Higher Yields Help Extend the Dollar’s Gains

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Marc Chandler
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Overview: The dollar continues to ride high. It is up 0.20%-0.50% today against the G10 currencies. Most pairs have extended last week's moves. The Dollar Index, which was near 100 in late September is approaching 106.00. Emerging market currencies are all weaker, as well. The dollar is being helped by higher US yields. After yesterday's holiday, the US 10-year yield is up five basis points to near 4.36%. The two-year yield also is five basis points higher to almost 4.31%. 

Stocks are under pressure. China, Hong Kong, Taiwan, South Korea, and India saw their main index fall by more than 1% today. Europe's Stoxx 600 is giving back most of yesterday's 1.15% gain, while US index futures are off around 0.20%-035%. Gold has lost its luster since the record at the end of October near $2790. It fell through the 50-day moving average yesterday (~$2646). Today, $2600 has yielded. The next area of support may be around $2540. After dropping 2.75% before the weekend and another 3.3% yesterday, December WTI is trading quieter today in a $65.75-$68.60 range. It peaked last week a little below $73. 

Asia Pacific

The Bank of Japan does not meet until December 19. The weakness of the yen has spurred speculation of another rate hike then. The swaps market has 11 bp of tightening discounted and has 35 bp discounted for the middle of next year. Given the market turmoil associated with the late July move, the BOJ is under greater pressure to signal its intent in a clearer fashion. So far, no such signal has been forthcoming, and the summary of the October meeting showed that at least some officials remain concerned that the markets have not stabilized sufficiently. Moreover, one of Prime Minister Ishiba's closest allies, Akazawa, the Minister for Economic Revitalization, attended the October BOJ meeting. The government prioritizes ensuring the end of deflation, which apparently it is not persuaded even though core CPI has not below the 2% target since March 2022. Separately, the weekly MOF portfolio flow report on Thursday may draw elevated interest. In the week through November 1 (i.e., ahead of the US election and during the week of the BOJ meeting and Japanese election), Japanese investors sold a record JPY4.46 trillion (~$29.1 bln) of foreign bonds. They also sold JPY1.17 trillion of foreign equities, the most in two years.

The dollar traded firmly yesterday and spent most of the holiday-thinned North American session in a narrow range, mostly JPY153.65-JPY153.95. Firmer US yields today has helped lift the dollar to JPY154.15. Many look for a firm US CPI reading tomorrow to underpin US yields and help the greenback extend its recovery. Japanese officials climbed the low rungs of the intervention ladder last week using word cues (e.g., "monitoring with a high sense of urgency"). Many observers suspect officials are bluffing. Material intervention would likely be seen as antagonistic by the new US administration. Still, the market may become cautious as the JPY154.70-JPY155.00 is approached. The Australian dollar was greeted with selling when it poked above $0.6600 yesterday. It spent most of the North American session below $0.6580. The Aussie has been driven to nearly $0.6535 today. It appears poised to challenge last week's low around $0.6515. The low for the year was set early August around $0.6350. The greenback rose to CNH7.2335 yesterday, its highest level since early August.  It is fraying CNH7.25 today. All else being equal, and the risk of new US tariffs on Chinese goods, and widening interest rate differentials, may be seen as a drag on the yuan. The dollar reached a high in early July slightly above CNH7.31 and is headed for a re-test. The PBOC set the dollar's reference rate at 7.1927 (CNY7.1786 yesterday). The PBOC's dollar fix has become slightly more volatile. The week ending October 18, the absolute value of the change in fix averaged almost 0.16%. The following week, the fix changed by an average of about 0.27%. Last week, the average fix was about 0.33% different than the previous session.

Europe 

Germany's ZEW survey disappointed. Rather than improve as economists surveyed by Bloomberg expected, it deteriorated. The expectations component fell to 7.4 from 13.1. Expectations had improved through H1 24 but now have fallen for four of the past five months. The assessment of the current situation fell to -91.4 from -86.9. This is the worst reading since the pandemic. The German political situation remains in flux. Chancellor Scholz who initially wanted a confidence vote in mid-January now allows that it could take place before Christmas--which could see an election in February, rather than March. Meanwhile, the first test of the minority government will be tomorrow when the Bundestag is scheduled to vote on the supplemental budget. The CDU and the FDP are likely to oppose. The failure to approve the supplemental budget would likely result in a budget freeze. For its part, the UK's labor market report showed mixed earnings changes in September and lower jobs growth in October. Average weekly earnings, including bonuses, rose 4.3% in the three months through September from a year ago, (3.9% in August). Excluding bonuses, average weekly earnings rose 4.8%, slowing from 4.9% in the three months year-over-year through August. The ILO's three-month unemployment rate rose to 4.3% from 4.0%. The number of payrolled employees fell by 5k after a 9k (initially15k) decline in September and a 34.6k fall in August. The claimant count rose to almost 27k, most since July. It may take a sharp decline in October CPI (due November 20) to rebuild speculation of another rate cut next month.

The euro was trading around $1.0935 ahead of the US election results and slipped slightly below $1.0630 yesterday. In thin North American afternoon activity, the euro was unable to resurface above $1.0660. It has been pressed to almost $1.0610 in Europe and the low does not seem in place. The low for the year was set in April near $1.06. Last year's low was a little under $1.0450. The 2022 low, recorded amid the Gilt crisis in the UK was nearly $0.9535. Sterling also struggled to sustain even modest upticks. It has traded below $1.28 today for the first time since mid-August. Also, sterling has fallen below the 200-day moving average (~$1.2820) for the first time since May. A convincing break could signal another 1.0-1.5-cent decline. Initial resistance may be around last week's low (~$1.2835). 

America

The post-election rally has carried the Dollar Index from about 103.40 at the close last Tuesday, election day, to almost 105.90 today. The high for the year was set mid-April near 106.50. The cyclical high was recorded in September 2022 a little shy of 114.80 and last year's high was around 107.35. Today's New York Fed survey of inflation expectations and the Senior Loan Officer Survey are not typically market movers. Tomorrow's CPI is a different story. A firm headline (2.6% vs. 2.4%) and steady core (3.3%) may support the dollar and support interest rates. Still Fed Chair Powell was clear that officials expect a bumpy course, and it will take more than a couple of prints to weaken their confidence that inflation is on a course back toward the 2% target. Canada's September build permits will not draw much attention from the foreign exchange or debt markets. For its part, Mexico reported a 0.6% rise in September industrial output yesterday, as expected. The highlight of the week is the central bank meeting on Thursday. Only one economist is Bloomberg's survey of 23 economists expected Banxico to stand pat. The rest expect a quarter point cut that would bring the overnight target rate to 10.25%. 

The US dollar consolidated at the upper end of its recent range against the Canadian dollar as US and Canadian banks were on holiday yesterday. It has made a marginal new high today slightly above CAD1.3965. The CAD1.40 level is of psychological importance. The greenback has not traded above it since the early days of the pandemic. Options for almost $600 mln expire there on Thursday. The greenback bottomed in the second half of last week around MXN19.76-77 and yesterday it reached nearly MXN20.5780. There are about $435 mln options at MXN20.55 that expire Thursday. The dollar posted its highest settlement (~MXN20.34) since August 2022 yesterday. Last week's intraday high was near MXN20.8080. The MXN21.02 area is the halfway point of the dollar slide since the pandemic high (MXN25.7850) and the low earlier this year (MXN16.2615).