Powell's Lack of Urgency Helps the Dollar Correct Higher snbchf.com

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Marc Chandler
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Powell's Lack of Urgency Helps the Dollar Correct Higher

Overview: Japan will go to polls a little ahead of the US. And the US election still looks too close to call. Canada may be forced into snap elections if the Bloc Quebecois abandon's negotiating with the minority Liberal government as it has threatened to do at the end of the month. The UK's new Labour government is putting together its first budget to be delivered at the end of the month. Among the first tasks of the new French prime minister is submission of next year's budget to the EU. The German government is unpopular, and the Bundesbank has warned of a possible contraction in Q3 after the economy shrank in Q2. Fed Chair Powell showed little sense of urgency and seemed to endorse the recent dot plot that implied two quarter-point rate cuts this year if the economy evolved as expected. This helped lift the dollar yesterday and the firmer tone carried into today's activity. The greenback is trading with firmer against all the G10 currencies and emerging market currencies. The tone seems consolidative and key chart points have remained intact.

Holidays in China, Hong Kong, and South Korea saw quieter regional activity. Japanese stocks recovered from Monday's sell-off and the Nikkei rose almost 2%. Taiwan and Australian equities moved in opposite directions. Like Australia, Indian and Singapore market traded lower. Europe's Stoxx 600 has recovered by about 0.25% after falling nearly 1% yesterday. US index futures are narrowly mixed. Bonds are rallying. Benchmark 10-year yields are mostly 6-9 bp lower. French bonds are leading the way amid talk that an increase in corporate taxes is being considered to close the budget deficit. The 10-year US Treasury yield is off almost four basis points to 3.74%. Gold as stabilized after tumbling a little more than $23 yesterday, its largest loss in over a month. It has recovered more than half of yesterday's losses to approach $2650. After correcting higher for the past two sessions, November WTI is sliding today. It fell to nearly $66, its lowest level since September 11. It has recovered to about $67, last week's low.

Asia Pacific

Japan's Q3 Tankan survey was slightly firmer from Q2, but capex plans were trimmed (10.6% vs. 11.1% in Q2 survey). Separately, the unemployment rate returned to 2.5% in August after 2.7% in July (2.5% in June). The chances of a rate hike by the BOJ this month were never regarded as very likely, and now, with a snap election called for late this month, it seems even less likely. In addition, recent data showed price pressures easing last month and industrial output considerably weaker than expected. Some reports play up Ishida as the anti-Abe candidate but that seems more a function of the political context than an ideological position. Indeed, the traditional LDP policy mix of easy monetary policy and accommodative fiscal policy looks set to continue. Ishida's cabinet is packed with senior LDP officials, though not from the right-wing of the party. The swaps market has about six basis points of tightening discounted for the end of the year and about 25 bp of hikes next year. The budget deficit this year is a little more than 4% of GDP and that is before a supplemental budget that reports suggest Ishida is considering. Australia reported a 0.7% (0.5% expected) increase in August retail sales and the July series was revised to 0.1% from flat. Building permits fell 6.1% (-4.3% expected) after surging a revised 11% in August (initially 10.4%), which was the largest increase since May 2023.

The US 10-year yield rose three basis points to end September and the market trimmed its aggressive view of the Fed's trajectory after Fed Chair Powell spoke yesterday. The dollar rose to session highs near JPY144.00 and briefly traded above JPY144.50 today. The dollar pulled back to JPY143.60 in the European morning. Intraday momentum indicators are getting stretched and the greenback is likely to find support ahead of JPY143.40. The Australian dollar stalled near $0.6940 yesterday. Amid the greenback's bump on Powell's comments (and lack of urgency) pushed the Aussie to $0.6900 where it met eager buyers who sent it back up to $0.6925. A consolidative tone has emerged today, and the Aussie is mostly trading in a $0.6900-$0.6935 range. The daily momentum indicators are stretched, but do not preclude a new high, with the next target around $0.6965. The weakness of the yen and higher US rates weighed on the offshore yuan yesterday. The greenback held the CNH6.97 low seen last Thursday and Friday and recovered to CNH7.0140. The recovery has been extended to about CNH7.0285 today. Nearby chart resistance is seen in the CNH7.0360-80 area.

