The Dollar's Recovery has been Extended, but it may Give North American Operators a Better Selling Opportunity
<div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEham35uauFS9NAWY0Y1TtReJBUfrYPbc1pi0dCaeZjHFjdjWYbtDJfTUCrhG01IrMtKzAVH4KQkKC1EynfmcdogNlYDZcQrEU_3cFpmWzN9K6pzsKO7UrWsGFWScqIzEDZIX5dswID4Awae-uvMfsa-njEhxQoNNquUVzh8o3O5KL7cbFIMwWwqohKF27-D/s815/RBA%201.jpg"><img alt="" border="0" data-original-height="815" data-original-width="812" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEham35uauFS9NAWY0Y1TtReJBUfrYPbc1pi0dCaeZjHFjdjWYbtDJfTUCrhG01IrMtKzAVH4KQkKC1EynfmcdogNlYDZcQrEU_3cFpmWzN9K6pzsKO7UrWsGFWScqIzEDZIX5dswID4Awae-uvMfsa-njEhxQoNNquUVzh8o3O5KL7cbFIMwWwqohKF27-D/s400/RBA%201.jpg" /></a></div><p><span><b>Overview:</b> The dollar's sell-off last week was
extreme and it recovered yesterday and through the European session today. The
Australian dollar has been hit the hardest. It is off more than 1% today after
the RBA lifted the cash rate by 25 bp (to 4.35%). Still, the US dollar's gains
have stretched intraday momentum indicators, suggesting the upside correction
may be nearly over. The greenback's moves appear to have been driven by
interest rate expectations. Recall that at the end of last week, the market was
pricing in three Fed cuts next year and a strong chance of a fourth hike. Yesterday,
the implied yield of the December 2024 Fed funds futures rose by 13 bp, which
essentially unwound the chances of a fourth cut next year. The implied yield is
four basis points lower today to 4.51%. The current average of Fed funds is
5.33%, implying about 82 bp of easing is discounted. <o:p></o:p></span></p><p><span>Equities are heavy today. Most
of the Asia Pacific bourses fell, with Taiwan the notable exception. The MSCI
Asia Pacific Index snapped a four-day advance. Europe's Stoxx 600 is off
marginally. It settled slightly lower yesterday too, which ended the five-day
rally. US index futures are also trading with a heavier bias. Bond markets have
rallied. Benchmark 10-year yields in Europe are off 6-9 bp. The 10-year US
Treasury yield is off five basis points to slip below 4.60%. Lower yields and a
firmer dollar are weighing on gold. After it briefly poked above $2000 ahead of
the weekend, gold fell by $14.50 yesterday and is off almost $12 today to near
$1966. December WTI is pushing below $80 a barrel for the first time since late
August. Demand concerns appear to be offsetting geopolitical concerns and the
tightness of supply. <o:p></o:p></span></p><p><span><b>Asia Pacific</b><o:p></o:p></span></p><p><span><b>The Reserve Bank of
Australia delivered the first rate hike since June. </b>The cash rate was lifted 25 bp to 4.35%. Governor
Bullock will deliver the monetary policy statement at the end of the week that
will update its forecasts, but the central bank has revised up its inflation
forecast a little and lowered its peak unemployment projection. While the
market is pricing in rate cuts next year for the Fed, ECB, BOE, and the Bank of
Canada, it has yet to do so for the RBA. The next central bank meeting is
December 5. The RBA's statement kept the door open to additional moves, but the
market understood a high bar to future hikes. <o:p></o:p></span></p><p><span><b>Japan reports Q3 GDP on
November 15. </b>Today's
labor cash earnings and household spending were in line with expectations and
illustrate a critical challenge. When everything is said and done, wage growth
in Japan remains poor. Labor cash earnings in September were 1.2% higher than a
year ago (up from a revised 0.8% in August, which was initially reported as
1.1% increase). Wage growth peaked at 2.9% year-over-year in May. Adjusted for
inflation, cash earnings have falling on a year-over-year basis since the end
of Q1 22 and in September were 2.4% lower year-over-year. The loss of
purchasing power has weighed on household spending. In September, household
spending was 2.8% lower year-over-year. Consumption contracted by 2.5% in Q2
but may have done better in Q3, but the median forecast in Bloomberg's survey
is that the economy contracting in the July-September period. <o:p></o:p></span></p><p><span><b>China's October trade
surplus unexpectedly narrowed in October to $56.5 bln, down from $77.8
bln. </b>Exports were
weaker than expected, falling 6.4% in dollar terms from a year ago. They had
fallen 6.2% in September and were expected to have recovered somewhat. Imports
were stronger than expected, rising by 3% year-over-year after falling by 6.3%
