Dollar Tone Remains Soft

from the BBH Currency Strategy Team

The US dollar is softer today versus the majors and EM. The euro maintained a supportive tone following the move up to the $1.3270 region. Momentum was lacking due to thin trading liquidity and an unexpected downward revision in French Q3 GDP. The euro crosses were mixed, with EUR/CHF dampened by the general euro area debt concerns and the recent PBOC rate hike (which may result in further quantitative tightening measures) while EUR/GBP continued to benefit from the euro’s support and the general sterling underperformance. Otherwise, the dollar has fallen the most against the Swiss franc and the yen while EM currencies continued to remain firm with the South African rand the best performer on the day.

French Q3 GDP growth was unexpectedly revised down to 0.3% q/q from 0.4% q/q reported initially, while Q2 was revised to 0.6% q/q from 0.7% q/q. Q3 GDP rose 1.7% y/y, less than the 1.8% y/y reported previously and Q2 was revised down to 1.6% y/y from 1.7%. Output growth was revised down, from figures that were already weaker-than-expected. Net exports provided the main drag and while the recovery remains intact, the data show that growth momentum is slowing down as government support is being phased out.

Japan had encouraging economic data with industrial production and retail sales both beating expectations, though inflation remains subdued. In addition, Japan’s November unemployment rate remains unchanged at 5.1%. Industrial production increased for the first time in six months, to +1.0% m/m from -0.2% m/m in October, signalling that export-led growth is gaining traction. The pick-up has been in parallel with exports, which show signs of firming after having sputtered for much of this year, after having supported the rebound in production from the Q1 2009 lows into Q1 2010. Despite the increase in retail sales, Japan’s domestic demand is weak and the country remains dependent on export-led growth. Overall, Consumer spending will represent a drag on Q4 GDP, having fallen back after expiration of government incentives for purchase of fuel efficient vehicles that had boosted PCE during the previous quarters.

China will tighten policy gradually in a manner "acceptable to the market", said PBOC academic adviser Li Daokui. He said the government would tailor monetary policy settings differently for different banks next year, in line with their business operations. Li said its very necessary to raise interest rates right now and policy decisions should mainly consider the Chinese economy, although there will be global hot money inflows. He said the 25bp interest rate rise would ease inflationary expectations towards the end of the year.

Peripheral bond yields are mostly higher with the 10-year spread to Germany down from recent highs but still elevated at 540bp. Greece’s 10-year bond is the worst performer, with the yield up 9bp on the day. Next is Spain, up 2bp on the day. With German 10-year yields down 6bp today, the peripheral spreads continue to widen. Meanwhile, US yields are flat with the 2-year up 1bp and the 10-year unchanged.

Asian equity markets were mostly lower, while European equity markets have started the day higher. US index futures are currently pointing to a modest open with the S&P up 0.2%.

US data out today are October’s CaseShiller home price index (-0.6% m/m expected, -0.2% y/y), December’s consumer confidence (56.4 expected vs. 54.1 previously), and December’s Richmond Fed Manufacturing index (11 expected vs. 9 previously).