Corrective Forces Help the Dollar Stabilize

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Marc Chandler
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Overview: Corrective forces helped the dollar stabilize yesterday and it enjoys a firmer today. The euro has slipped below $1.09, and the dollar has resurfaced above JPY149.00. The FOMC minutes seem dated by the more than 30 bp decline in the US 10-year yield, the 7% rally in the S&P 500 and roughly 3% drop in the Dollar Index. The implied year-end 2024 Fed funds rate has fallen by 10 bp to 4.51% (5.33% currently). The Japanese government downgraded its economic outlook for the first time in ten months. While the recovery is judged to still be intact, some parts have "paused", it said. The dollar's gains against the are the most in a week. The greenback is also firmer against most emerging market currencies too.

Benchmark 10-year yields are little changed, though Gilts are underperforming ahead of Chancellor Hunt's Autumn Statement shortly. The 10-year US Treasury yield is near 4.39%. While the Nikkei posted an outside up day, most of the other large regional markets were sold, dragged lower by the tech sector. Tech is less represented in Europe and the Stoxx 600 is recouping yesterday’s minor loss and a little bit more. US index futures have turned higher from earlier losses. Gold jumped 1% yesterday and reached about $2007.60. It is consolidating in mostly a $5-band on either side of $2000. A rise in US oil inventories (~9 mln barrels estimated by API) is helping cap the price of crude today. The January WTI contract is has traded on both sides of yesterday's range (~$76.90-$77.90). The market may be reluctant to take on new positioning ahead of the upcoming OPEC+ meeting.

Asia Pacific

The dollar fell to four-month lows against the Chinese yuan. When the yuan moves, the sheer size of the state-owned Chinese banks are typically involved. The US Treasury's recent report on the international economy and the foreign exchange markets said: "Additionally, multiple press reports provide evidence of state-owned banks taking actions that resist depreciation pressure—including increasing dollar sales in exchange for RMB in the onshore and offshore spot and forward markets—with some reports explicitly tying this behavior to instructions from the Chinese authorities." Leaving aside if such press reports truly provide evidence for their claims, often citing unnamed people who are not authorized to speak, making such claims nearly impossible to verify. Some press reports suggest that state-owned banks are swapping yuan for dollars in the offshore market and then selling the dollars onshore. Ostensibly, the hope was to force exporters, who have been holding on to their dollars, to sell. Are we to conclude that the PBOC intervened? It does not seem reasonable to conclude that all the foreign exchange transactions by China's large banks are on behalf of the central bank. They obviously conduct commercial transactions on behalf of clients and likely trade for their own account. In any event, the sharp appreciation of the yuan is seen giving the PBOC room to maneuver and a cut in reserve requirements seems consistent with recent efforts that focused on liquidity provisions more than reducing interest rates.

Tomorrow, Australia sees the preliminary November PMI. The manufacturing PMI was last above the 50 boom/bust level in February and at 48.2 in October, it was near the year's low. The services PMI was mostly above 50 in H1 but at 47.9 in October, it is also near the year's low. The composite PMI slumped to 47.6 in October (from 51.5), which is the low this year. The Reserve Bank of Australia insists that the remaining inflation challenge is "increasingly homegrown and demand driven" and Governor Bullock argued that it is precisely because of this that "more substantial monetary policy tightening is the right response to inflation that results from aggregate demand exceeding the economy's potential to meet that demand."  The market is not there. The futures market has about a 23% chance of a hike discounted by the middle of next year. That is a little less than a week ago.

