Dollar Stabilizing After Bounce

News that the FBI was once again ending its
investigation into Clinton’s emails and use of private servers spurred sharp
dollar against the major European currencies and yen. 
The dollar-bloc
currencies fared better, while expectations of a rate cut late this week,
weighed on the New Zealand dollar.  Emerging market currencies, led by the
Mexican peso, are mostly doing better.  

Risk assets are doing better generally. Oil
is recovering from last week’s outsized slide, despite the stronger dollar, as
the Algerian Minister said OPEC would
agree on output cuts next month, and a 5.3 magnitude earthquake struck within a
couple of miles of Cushing,

The MSCI Asia-Pacific Index broke the
three-day down move to rise 0.4%. 
The Nikkei gapped lower last Friday
and gapped higher today, leaving a bullish island-bottom in its wake.  The
Nikkei closed on its highs. 
Technically, it looks poised to re-challenge the seven-month highs seen last
week near 17500.  

The DAX also gapped lower before the weekend
and gapped higher today.
  It is stalling just ahead of the earlier gap
from last week (10460-10508).  It is up about 1.6% in late-morning
turnover.  The strongest sector is the financials, up 2.5%, with the banks
up 3.4%.  Deutsche Bank is snapping a five-session drop.  It fell
9.1% last week.  It has recouped more than half of that today.

More broadly, the Dow Jones Stoxx 600, which
had not posted an advancing session since October 20 is up 1.2% today. 

Financials are up twice the overall market, followed by materials and
energy.  The S&P 500 is similarly poised to snap its longest decline
since 1980.  It may gap open (last Friday’s high was 2099).  Since
the middle of March, the S&P 500 not spent an entire session below its
200-day moving average and it has only closed below it once.  It was approached before the weekend, and it held. 

Emerging market equities are up almost
The MSCI Emerging Market equity index has advanced on Monday’s in
each of the past two weeks but proceeded
to fall in the following four sessions.  Support near 880 frayed and a
move now above 890 creates scope for another 1% advance.  

Core bond yields are firmer, with the 10-year
UK Gilt leading the way with a 5 bp
  The 10-year US Treasury yield is up four basis points to
resurfaces above 1.80%.  The Bund yield is up 1.5 bp.  Italian,
Spanish, Portuguese and Greek yields are 3-17 bp lower, respectively.  

Outside of the US political developments, two
economic reports standout.
  First, September factory orders from
German disappointed, but the impact is blunted
by the more recent October PMI recovery.  Orders slipped 0.6% in
September.  The median forecast in the Bloomberg survey was for a 0.2%
increase.  August’s 1.0% gain was shaved
to 0.9%.  The year-over-year rate rose to 2.6% from a revised
2.0%.   Domestic orders fell 1.1%, while export orders slipped
0.3%.  Orders from the eurozone fell
4.5% after rising 4.2% in August.  Orders from outside EMU rose

The other
economic report that is important to investors is China’s reserve data for last
  Reserves fell by $45.7 bln, the most since January, and about
a quarter more than expected.   Valuation shifts played a role.  The
other reserve currency assets fell (sterling -5.6%, euro -2.2%, yen -3.3%) and
bond sold off, with 10-year Treasuries rising 10
bp, and Gilt yields up 21 bp, Bunds, and
Oats up almost 15 bp.  

However,  valuation does not explain it
fully, and capital outflows appear to have increased.
  The yuan fell
by 1.5% against the dollar in October.  It fell about the same amount in
May, when reserves fell $9 bln, and last December
when reserves fell by $108 bln.  In August 2015, when the yuan fell 2.7%,
Chinese reserves fell by $43.  This speaks
to the lack of relationship between the size of the yuan’s fall and the amount
of reserve pressure.  

It may reflect the of lack of full
transparency regarding intervention in the derivatives market.
It also suggests that the currency remains highly managed.  There had been
much talk about officials propping up the yuan ahead of the October 1 formal
inclusion into the SDR basket.  Some see it stepping away during the
national holidays in the first week of October, and others linked it to the
seventh consecutive monthly decline in exports. 

China also reported its reserves in terms of SDRs.  By this metric,
Chinese reserves increased to SDR2.271 trillion from a SDR2.68 trillion.  

The euro rallied from $1.0850 on October 25 to
$1.1145 before the weekend.  The 38.2% retracement is seen near $1.1035.  Today’s low
thus far is about $1.1045.   Look for sellers to come back in on a bounce
toward $1.11.   The dollar already recouped more than 61.8% of last
week’s slide against the yen.  That was
near JPY103.40.  The intraday technicals warn of near-term

Sterling look set to end its six-day
The better dollar tone and Labour’s threat to block the triggering
of Article 50 unless access to the single market is assured is taking a
toll.  Sterling’s pullback has met a  38.2% retracement of the rally
(~$1.3390).  The 50% retracement is at $1.2335.  The intraday
technicals suggest this is unlikely to be seen before a recovery back toward

Lastly, a word about the Mexican peso. 
It recorded a key reversal last Thursday,
and there follow through buying on Friday.  It had been embraced by many
as a proxy for Trump, and its strength in the second half of last week (and the
steady Fed funds futures) suggested some were looking past the latest tracking
polls.  The peso was marked sharply higher earlier today in Asia. 
The dollar hit a high a little below MXN19.55 last week and closed before the
weekend at 19.02.  It fell to almost MXN18.55 today.   We
continue to monitor a trendline drawn off the April lows that comes in near
MXN18.50.  The near-term risk now is
on the upside for the dollar, with potential back toward MXN18.90.  


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