Dollar Extends Losses Post-FOMC snbchf.com

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Marc Chandler
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Overview: We suspect that if Martians read the FOMC statement, which was nearly identical to the September statement and listened to Chair Powell, they would conclude there was nothing new. Yet, the market habitually hears Powell as dovish and this has weighed on rates and the dollar, while lifting risk appetites. Follow-through selling of the greenback has dragged it lower against all the major currencies, with the Antipodean leading the way, and nearly all the emerging market currencies (but the Chinese yuan, Russian ruble, and Turkish lira). Further dollar losses may be limited by the stretched intraday momentum and the proximity of tomorrow 's US employment report.

Asia Pacific equity markets except China advanced today, with several bourses up over 1%. Europe's Stoxx 600 is rising for the fourth consecutive session and its 1.5% gain, if sustained would be the most in nearly four weeks. US equities are also poised to extend yesterday's gains. Bonds are rallying, driving down yields, three basis points in Japan, and around 5-9 bp in Europe. The 10-year US Treasury yield is off a couple of basis points to around 4.71%, the lowest since October 17. It settled yesterday below the 20-day moving average for the first time in two months. Given the dollar's setback and the lower yields, one might have expected gold to be higher. The yellow metal is firm but below yesterday's high near $1992. December WTI tested support near $80 yesterday and has come back better bid today and is hovering around $82 in the European morning.

Asia Pacific

Without putting a fine point on it, Japan is in a pickle. The economy appears to have contracted in Q3. The Bank of Japan is trying to softly exit its extraordinary monetary policy but appears clumsy with a milquetoast adjustment to 1.0% cap on the 10-year JGB. It is now regarded as a reference rate. This seems to have signaled a more flexible approach, but the central bank stepped into the market to buy JGBs yesterday. Reports suggest that the BOJ could set a record this year in annual bond purchases. The current record of JPY119 trillion (~$790 bln) was set in 2016.

The yen clearly sold off on the BOJ's move, but the MOF seemed unable to link the currency's slide to fundamental considerations and renewed its threat to intervene in the foreign exchange market. Ironically, the BOJ created the jump in volatility that the MOF could use to justify intervention. The unpopular prime minister announced a fiscal package that the cabinet estimates is worth about JPY21.8 trillion (~$144 bln) to help cushion the inflation, which apparently is not high enough or for long enough to get the Bank of Japan to hike its overnight rate from -0.10% and support the economy. Optimistically, the extension of energy subsidies will suppress inflation by an estimated 1% and may boost growth by one percentage point a year for the next three years, according to reports. Ironically, in other countries, such as Australia, Canada, and the US, some economists link the government's accommodative fiscal stance to price pressures. Still, some view Prime Minister Kishida's push for temporary cuts income and residence tax as a cynical effort to boost support, and at least, initially, it does not seem to be working. Also, while this year's spring wage round was regarded as a success, next week's report will likely show that real wages have fallen for the 18th consecutive month in September.

Australia reported a much smaller trade surplus in September. The A$6.79 bln surplus was about a third smaller than expected and was the smallest surplus since February 2022. Exports fell 1.4% month-over-month, while imports surged 7.5%. The market seemed to largely shrug it off as the focus is on next week's central bank meeting. The odds of a rate hike have doubled since the slightly firmer than expected Q3 CPI (5.4% vs. 5.3% median forecast in Bloomberg's survey, from 6.0% in Q2) to almost 55%. The futures market shows a little more than an 80% chance of a hike by year-end. It was around 45% before the CPI.

The sharp drop in US rates, encouraged by the soft manufacturing ISM and smaller than expected US quarterly refunding next week, helped pull the dollar lower against the yen. It fell to new session lows around JPY150.65 in the North American afternoon at the tail end of Fed Chair Powell's press conference. Follow-through selling today has brought the greenback to about JPY150.15. A (61.8%) retracement of this week's gains is found near JPY149.90. One-month implied volatility peaked near 9.0%, settled yesterday close to 8.0%, and is near 7.5% now. The Reserve Bank of Australia is seen to be among the most likely of the G10 central banks to hike rates, and a move could come as early as next week. The contrast with the Fed, which is assumed to be done, helped lift the Australian dollar to nearly $0.6400 late yesterday in North America. It has overcome the optionality struck there to rise toward $0.6440, its best level in more than three weeks. As we have noted there are options there: A$1.12 bln expire today and another A$1 bln on Monday. The next formidable resistance is seen around $0.6500. The Chinese yuan has made no headway in the weaker greenback environment. The dollar traded inside yesterday's narrow range to trade below CNY7.32 and above CNY7.3150. Of note, the PBOC set the dollar's reference rate above a bit stronger at CNY7.1797, while the average projection in the Bloomberg survey fell to CNY7.3030.