Early Friday, Japan reports its national CPI figures for October and sees its preliminary PMI. The signal on Japanese price pressures comes from the Tokyo CPI, which is released a few weeks before the national estimate. Although the weightings are different, the Tokyo CPI is a fairly accurate guide. The year-over-year headline and core rates accelerated by 0.5% (to 3.3%) and 0.2% (to 2.7%), respectively. The measure that excludes both fresh food and energy eased to 3.8% from a revised 3.9% (initially 3.8%). Note that BOJ officials had the Tokyo CPI in hand when it met at the end of last month. The national figures should show a little less acceleration in the headline pace (to 3.4% from 3.0%) and a similar rise as Tokyo in the measure excluding fresh food (3.0% vs. 2.8%), while the ex-fresh food and energy may slow to 4.1% (from 4.2%). Japan's manufacturing PMI has been above 50 once this year and that was in May. Japan's manufacturing sector likely continued to contract in November. Japan's services PMI has been above 50 for the entire year but is has fallen in four of the past five months, and its 51.6 reading in October was the lowest of the year. The composite PMI has also held above 50 this year, and after declining in September and October, it stands at 50.5 the lowest this year.

The dollar gradually recovered from the JPY147.15 low reached yesterday in late Asia Pacific turnover. The session high was recorded in North America near JPY148.60. The dollar appears to have forged a bullish hammer candlestick pattern. Follow-through buying lifted the greenback to JPY149.35 today. The JPY149.50 is around the (50%) retracement of the leg down from the November 13 high near JPY151.90. The next retracement (61.8%) is by JPY150.10, slightly below the 20-day moving average (~JPY150.25). According to Bloomberg, the Australian dollar came within 1/100 of a cent of its 200-day moving average at $0.6590 yesterday. It retreated until it found bids near $0.6545, around 1/10 of a cent above Monday's low but was fell to almost $0.6525 today before recovering to $0.6560 in early European turnover. Nearby resistance is seen near $0.6570. The Chinese yuan is snapping a six-day advance. The dollar had fallen to about CNY7.1265 yesterday and its upticks today have entered the gap created by yesterday's sharply lower opening. The gap extended to Monday's low (~CNY7.1640). The dollar has traded slightly above CNY7.1540 today. The PBOC set the dollar's reference rate at CNY7.1254, the weakest since June. The average projection in Bloomberg' survey was CNY7.1432. In the offshore market, the dollar tested the 200-day moving average near CNH7.13 yesterday and today. It has recovered to around CNH7.1640. 

Europe

There are three European highlights in the remainder of the week. First, the Dutch are voting today, and it will have a new prime minister after 13 years of leadership by Rutte and the People's Party for Freedom and Democracy (VVD). Rutte will remain caretaker until a new government is in place and it could take some time. Running to replace Rutte is a woman and a former refugee who is embracing a restrictive immigration policy. A center-left bloc of Labor and Green Left is running neck-to-neck with the VVD. However, the strong polling by the Party for Freedom (PVV), led by the anti-immigration and nationalist Wilders, makes it a three-way contest. One poll earlier this week had the PVV slightly ahead of the VVD.

Second, Sweden's Riksbank meets tomorrow. In Bloomberg's survey, 13 of the 21 economists look for the Riksbank to deliver a 25 bp hike to bring the repo rate to 4.25%. The swap market is less sanguine, and it has about a 50% chance of a hike discounted. We are more inclined to see the Riksbank standpat. The economy is contracting, and inflation is falling. Moreover, the currency has been on a tear since the central bank announced on September 21 that it would "hedge" part of its reserves by selling $8 bln and 2 bln euros. The krona has rallied about 7.2% against the dollar and 4.6% against the euro.

Third, the eurozone and UK see their flash PMIs tomorrow. They are not expected to change by much, which reinforces the sense that the euro and sterling's recent appreciation is more about the dollar than positive economic impulses from Europe. Economists expect the eurozone to stagnate in Q4 after contracting by 0.1% in Q3. The ECB's forecast of 0.7% growth this year still looks a bit optimistic. The UK economy stagnated in Q3, and the median forecast in Bloomberg's monthly survey sees the British economy flat in Q4 and Q1 24. The median projection of 0.5% growth this year matches the BOE's forecast. 

