Dollar Continues to Recover

The exaggerated response to last week's ECB meeting continues to unwind.   Draghi's dovish comments and the strength of US employment data have helped keep the divergence meme front and center.  

The euro traded quietly in Asia before breaking down to almost $1.0800 in the European morning.   There seemed to be only two news developments that had a bearing.  First, the results of the first round of the French elections saw the National Front capitalize on the refugee and terrorism to lead in six of the twelve regions.  This is largely what the polls had warned.  In the peculiarities of the French system, this exaggerates the strength of the far-right.  In the second round this weekend, the smaller parties drop out and in one-on-one contests, the National Front is likely to hold on to two regions, the projections show.  This is still significant, but talk of a Le Pen presidency in 2017 seems wide of the mark. 

Second, German industrial output disappointed.  The 0.2% increase in October compares with a consensus expectation for a 0.8% increase.   German industrial output had fallen in three of the four months through September (when it posted a 1.1% decline).  In the first ten months of the year, German industrial output has contracted in six months. 

However, the details were not as poor as the headline suggests.  First, manufacturing output rose 0.7%, led by a 2.7% increase in investment goods output.  This follows a 1.8% jump in October factory orders (and the Sept series was revised to show a fall of 0.7% rather than the 1.7% drop initially reported).  The main drag on industrial output came from the energy sector, where output slumped 5.9%, the most in seven years. 

Despite the decline in the euro, growth in the eurozone in Q3 was largely driven by domestic demand.  This is what the Bundesbank reported before the weekend.  It is also what should be confirmed in tomorrow's revision (and details) of Q3 GDP for the region as a whole. 

The $1.08 area has technical significance for the euro.  It was important support over the summer and morphed into resistance when it was eventually penetrated.  It corresponds to a 38.2% retracement of the euro's surge last Thursday.  The 50% retracement objective is found near $1.0755.  The 61.8% retracement is $1.07.

The dollar has firmed to the upper end of its recent range against the yen.  The JPY122.20 to JPY123.75 has confined the price action since early November.   The bar to even more asset purchases or negative interest rates remains high.  Tomorrow Japan reports revisions to Q3 GDP.  The contraction, which spurred many to claim that Japan was in a technical or official recession, will likely be revised away, thanks to stronger than expected capital investment. 

The Norwegian krone is the weakest of the major currencies.  A combination of the push lower in oil and a collapse in industrial output has taken its toll.  After the ECB’s “hawkish cut”, many observers suspected that the knock-on effect would be to reduce the likelihood of Switzerland, Denmark, Sweden and Norway from easing policy.  Today’s data makes a cut in the 75 bp deposit rate when the Norges Bank meets on December 17 more likely.   Industrial output fell 2.6% in October, and unlike the German results, manufacturing offered no consolation.  Manufacturing output dropped 2.3%.  The consensus was for a 0.2% decline. 

Following OPEC decision to do nothing but ratify the current output in excess of the quota has pushed the front month Brent to almost $42.55, just above the late-August low of about $42.25.  Light sweet crude is near $39.50.  The late-August low was $37.75.   

The drop in oil prices is also taking a toll on the Canadian dollar.  It is off 0.5% to approach the multi-year high set in late-September near CAD1.3460.  Last week’s data on growth, trade, and employment was mostly disappointing. 

Within the dollar-bloc, the New Zealand dollar is the weakest, shedding nearly 1.2% today.  It is not a function of new data, but rather increased speculation that the RBNZ could cut rates at this week’s meeting.  Sentiment is fickle and the Kiwi’s outperformance before the weekend was attributed to speculation that the central bank would stand pat.   Despite its losses today, the New Zealand dollar is within the pre-weekend range.  Initial support is seen near $0.6650 and then $0.6620. 

The US economic calendar is light.  The Fed’s Labor Market Conditions Index will be reported, but has little market impact.  Late in the session, October consumer credit will be released.  The $28.9 bln increase in September is unlikely to be repeated.  Revolving credit (credit cards) has not been particularly robust, though it did rise by $6 bln in October.   The week’s highlight is retail sales at the end of the week.