Dollar Weakness Resumes After Brief Hiatus

The US dollar is weaker across the board today, but largely confined to yesterday’s trading ranges.  Short-term participants are getting chopped up while long-term investors seem to have adjusted their positions and awaiting the passing of the significant event risk next week.  Japan’s poor Sept retail sales (-3% vs consensus of -0.5%), nor the BOJ’s downgrade of its growth forecasts nor bringing forward the next meeting to next week from mid-Nov able to stop the yen from rising today.  Dollar support near JPY81.20 is holding and although it may be frayed, recent widening of interest rate differentials in the US favor appears to have helped slow the greenback’s descent.   North American dealers will inherit the books with the euro near the middle of the $1.3700-$1.4000 trading range.   Cable continues to consolidate the post-Q3 GDP gains and remains confined to Tuesday’s broad trading range (~$1.57-$1.59) for the second consecutive day.   Emerging market currencies are mostly firmer, though of note the Chinese yuan reference rate was set lower again (4th consecutive session); leaving the yuan at its weakest level of the month. 

Japanese stocks fell for the second consecutive day on concern that earnings growth will slow.  The Nikkei fell by 0.2%, led by a 1% drop in financials.  China’s stock markets, too, continued to fall on earnings concerns.  The Shanghai Composite Index lost 0.1%, led by nearly a 1% drop in consumer goods.  Overall, despite the weakness the China and Japan, the MSCI Asia Index was still up by 0.3% in overnight trading.   In Europe stocks rebounded from yesterday’s decline as companies raised their profit outlooks, coupled with the stronger-than-expected European confidence numbers.  The Stoxx Europe 600 Index climbed 0.6%, led by a 1.7% gain in telecommunications and technology shares.

The Reserve Bank of New Zealand (RBNZ) left its policy rate unchanged at 3.00%, a decision that was widely expected in the market. The RBNZ thinks "continued GDP growth is expected to gradually absorb current surplus capacity over the next few years"; meaning it is comfortable with the current outlook.  Meanwhile, the European periphery is under duress again as the ECB discussed the future of bond purchases program ahead of today’s EU summit, where European officials discuss possible changes to the Lisbon Treaty.  For instance, 10-year Irish yields were up nearly 12 bp followed by a 4 bp increase in Greece and a 3 bp increase in Portugal.  Meanwhile, 10-year German government yields were up 1 bp following the news and Treasuries yields were down, with the 10-year down 3 bp and 2-year down 2 bp.

Currency Markets

News that the Federal Reserve conducted a survey of dealer expectations of the initial size of its asset purchases (and reportedly included a “0” option) is being understood in two ways.  First, it would seem as a normal part of the Fed’s market surveillance function.  Second, others are suggesting that it reflects the fluidity of the situation at the Fed.  This second interpretation would seem to imply that what the Fed does will be influenced by what the market expects it to do and those expectations have been largely fueled by comments of a number of Fed officials.  A Reuters survey found a consensus favoring an initial $80-$100 bln a month program with the total size ranging from $250 bln to $ 2 trillion.   Given the range of opinion and the more than 30 bp rise in US 10-year Treasury yields over the last three weeks, the only thing that seems clear is that whatever the Fed does next week, substantial headline risk will remain.   Ironically, the BOJ provided some details about the assets it will buy under the JPY5 trillion program announced earlier this month. It has lowered the minimum rating of the corporate bonds it will buy to BBB.  It will also buy exchange trades funds and REITS (~JPY500 bln combined).  JPY3.5 trillion of the fund will be used to buy government paper.  In contrast, most expect the Fed to limit its asset purchases solely to Treasuries. 

The ECB Bank Lending Survey points to improved conditions in Q3 though credit standards are expected to be tightened in Q4. Banks reported that constraints in their access to wholesale funding had eased somewhat in Q3, compared to in Q2. The survey showed that a net of 4% of banks reported tightened credit standards to firms in Q3, versus 11% in Q2. However, a net of 5% of banks expect further tightening in Q4, same as in Q3. A net of 29% of banks expect a rise in demand for credit in Q4. In regards to lending to households, a net of 1% of banks reported tighter credit standards in Q3, versus 10% in Q2, and a net of 27% of banks expected increased demand in Q4.

Eurozone October ESI economic confidence unexpectedly improved to 104.1 from 103.2 in the previous month, and compared to median consensus of 103.5, thus improving the growth outlook for next quarter. The breakdown showed industrial sentiment improving to 0 from -2. Consumer confidence remained unchanged at -11, as did services sentiment at 8. Retail confidence also held steady, at -1, and construction improved to -25 from -26. It seems domestic demand is starting to support the economy, supporting a more broad balanced recovery.  Following the report the euro perked up from its session low of 1.3739 to 1.3875, where is subsequently consolidated gains after the flare up of periphery bond yields.   

The U.K. CBI distributive trades survey fell to +36 in October from a six-year high of 49 in September but was above the market consensus of 35. The CBI survey is now adding to evidence of a slowdown to retail sales growth and is generally neutral for recovery.  But the weak report should be taken as a signal of moderation from the record high figures reported the previous month, while other elements of the survey suggest ongoing optimism especially in sale volumes.  In addition, October Nationwide house prices fell 0.7% m/m and were up just 1.4% y/y in September.  The data adds to the evidence that momentum in the UK housing market is waning, which may be exasperated going forward as high unemployment, weak wage growth and tight credit stymie a recovery.  That said, sterling seemed to shrug off the news (along with the dovish comments of Adam Posen) and held steady after reaching a low 1.5733 in the overnight session, trading in a broad range of 1.5733 to 1.5883. On the whole it appears that sterling remains resilient on the back of yesterday’s strong GDP figures, despite the weakness in today’s data. 

Upcoming Economic Releases

At 8:30 EST / 12:30 GMT the US reports October 23rd initial jobless claims.  The market consensus is for a small uptick of 3k to 455k from 452k the previous week.  Continuing claims, too, are expected to drop to 4430k from 4441k.  At 11:00 EST / 15:00 the US Fed is slated to purchase notes/bonds followed by a $29 bln auction of 7-year notes  And finally, the US Treasury’s Warren speaks at 23:00 EST / 3:00 GMT.

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