The euro is tired. It brought in the last buyers as it rose above the previous session's high for the fourth consecutive day yesterday and met the (61.8%) retracement of its decline from the July high (~$1.0960) and overshot it by 5/100 of a cent before it turned tail and slipped back to $1.09. Follow-through selling to it slightly below $1.0885. It requires a break of $1.0875 to signal anything of technical importance. It has since been capped near $1.0920. The consolidative/corrective pressures we anticipated do not seem finished. Sterling fared better than the euro and is inside yesterday's range (~$1.2500-$1.2560). It retained its bid tone even after reaching almost $1.2560, its highest since September 6. However, the (50%) retracement of its losses since the mid-July high is still a little way off near $1.2590. The (61.8%) retracement, like the euro fulfilled, is about $1.2720 for sterling. The key event of the day for the UK, Hunt's fiscal statement is awaited but the details appear to have largely been leaked. He reportedly will make permanent an investment tax break ("fully expensing" investment) and cut the national insurance (payroll tax). We expect limited market reaction. 

America

The US economy is slowing, and the immediate question is the magnitude. Due to tomorrow's US holiday, today's reports include weekly jobless claims, October durable goods orders, and the final November University of Michigan consumer survey. Recall that in the week ending November 10, weekly initial claims rose for the third week in the past four, to 231k, a three-month high. Continuing claims rose for the eighth consecutive week, and at 1.865 mln, it is the most in nearly two years. A small decline in initial claims would not surprise while the rise in continuing claims is consistent with slower hiring. A slowing of the labor market is not just about wages, but also demand. Note that the early forecasts for this month's nonfarm payrolls are coming in around 175k, which, while better than the initial October estimate of 150k, it would still see the three- and six-month averages decline.

Durable goods orders are volatile but on average declined by 0.4% a month in Q3. Through September, durable goods orders have averaged a 0.6% gain this year, twice the average for the same 2022 period. We already know that Boeing's orders were almost halved from September's 224, though deliveries increased (34 vs. 37). The median forecast in Bloomberg's survey anticipates a 3.2% decline, which would be the second steepest decline since April 2020 (The biggest decline was July's 5.6% hit.). Excluding defense and aircraft orders, durable goods orders are seen edging up by 0.1% after a 0.5% gain in September. 

The University of Michigan's consumer survey may have hit peak interest when Fed Chair Powell cited a preliminary estimate (that was later revised lower) to help explain why the central bank decided to hike by 75 bp rather than the 50 bp it had previously signaled. The preliminary measure of the one-year expectation and the five-to-10-year projection rose by 0.2% to 4.4% and 3.2%. The increase runs a bit counter-intuitive given the steady decline in average retail gasoline prices since the end of September, without fail to the lowest level since mid-January. In early October, the two-year breakeven (difference between the yield of the conventional two-year note and the inflation protected security) reached six-month high near 2.35% and is now near 2.16%. The 10-year breakeven reached a seven-month high a little shy of 2.50% in mid-October and was near 2.28% yesterday, the lowest in more than two months. 

Canada's October CPI probably did not change any minds about anything. The 0.1% increase was expected as was the decline to 3.0% year-over-year. The underlying core measures eased slightly. Short-term Canadian rates were little changed. The US dollar slipped to a three-day low near CAD1.3680. It is trading quietly inside yesterday's (~CAD1.3680-CAD1.3730) range. The trendline that forms the lower edge of a potential symmetrical triangle is around CAD1.3670 today, while last week's low was closer to CAD1.3655. The greenback recovered against the Mexican peso but only after falling to about MXN17.0660, its lowest level in two months. It managed to rise through Monday's high (~MXN17.2530) but settled below it, neutralizing the technical damage. It has come down from a high on November 10 of almost MXN17.94. The dollar is consolidating quietly mostly between MXN17.18 and MXN17.25 ahead of Mexico's September retail sales report. A modest increase after August's 0.4% decline is expected. Still, a move now above around MXN17.28 could signal a corrective phase and the first target is in the MXN17.40-50 area.