Europe

The eurozone's final October manufacturing PMI was in line with the preliminary reading of 43.0, rising to 43.1 but still below September's 43.4. It is the lowest reading since the pandemic. It has not been above the 50 boom/bust level since June 2022. Germany's manufacturing PMI rose for the third month in October but at 40.8 (40.7 flash), it is still contracting at a rigorous pace. It was at 47.1 at the end of last year. France's final manufacturing PMI is 42.8 up from the 42.6 initial estimate but down from 44.2 in September. It was at 49.2 at the end of 2022. Italy's manufacturing PMI fell to 44.9 (from 46.8) to end three months of improvement. Spain's manufacturing PMI slumped to 45.7 from 47.7, a new low for the year. Separately, German reported unemployment rose last month to 5.8% from 5.7%, where it was for the past four months. It was at 5.5% at the end of last year. The number of unemployed rose by 30k, twice the anticipated increase. In the coming days, France, Italy, and Spain will report on the labor market.

Norway's central bank left the deposit rate at 4.25% as widely anticipated. The Bank of England is next. Its decision will be announced shortly. The market thinks that the BOE is finished with its tightening cycle. Judging from public comments, a few members may still be inclined to hike again, but they do not seem to be in a majority. The central bank will update its forecasts and a case can be made to shave this year's 0.5% GDP forecast. The swaps market begins to price in a cut starting next June, but it is not fully discounted until September 2024. A UK national election needs to be called by late January 2025, but many expect it to be in late 2024.

The euro reversed lower from $1.0675 on Tuesday and bottomed Wednesday slightly ahead of $1.0515. It may have formed a bullish hammer candlestick. Follow through buying today has lifted the single currency back to almost $1.0630 in the European morning. The intraday momentum indicators are stretched and gains from here are likely to be limited ahead of tomorrow US jobs data. Sterling's range yesterday was set in North America between roughly $1.2095 and $1.2165. And it basically covered the range three times. The range has been extended today to almost $1.2200. Above there, the $1.2240-50 may offer the next hurdle. Lastly, note that many expect Czech to deliver its first rate cut in the cycle later today. The two-week repo has been at 7% since the middle of last year. Most economists expected a quarter-point cut.

America

The Fed said little and did less. As widely anticipated, the Federal Reserve stood pat for the second consecutive meeting. As is its habit, the market heard a dovish Chair. Judging from the swaps and futures market, most think that the Federal Reserve is done. More than that, the market moved toward discounting a third cut next year on top of the two the Fed signaled with its dot plot in September. It had been near a 50/50 proposition. Now it is almost 90%. The accompanying statement was hardly changed from September, though that did not stop some from saying it was dovish. The statement acknowledged the strength of Q3 GDP. It also noted that although job growth has slowed, it remains strong. Lastly, it added "financial" to the "credit tightening" cited in September that will slow economic activity. Indicative pricing in the swaps and futures market reflects expectations that the monetary tightening cycle is over, even as the unwinding Fed's balance sheet continues.

The ADP private sector jobs estimate may not be very helpful as a last-minute input to nonfarm payroll projections, but the wage data seems to confirm the slowing of what some economists see as a source of price pressures (but is debatable). ADP estimates that wages for those staying at their jobs slowed to 5.7% year-over-year from 5.9%. It is the slowest pace since September 2021. Those who changed jobs saw an increase of 8.4%, down from 8.8% It peaked last June at 16.4%, and now is the lowest since June 2021. Separately, earlier this week, the Q3 labor costs rose slightly more than expected (1.1%) and today's data is likely to show that the increased labor costs was covered by the increase in productivity. The median forecast in Bloomberg's survey sees a 4.3% increase in Q3 productivity, which, if true, would be the best since Covid-distorted surge Q2-Q3 2020 (17.3% and 6.5%, respectively). This translates to a 0.4% increase in unit labor costs. Separately, with Q3 GDP in hand, September factory orders, and a final look at durable goods orders, are unlikely to move markets. And weekly jobless claims are overshadowed by tomorrow national jobs report.

The modest uptick in Canada's manufacturing PMI (to 48.6 from 47.5) did little to ease concerns that the country may be experiencing its second consecutive quarterly contraction. The Canadian dollar lagged the other dollar-bloc currencies yesterday. The greenback got as close to CAD1.39 as possible yesterday, setting the high for the year, and were there are about $1.75 bln in options that expire tomorrow. It settled slightly above CAD1.3865 and has approached support near CAD1.38 in the European morning. A band of support extends to CAD1.3780. The greenback slumped against the Mexican peso yesterday, falling by 1.35%, and extending its setback for the fifth consecutive session. The acceleration of move after the FOMC meeting concluded would seem to suggest the attractive carry may have been an important driver. Selling pressure on the dollar continued today and the greenback is traded below MXN17.70. And for the first time since October 3, it is trading below its 200-day moving average (~MXN17.7165). The next technical area of note is around MXN17.55. Latam currencies accounted for four of the best performing emerging market currencies yesterday. In fact, the Brazilian real outperformed the peso even though the market expected (and got) a 50 bp rate cut by Brazil's central bank. The Selic rate stands at 12.25% (Mexico's overnight rate is 11.25%).

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About Marc Chandler

He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.

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