The Wait is Nearly Over, and the Dollar Catches a Bid

The anticipation is nearly over.  The softer than expected preliminary EMU inflation figures encourages expectations for the more aggressive range of actions by the ECB tomorrow.  Draghi has claimed that movement toward the inflation target was too slow.  Today's data showed a 0.1% increase year-over-year in the headline rate.  The market had anticipated a 0.2% increase.  Although the ECB targets headline inflation, it clearly also tracks core inflation.  Core price increases slowed to 0.9% from 1.1%. 

The anticipation is almost over in the US as well.  The November employment report is seen as the last hurdle to a mid-December Fed hike. Although the ADP estimate has some tracking error with the BLS estimate, and there have been some significant divergence in some months, an as expected increase of 190k jobs would strengthen expectations that slack in the labor market continues to be absorbed.  

The market has largely shrugged off yesterday's dismal US manufacturing ISM.  The 48.6 reading was the first below the 50 boom/bust level since late-2012 and was the lowest since 2009.  It was so poor that it offset the somewhat larger than expected increase in construction spending (1.0% vs 0.6%), and prompted the Atlanta Fed's GDPNow to cut its Q4 growth tracker to 1.4% from 1.8%. 

On the other hand, US November auto sales were the third month above 18 mln unit annual pace.  Barring a major disappointment in December, 2015 is set to be a record year of sales, edging out the previous peak in 2000 at 17.4 mln vehicles.    Americans bought roughly a million more vehicles this year over 2014.    Yet the news is thought to be too good to be sustained, and some slowing next year is being built into forecasts.  

Sterling had been resilient in the face of yesterday's disappointing UK manufacturing PMI.  However, this seemed to be more a reflection of the general corrective pressure on the US dollar.  Sterling is heavier today following the disappointing construction PMI, even though it is a smaller part of the economy than manufacturing.  The construction PMI fell to 55.3 from 58.8.  The market anticipated a smaller pullback.  It is the weakest report since April.   The services PMI will be reported tomorrow.

The euro upticks ran out of steam near $1.0640 and with the disappointing inflation report was sold-off back below $1.06.  Large option positions at both $1.06 and $1.05 expire today, the day before the ECB meeting.  Initially the $1.0560 area should offer support.    The recent pattern has been for some profit-taking to be seen following new euro lows.  

Yesterday's high for sterling near $1.5125 seems like a long time ago.  It traded nearly a cent lower after the disappointing construction PMI.  A move above $1.5080 is needed to stabilize the technical tone and avert a test on the recent low just below $1.50.  

The yen is unflappable.  The dollar remains within the range set on Monday roughly JPY122.60 to JPY123.35.  Firmer US bond yields and an uptick in the S&P 500 may keep the dollar firm against the yen.

The Australian dollar remains the market's favorite.  It is the only major currency to have gained against the greenback over the past month (~2.5%).   A little more than half of that has been recorded this week (~1.4%).  It has been aided by the RBA's recognition of improvement in the non-mining part of the economy, and some improving data, including Q3 GDP (0.9% vs 0.8% consensus), rising exports, and building approvals.   We continue to view the upticks as corrective in nature.  It has approached technical resistance near $0.7350.  A break of this area, which seems unlikely today, barring a disappointing ADP estimate in the US, could spur a move toward $0.7400 were stronger offers are thought to lay. 

In addition to the ADP estimate, the North American morning also features the Bank of Canada meeting.  The large (0.5%) contraction in the September GDP offset the fact that Canada snapped a two-quarter contraction in Q3.  The mining, drilling quarrying sector contracted 5.1% in September, suggesting that Canada is still struggling with the commodity shock.  The Canadian dollar was also weighed down by the unexpected US crude oil inventory build (API 1.6 mln barrel increase).  If there is a risk with the Bank of Canada, we suspect it may be on the dovish side, though not rate cut, of course.    Canada, like the US reports November jobs data on Friday.  It is expected to report a net loss of jobs.  The US dollar is poised to make new multi-year highs against the Canadian dollar in the coming days. 

There are several Federal Reserve officials that speak today, but the key is Yellen’s speech shortly after midday at the Washington DC Economic Club.  She can be expected to stick to the script, which means a reiteration of the October FOMC statement.  Still the market will be sensitive to any deviation.  Late the Beige Book in preparation for the mid-month FOMC meeting will be reported.  It typically is not a market mover.