Dollar Bulls Catch Breath

by
Marc Chandler
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Overview: Surging US yields helped send the dollar higher but wobbled the stock market yesterday. A fragile consolidative tone has emerged today for the foreign currencies. The greenback remains mostly within yesterday's ranges. All but a few emerging market currencies are trading with a firmer bias. Beijing's weaker dollar fix may have been the first protest of the yuan's weakness since the election. The highlight of the North American session is the US October CPI. The year-over-year headline rate is expected to rise (2.6% vs. 2.4%) for the first time since March. The core rate is anticipated to be steady at 3.3%. It last fell in July. Ahead of the release, the derivatives market has a little more than a 60% chance of a December Fed cut discounted. 

Outside of China, the large equity markets in Asia Pacific fell today. Japan, South Korea, and India saw their main indices drop more than 1%. Europe's Stoxx 600 is extended yesterday's 2% decline. The US index futures are slightly softer. Asia Pacific bonds sold off, playing catch-up to the sharp rise in US Treasury yields yesterday. European benchmark yields are 1-4 bp higher today. French bonds are under the most pressure today amid continued budget wrangling. The 10-year US Treasury yield is off about 1.5 bp to 4.41%. At least five Fed officials speak today but little color is expected on next month's meeting. Gold is trying to re-establish a foothold above $2600. It peaked in late October near $2790. December WTI is trading quietly, (~$68.00-$0.68.85), inside yesterday's range. 

Asia Pacific

The news stream is light today. Japan reported October PPI. It rose 0.2% following a revised 0.3% increase in September. The year-over year rate continues to gradually rise. It was at 0.3% year-over-year in December 2023 and January 2024. It reached 3% in July before backing to 2.6% in August. It was 3.1% in September and 3.4% in October. Next month's BOJ rate decision is unlikely to be impacted by the PPI. Even the soft Q3 GDP report expected before the weekend will not have much impact on rate expectations. Australia reports October jobs data tomorrow. Through September, Australia has created almost 20% more jobs than in the first nine months of 2023 (~373.5k vs. 317k) and around twice the full-time posts (291k vs.143k). Turning to China, it is not immediately clear that the next US administration will impose a 60% tariff on all imports from China. However, the US could end China's most-favored national trade status ("Permanent Normal Trade Relations, PNTR), which was granted in 2000. Ending China's PNTR designation would automatically lift tariffs on Chinese goods.

The US 10-year Treasury yield jumped a dozen basis points yesterday and lifted the dollar to its best level since the end of July. It drew toward JPY155.00 and almost JPY155.25 today. There is modest resistance around JPY155.40 before JPY156.60. The Australian dollar has fallen one-and three-quarters cents since last Thursday's high (~$0.6690) to yesterday low (~$0.6515). It is consolidating in a narrow range below $0.6540. Initial support below $0.6500 may be around $0.6475-80. Options for about A$350 mln at $0.6525 expire today. The Chinese yuan has been sold since the US election. The greenback traded above CNH7.25 yesterday for the first time since early August. Last week's low was about CNH7.0870. The dollar is trading with a heavier bias today, having tested CNH7.2150. The dollar peaked a little above CNH7.30 in early July and a near-term revisit seems likely. The PBOC set the dollar's reference rate at CNY7.1991 (CNY7.1927 yesterday). This was strikingly weaker than expected and was understood as a protest of the yuan's sharp weakness. 

Europe

There is a midweek lull in European news. The eurozone will report more details about Q3 GDP and September industrial output (expected to have fallen 1.4% in September, the biggest decline since January). Recall that German industrial output tumbled 2.5% (the median forecast in Bloomberg's survey was for a 1% decline). French industrial output fell 0.9% in September (the median forecast in Bloomberg's survey was for a 0.6% decline). Italian industrial production fell by 0.4%, a slightly smaller than expected decline, while Spain's industrial output rose by 0.5%, which was a little stronger than expected.

The euro fell to a marginal new low for the year (~$1.0595) yesterday and re-tested it today. Although it stabilized, the corrective upticks were limited to about the $1.0630 area. Options for nearly 1.5 bln euro expire at $1.06 today. The US two-year premium over Germany continued to surge. It rose above 220 bp, the most in two years. before pulling back slightly. A bottom in euro requires that the US premium stabilize. The direction and pace of change is important, but the absolute differential quantify how much one could be paid for being long dollars. Of note, options for 1.7 bln euros expire Friday at $1.05. When the euro was sold below $1.06 yesterday the subsequent price action--limited losses--suggest there were not many stops triggered. Sterling's experience was different. When $1.2790 was offered, sterling steadily fell to $1.2720 before finding a bid. Sterling ins consolidating in about a quarter-cent range above $1.2730 today. Struck at $1.2665, here are almost GBP440 mln in expiring options tomorrow. One result of the price action is that the euro snapped a five-session decline against sterling that had brought the single currency to a two-and-a-half year low (GBP0.8260) on Monday. The euro has edged a little higher today to approach the 20-day moving average near GBP0.8340. 

America

The keen interest in the personnel of the next US administration takes a little break today as the market focuses on the October CPI. The median forecast in Bloomberg's survey anticipates the fourth consecutive 0.2% monthly increase. Given the base effect (0.1% increase in October 2023), the year-over-year rate will likely rise for the first time since March. Depending on the rounding, it could match the Q3 average of 2.6%. The core rate is expected to rise by 0.3%, which would match the September increase. It rose by 0.2% in October 2023, so depending on the rounding is likely to be 3.3% or 3.4%. (3.3% in September). Ahead of the print, the Fed funds futures market has about a 67% chance of a December cut discounted and about 56 bp in cuts between now and the end of Q2 25. 

The US dollar peaked in early European activity yesterday slightly above CAD1.3965. It pulled back to around CAD1.3925 to get a running start at the high but stalled slightly shy. The greenback remains firm and is holding above CAD1.3940 so far today. Since the US election, all the G10 currencies have fallen, but the Canadian dollar is the only one that has declined by less than 1%. Options for a combined $1.1 bln struck at CAD1.40 expire tomorrow and Friday. The US dollar rose for the third consecutive session against the Mexican peso yesterday. It is drawing closer to last Wednesday's spike hike near MXN20.8070. Since the US election, the Mexican peso has depreciated by about 2.6%, the second-most in the region, after the Chilean peso's nearly 3% decline. The Brazilian real has been the best performer, falling only 0.35%. The dollar has steadied and is trading inside yesterday's range (~MXN20.34-MXN20.70). Initial support may be near MXN20.40.