Europe

The four largest eurozone members reported that September inflation fell below 2%. The aggregate figure today slipped by 0.1%, and this saw the year-over-year pace moderate to 1.8% from 2.2% in August. That is the lowest since June 2021. Last September, eurozone CPI stood at 4.3%. The three-month annualized rates in Q3 slow to zero from 4% in Q2. The swaps market has grown more confident of an ECB rate hike in October and December. A little more than 90% chance of an October cut has been discounted. That is up from about 40% at the start of last week. The final September manufacturing PMI for the eurozone and UK were in line with the flash estimates and had little market impact.

The euro traded on both sides of last Friday's range, but the technical implications were muted by the settlement inside the pre-weekend range. Still, for the fifth time since late August, the euro rose above $1.12 on an intraday basis but failed to close above it. The euro fell to around $1.1115 on in response to Powell. Dip buyers emerged but could not get much more than a fifth of a cent out of it before the single currency stalled. While $1.12 held on a closing basis, so has $1.11. The euro has not settled below $1.11 for a little more than two weeks. Still, while $1.12 frayed yesterday, the $1.11 has been penetrated today, albeit slightly. Support is seen in the $1.1070-80 area. Intraday momentum indicators are stretched, which suggests limited downside in early North America. Yesterday, sterling held below the two-and-a-half year-high set last week near $1.3435 and pulled back to record the session low near $1.3350. It found buyers but could not resurface above $1.3375. It has fallen to $1.3325 in the European morning. With the intraday momentum stretched support in the $1.3300-15 area will likely hold. Still, a break could spur a move toward $1.3200-20, initially. The euro also recorded an outside day against sterling, reaching its lowest level since April 2022 (~GBP0.8315) but similar to its performance against the dollar, the euro settled back within last Friday's range, neutralizing the potential negativity, and signaling today's consolidation.

America

The September ISM manufacturing survey and the JOLTS report on job openings are reported at the same time today (10:00 am ET). The final manufacturing PMI is due a quarter-of-an-hour earlier but tends not to elicit much of a market reaction. Job openings are expected to have fallen for the third consecutive month, which would match the longest decline since 2008. Auto sales will be reported throughout the session, and the market expects a pickup to around a 15.6 mln unit annualized pace (up from 15.1 mln in August). In the first eight months, US auto sales have averaged about 15.52 mln, up from 15.36 mln in average in the January-August 2023 period. The Atlanta Fed will update its GDP tracker later today. It stood at 3.1% as of September 27. The NY Fed's tracker is at 3.0%. Economists surveyed by Bloomberg have a median projection of 2%. Ports in East Coast and Gulf will be hobbled by the dockworkers strike. Some estimate that the strike could cost as much as $5 bln a day (though other projections are less than half as much) and is a new source of new supply chain disruptions and is potentially inflationary. Separately, Montreal dockworkers are also on strike. Their three-day warning strike ends Thursday. Fed Chair Powell's remarks at the National Association of Business Economists yesterday expressed the lack of urgency in terms of large rate cuts. Powell seemed to suggest the bar to another 50 bp rate cut in November is high. The market shaved the odds of a 50 bp cut to about 35% from near 55%. Today, Governor Cook and Fed Presidents Bostic and Collins (Atlanta and Boston, respectively) speak. The Vice President candidate debate will be held today (during the Asia Pacific session on Wednesday). Mexican markets are closed today to celebrate the inauguration of Sheinbaum, its first woman president.

The US dollar reached almost CAD1.3540 yesterday, which met the (50%) retracement of the losses since the September 19 high (~CAD1.3650). It is consolidating so far today in a CAD1.3500-CAD1.3540 range in quiet turnover. The next target is CAD1.3560, then CAD1.36. Note that options for around $1.3 bln at CAD1.3550-CAD1.3555 expire Thursday. The greenback traded inside Friday's range (~MXN19.53-MXN19.76). It is trading in a subdued fashion between roughly MXN19.6450 and MXN19.7175. The issue is whether the nesting is consolidative in nature before the next leg up, or a topping pattern after the greenback's recovery from MXN19.00 stalled. The positioning of the momentum indicators and the rise in US rates would seem to favor the former scenario, which points to an upside break.

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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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