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The Dollar is Having One of Its Best Days This Month

The Dollar is Having One of Its Best Days This Month

Overview: After being bludgeoned, the dollar is having one of its best days of the month. It is rising against all the major currencies. The Dollar Index is up about 0.5%, which is the most since the end of October. The greenback is also firmer against all the emerging market currencies but the Turkish lira and Russian ruble. Some of the demand for the dollar may be a function of month end, but also the disappointing Chinese PMI, revisions that show the French economy contracted in Q3, and softer than expected eurozone CPI are also consideration.

After slipping below 4.25%, the US 10-year yield has recovered and is near 4.29%. It has fallen for the past three sessions by slightly more than 20 bp. European benchmark yields are narrowly mixed, though the 10-year Gilt yield is up almost three basis points. Equities are finishing the month on an up note. Nearly all the large bourses in Asia Pacific rose today and among the large markets, only China and Hong Kong are posting losing months. Europe's Stoxx 600 is adding to yesterday's recovery after falling Monday and Tuesday. It is up about 6.3% this month. US index futures are also higher. The S&P 500 has gained around 8.5% this month coming into today. Rising rates and a stronger dollar arrested gold's rally that reached $2052 yesterday. It found support, so far today, slightly below $2037. Ahead of the OPEC+ meeting, January WTI is extending its two-day rally and is trading above $79 a barrel. The low for the week, set Monday, was near $74.00.

Asia Pacific

Following new measures to support the economy, the property sector, and strapped local governments, the IMF revised its forecast for China's GDP to 5.4% this year from 5.0% previously. But today's November PMI disappointed despite the increase in the number of working days after the extended holiday in October. The manufacturing PMI had recovered steadily in June through October. It pushed above 50 in September (50.2, its best in six months) but set back to 49.5 in October. It slipped to 49.4 in November. The non-manufacturing PMI fell from April through August but remained above the 50 boom/bust level. September's rise was unwound in full in October, where the 50.6 reading was the lowest of the year. However, the November reading fell to 50.2. The composite (output) has also remained above 50 this year and November's 50.4 is a new low for the year. Tomorrow Caixin's manufacturing PMI is due. A small increase from 49.5 in October is expected. Although after today's PMI some have concluded that more stimulus is needed, Beijing cautious approach may be more inclined to wait for recently announced measures to have to be implemented first.

Japanese consumption contracted in Q2 and Q3, but economists expect it to stabilize here n Q4. However, today's retail sales report was shockingly weak. Recall that the 0.1% decline in September retail sales was revised to a 0.4% gain. Earlier today, Japan reported a whopping 1.6% drop in October. The median forecast in Bloomberg's survey called for a 0.4% rise. Moreover, recall that this is a nominal report that would also pick-up an increase in prices. Despite what was heralded as a successful wage round earlier this year, real cash earnings were 2.4% lower than a year ago in September, and in September 2022, they had fallen 1.2% year-over-year. In September 2021, they were flat, and in September 2020, were down 1.1% year-over-year. Separately, Japan reported a stronger rise in industrial output. It rose by 1.0% in October after a 0.5% gain in September. Lastly, the BOJ left its bond buying plans for December unchanged. It had reduced its regular purchases twice recently and many had anticipated another reduction. BOJ bond purchases reached a record of nearly JPY24 trillion (~$163 bln) in January. This month it purchased about JPY10 trillion. 

Although the dollar fell to almost JPY146.65 in Asia yesterday, it did not trade below JPY147 in Europe or the US yesterday. The session high was recorded in early North American turnover a little shy of JPY148. Again, in Asia today, the dollar recorded the session low near JPY146.85. It was snapped up and recovered above JPY147.50 in early European activity. Yesterday's high near JPY148 may offer the nearby cap. The Australian dollar looks tired after rallying almost four cents this month. The softer than expected monthly CPI print and the unexpected fall in retail sales encouraged market push back against Governor Bullock's recent seemingly hawkish comments. The Aussie held above $0.6600 in North America yesterday and so far is holdings barely above it Europe today. A convincing break may signal move back toward $0.6540 initially. The dollar is recovering against the Chinese yuan, as well. It closed yesterday's gap and approached CNY7.14. The PBOC set the dollar's reference rae at CNY7.1018 (CNY7.1031 yesterday). The average projection in Bloomberg's survey was CNY7.1259. The gap is the smallest of the week. 


German and Spanish inflation surprised on the downside yesterday and pointed to a soft aggregate figure today. Headline inflation fell by 0.5% this month and brought the year-over-year rate to 2.4%, the lowest since July 2021. It finished last year at 9.2% after peaking last October at 10.7%. The core rate slowed to 3.6% from 4.2% and is the least since April 2022. It was at 5.2% at the end of last year but peaked at 5.7% this March. The soft data reinforces market ideas that the ECB could deliver its first rate cut in Q2 24. The swaps market has about a 50% chance it is delivered in March and is fully discounted by the end of April. Three rate cuts are fully discounted by the end of Q3 24 and with about 40% chance of a fourth cut.