in September. Separately, China reported a decline in the dollar value it is
reserves to $3.101 trillion in October, down by about $14 bln. It is the third
consecutive monthly decline, and the value of reserves are at their lowest
since September 2022. <o:p></o:p></span></p><p><span><b>The dollar ended a three-day
air pocket against the yen yesterday. </b>It trended steadily to pop a little above JPY150 in late
North American dealings. A key question is whether the dollar's pullback was
corrective in nature or an important top. From a technical perspective the
answer may be in this bounce. How much of the pullback does it retrace? The
halfway mark is almost JPY150.40, which the dollar rose slightly above today to
almost JPY150.50. The (61.8%) retracement is near JPY150.70. On the downside,
support is seen around JPY150.00. <b>The Australian dollar seemed
vulnerable in any event today.</b> If the RBA hiked, it was “buy the rumor
and sell the fact.” If the RBA stood pat, it was selling in disappointment. The
Aussie peaked yesterday slightly just shy of $0.6525, and a little above the
(38.2%) retracement of its decline since the mid-July high (~ $0.6900). It
rallied two cents in five sessions. Today's retreat has extended a little below
$0.6420. Additional support is seen in the $0.6395-$0.6400 area. Still, the
intraday momentum indicators are stretched and a move back above $0.6440 may
signal a low is in place. <b>After falling to its lowest level since
mid-September on Monday, the US dollar has been trading quietly in narrow
ranges against the Chinese yuan. </b>The greenback is rising for the first time
in five sessions but is holding below CNY7.29. The PBOC set the dollar's
reference rate at CNY7.1776 (CNY7.1780 yesterday). The average forecast in
Bloomberg's survey was CNY7.2849 (CNY7.2860 yesterday). The narrowing of the
gap is coming as the market average for the dollar edged lower. <o:p></o:p></span></p><p><span><b>Europe</b><o:p></o:p></span></p><p><span><b>News last week that the
eurozone economy contracted by 0.1% in Q3 saps the some of the interest from
the September's high-frequency data. </b>That includes today's German and Spanish industrial output
figures. For the record, the German industrial production fell by 1.4%,
compared with a median forecast in Bloomberg's survey for a 0.1% decline. It is
the fifth consecutive decline. Spain's industrial output rose by 1.1%. he
median projection in Bloomberg's survey was for a 0.4% gain. While Germany's
industrial output has been in a clear downtrend, Spain's has been alternating
between monthly gains and falls in a sawtooth pattern since April. <o:p></o:p></span></p><p><span><b>King Charles III will set
out the government's legislative and policy program to open the new session of
parliament. </b>It is a
catch-all wish list and shows how the Conservatives are positioning for the
general election likely late next year. One of the most controversial aspects
will be the next system for awarding oil and gas licenses (which Labour is
opposed). The economic highlight of the week is Friday's Q3 GDP and details.
The median forecast in Bloomberg's survey is a for a 0.1% contraction.<o:p></o:p></span></p><p><span><b>After recording the session
high in early European turnover yesterday near $1.0755, the euro eased
throughout the North American session. </b>It slipped through $1.0720 late in the session but remained
above its upper Bollinger Band (~$1.0705). The euro is paring its recent gains
and the initial target is near $1.0665. Here, too, the intraday momentum
indicators are stretched, suggesting a better tone is likely in early North
America. A close above $1.0720 renew the upside focus. <b>Sterling set the
session high near $1.2430 in early North American turnover yesterday and spent
the remainder of the session trending gently lower. </b>Its peak was
slightly below the 200-day moving average (~$1.2435), which it has not traded
above since mid-September. New session lows were recorded in late activity
around $1.2340. Follow-through selling has seen sterling slip slightly below
$1.2300. Near-term risk may extend to the $1.2270, but the intraday momentum
indicators are extended. Initial resistance now is seen in the $1.2340-50
area. <o:p></o:p></span></p><p><span><b>America</b><o:p></o:p></span></p><p><span><b>The US reports the September
trade balance. </b>Although
Q3 GDP is behind us, trade (and inventories) is often the source of revision.
