Corrective Forces Emerge, but Underlying Trend is Evident

<br /> Corrective Forces Emerge, but Underlying Trend is Evident – Marc to Market<br />


The US dollar’s recent gains are being
trimmed today, and it is down against all the major currencies.
  Many emerging market currencies,
including the Turkish lira, Indian rupee, and Hungarian forint are firmer
The dollar’s
losses are minor, and the forces that drove it higher remain intact.
  One of the most important of these
drivers has been the increase in US interest rates, and the US yields 2-3 bp higher today.  The recent
string of economic data leaves the Fed set to hike rates next month.  Next
week’s November employment report is seen
as the last potential hiccup on the way to a rate hike. However, most are
looking for an improvement in job creation after a 161k increase in October.  
The other important driver has been the
anticipation that the populist-nationalist rise will be expressed shortly in
 The Italian referendum and the
Austrian presidential election next week may be a dress rehearsal for the French Presidential election next spring.
 The center-right Republicans will have a run-off between a self-styled
Thatcher-esque candidate (Fillon) and the old guard (Juppe).  Perhaps obscured by the pressure on Italian bonds, the
French premium over Germany continues to trend higher.  It is near 54 bp
today, the widest since Q1 2014.  As recently as July, the premium was
near 20 bp.  
There has been
no fundamental news development that is spurring today’s modest correction.
 The main data has come from Japan. 
 At the headline level, Japan’s CPI,
on a year-over-year basis rose to 0.1% from -0.5%. It is the first reading
above zero since February.  However, it exaggerates improvement.
 What the BOJ calls the core rate, excludes fresh food, and on a year-over-year basis, it remained -0.4%.
 It has been negative for eight months, which is the longest deflation streak since 2009-2011.   
What happened
in October is that because of the typhoon and poor weather, fresh food prices rose by nearly 11.5%. 
 We can be confident that the upward pressure on fresh
food prices will not be sustained.
 At the same time, there was another encouraging sign that deflation may
be ebbing.  The measure of Japanese inflation that comes close to the US
core rate, which excludes both food and energy rose from its lowest pace since
September 2013 (of zero) to 0.2%.  
The dollar’s
gains were initially extended to almost
JPY114 in Asia, but corrective forces quickly emerged,
and the greenback fell to JPY112.50 by late in the session. 
 Europe has seen some consolidation.  A break of
the low could see the dollar slipped toward
 JPY111.85-JPY112.00 and still not do much technical damage to the charts.
Japan’s Topix advance was extended for an
11th session.
  It has rallied for three consecutive
weeks, the longest streak since May.  The MSCI Asia-Pacific Index rose
0.6%, the fourth gain this week, and managed to snap a four-week losing streak
with a 1.3% advance.   European bourses are mostly slightly higher in a mixed session that is seeing health care and
utilities post small gains, while energy, materials, and information technology
sectors ease.  
In Europe, the
UK provided details about its Q3 GDP that rose 0.5%. 
 The surprise was the 0.9% increase in business
investment.  Household spending increased by 0.7%, a little slower than
recent averages.  The external sector added 0.7 percentage points to GDP,
the most since 2014.  Exports rose 0.7%, while imports fell 1.5%.
 After the Autumn Statement in the middle of the week, the Office for Budget Responsibility slashed its forecast
for 2017 growth to 1.4% from 2.2% (in March).  
The US economic
calendar includes the new advance look at merchandise trade.
  The October shortfall is expected to
rise to $59 bln from $56.5 bln in September.  Wholesale and retail
inventories for October will also be reported, but are not market moving data.
 Markit issues its preliminary estimate for the US services PMI and
composite.  Little change is expected.
  With yesterday’s US holiday, many will take today off as well.  US
bond market closes early.    There is some speculation that China
could announce the long-anticipated the Hong Kong-Shenzhen link later today.
The euro’s high
in early Asia near $1.0620 brought in sellers in Europe. 
 Look for initial support near $1.0560.  For its
part, sterling could not make it back to yesterday’s high near $1.25.
 Nearby support is pegged by $1.2420.  The Australian dollar has
moved higher for the fourth session this week
but hit a wall of offers near $0.7470 that knocked it back toward $0.7430 in
the European morning.  Chart support is found between $0.7400 and $0.7420
today.  The Canadian dollar is little changed, with the US dollar in the
middle of its CAD1.34-CAD1.36 range.  

(The effort to
finish my book, Political Economy of Tomorrow is
also done.  I expect to resume my normal commentary schedule next
week.  Thank you for your patience). 


Corrective Forces Emerge, but Underlying Trend is Evident
Corrective Forces Emerge, but Underlying Trend is Evident

Reviewed by Marc Chandler

November 25, 2016

Rating: 5

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