Separately, as we noted, despite the weak economy and tighter monetary policy, the eurozone unemployment rate remains in its trough (6.4%-6.5%). And by trough, we should note, it is the lowest since well before monetary union. It was unchanged in October at 6.5%. Italy's unemployment rate is at 7.4%. The August rate of 7.3% was the lowest since early 2009. Lastly, we note that disappointing French data. First, Q3 GDP was revised to show a 0.1% contraction. Initially, a 0.1% gain was estimated. Second, its October consumer spending fell a dramatic 0.9%. The median in Bloomberg's survey was for a 0.2% decline. Adding insult to injury, the September's 0.2% gain was revised away.

The euro’s four-day advance ended yesterday with a small loss after briefly trading above $1.1015, its best level since August. The pullback initially held $1.0960 support but has been sold further today. If sustained, today's 0.5% decline would be the largest fall this month. Since the euro bottomed on October 3, there have been five pullbacks that have averaged about 1.2-cents. The average would bring the euro toward $1.09 and the (38.2%) retracement of the leg up from November 10 low (~$1.0655) is about $1.0880. Sterling met the (61.8%) retracement of its losses since the July high yesterday (~$1.2720) and stalled in front of $1.2735 and is around a cent below there in Europe. Earlier this month, the euro reached a six-month high against sterling near GBP0.8770. It has fallen now for seven of the past eight sessions. It is approaching GBP0.8630, the halfway point of the rally that began in late August. We attribute sterling's recent outperformance to the relative hawkishness of the BOE compared with the ECB and market positioning. Initial support is seen near $1.2600.


All else being equal, the larger US goods trade deficit and the weaker inventories reported yesterday are consistent with slower US GDP. The Beige Book pointed in the same general direction and noted softer demand for discretionary and durable goods. Still, today's data are more important and the Atlanta Fed's GDP tracker will be updated after the reports (from 2.1% last week). Personal income is expected to slow to 0.2% from 0.3%. Through September personal income has risen at the same pace as the year ago period (0.4% on average per month). The same is true of personal consumption expenditures. They have risen by an average of 0.6% a month this year, the same as last year through the end of Q3. An important element of the economic slowdown expected this quarter is that consumption/demand slows. The median forecast in Bloomberg's survey is for a 0.2% gain in consumption last month. That would be the least since May. 

Meanwhile, as already tipped by the CPI, the deflator for personal consumption expenditures most likely slowed. The median forecasts in Bloomberg's survey sees the headline pace rising by 0.1%, which would bring the year-over-year rate to 3.0%-3.1%. The core deflator is seen rising by 0.2% for a 3.5% year-over-year pace (down from 3.7%). Recall that in the September "Summary of Economic Projections", the median Fed dot was for two rate cuts next year, even though the median forecast had the PCE deflator at 2.5% (headline) and 2,6% (core) at the end of 2024.

Canada reported a C$3.2 bln Q3 current account deficit yesterday (C$1 bln surplus expected), and this warns of downside risks to Q3 GDP that will be reported today. The median forecast in Bloomberg's survey was for 0.1% growth after a 0.2% contraction in Q2. On Friday, Canadian employment data for November will be reported. The labor market is softening. The issue is the pace. Canada's unemployment rate has risen to 5.7% in October from 5.0% where is based at the end of last year and through April this year. The swaps market has a 60% chance that the first cut will be delivered by the end of Q1 24, and two cuts fully priced in by the end of Q3 and about a 72% chance of a third cut.

The US dollar recorded new lows since late September against the Canadian dollar yesterday near CAD1.3540 in Asia. In Europe and North America, it did not trade below CAD1.3565. The CAD1.3600 area is important from a technical perspective, and it drew prices to it. An important question may be how much of the last leg down does the greenback need to correct? Above CAD1.3630 and there may be scope toward CAD1.3680. A move above CAD1.37 would be disappointing. The US dollar recorded this month's low on Tuesday near MXN17.0340, nearly meeting the technical objective of MXN17.00. It recovered to MXN17.3225 yesterday and briefly traded slightly above MXN17.48 today. In addition to the broader recovery of the greenback, Banxico head Rodriguez said it was a rate cut in early 2024 was possible. She seemed to try to navigate a nuanced position that discussions could start, and her comments reinforce the changed forward guidance. In addition, recent comments suggest the consensus at the central bank may be fraying. A convincing push above MXN17.48 could see MXN17.60. 

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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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