Trade contributed to US growth this year under GDP math. Yet, the improvement
is most owed to a decline in imports rather than an increase in exports. In
nominal terms, the trade deficit average $66 bln a month through August. In the
same period last year, the US recorded an average deficit of $82.2 bln a month.
Still, note that exports have fallen for five consecutive months through August
and are up about 0.7% this year. Imports have fallen for six consecutive months
through August and are off by about 3% so far here in 2023. September consumer
credit will be reported late in the session. It is expected to rebound from
August's dramatic $15.6 bln plunge. It was driven down by a $27 bln drop in
federal government loans outstanding as student loans were paid back ahead of
the resumption of servicing obligations. Revolving credit (credit cards) jumped
by $14.7 bln in August, the largest monthly increase this year. Still, through
August, the average monthly increase in revolving credit is about $9 bln, down
from $13.5 bln in the same period in 2022.<o:p></o:p></span></p><p><span><b>Canada reports September
merchandise trade figures today. </b>The median forecast in Bloomberg's survey is for a C$1 bln
surplus, which would be the largest since January. Canada's goods balance has
deteriorated this year. It has recorded an average deficit of about C$0.75 bln
a month compared a C$2.37 bln average surplus in the first eight months of last
year. In volume terms, Canada's August exports were about 3.4% above December
2022 levels, while imports were up about 2.6%. Mexico reports October vehicle
production and exports today. In the year through September, Mexico's vehicle
output was up about 41.5%. Exports of vehicles has risen by almost 24% this
year and the 301.3k vehicles exported in September was the most in any month
since October 2019.<o:p></o:p></span></p><p>
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</o:p></o:p></span></o:p></p><p><o:p><span><o:p><b><span></span></b></o:p><b>As we have seen with most of
the other currency pairs, the greenback initially extended last week's sharp
decline against the Canadian dollar, and gradually recovered in the North
American session. </b></span></o:p><span><span>The
US dollar fell to about CAD1.3630, its lowest level in nearly three weeks and
made session highs late in the day near CAD1.37, and some momentum traders may
have cashed in. The greenback moved above CAD1.3700 and reached CAD1.3755
today. The CAD1.3765 area is the (50%) retracement of the US dollar's recent
decline. The next retracement (61.8%) is near CAD1.3800. Still, like in the
other pairs, the dollar's momentum is stretched, and the greenback looks poised
to trade heavier in North America. <b>The Mexican peso struggled
yesterday. </b>Its 0.50% decline was among the largest experienced by
emerging market currencies yesterday, though the Chilean peso and Peruvian sol
did worse. Still, the larger context is important. The US dollar fell by nearly
6.20% against the peso from the high on October 26 to the post-US jobs low
before the weekend. The dollar rose slightly above the pre-weekend low to
almost MXN17.5840 and it made a marginal new high today near MXN17.5885. Dollar
selling emerged in the European morning to push it back toward MXN17.52. Support
is seen in the MXN17.40-45 area. On the topside, above MXN17.60, and the dollar
could recover toward the MXN17.70-72 area that houses the 200-day moving
average and the (38.2%) retracement of the leg down from October 26. <b>The
dollar trended higher from the late July low (~BRL4.6960) to a high early last
month (~BRL5.22). </b>It has held a trendline drawn through the late July
low, the mid-September low and was frayed in late October but held on a closing
basis. The dollar settled last Thursday slightly above the trendline and then
gapped below after the employment data. The dollar's low before the weekend was
about BRL4.8765. It consolidated yesterday but settled a little lower and below
BRL4.8965, the (61.8%) retracement of the dollar's gains from the July low.</span><span><o:p></o:p></span></span></p><p><span> </span></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>
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