) did little to ease concerns that
the country may be experiencing its second consecutive quarterly contraction. </span></b><span>The Canadian dollar lagged the other
dollar-bloc currencies yesterday. The greenback got as close to CAD1.39 as
possible yesterday, setting the high for the year, and were there are about
$1.75 bln in options that expire tomorrow. It settled slightly above CAD1.3865
and has approached support near CAD1.38 in the European morning. A band of
support extends to CAD1.3780. <b>The greenback slumped against the Mexican peso
yesterday, falling by 1.35%, and extending its setback for the fifth
consecutive session. </b>The acceleration of move after the FOMC meeting
concluded would seem to suggest the attractive carry may have been an important
driver. Selling pressure on the dollar continued today and the greenback is traded
below MXN17.70. And for the first time since October 3, it is trading below its
200-day moving average (~MXN17.7165). The next technical area of note is around
MXN17.55. Latam currencies accounted for four of the best performing emerging
market currencies yesterday. In fact, the Brazilian real outperformed the peso
even though the market expected (and got) a 50 bp rate cut by Brazil's central
bank. The Selic rate stands at 12.25% (Mexico's overnight rate is
11.25%). <o:p></o:p></span></p><p>
<o:p>
<o:p>
<o:p>
</o:p></o:p></o:p></p><p><o:p> </o:p></p><p><a href="http://www.marctomarket.com/p/disclaimer_28.html" target="_blank"><span face=""Open Sans", sans-serif">Disclaimer</span></a></p><p><br /></p>
Leave a Comment