The Dollar’s Recovery has been Extended, but it may Give North American Operators a Better Selling Opportunity

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Marc Chandler
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Overview: 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.

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.

Asia Pacific

The Reserve Bank of Australia delivered the first rate hike since June. 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.

Japan reports Q3 GDP on November 15. 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. 

China's October trade surplus unexpectedly narrowed in October to $56.5 bln, down from $77.8 bln. 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.

The dollar ended a three-day air pocket against the yen yesterday. 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. The Australian dollar seemed vulnerable in any event today. 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. 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. 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. 

Europe

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. 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. 

King Charles III will set out the government's legislative and policy program to open the new session of parliament. 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.

After recording the session high in early European turnover yesterday near $1.0755, the euro eased throughout the North American session. 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. Sterling set the session high near $1.2430 in early North American turnover yesterday and spent the remainder of the session trending gently lower. 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. 

America

The US reports the September trade balance. 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.

Canada reports September merchandise trade figures today. 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.