Euro and Yen Extend Recovery

The US dollar’s upside momentum reversed in North America yesterday and
has been sold in Asia and Europe. 
 
This seems like mostly position
adjustments ahead of next week’s FOMC, BOE and RBA meetings, in an otherwise
subdued news period.  

The euro has at three-day highs.  It has scope toward
$1.0950-$1.0970 in this corrective phase.  Support may be found around $1.09.  

The dollar’s losses against the yen have been
extended
After approaching JPY105 yesterday, the greenback is
near JPY104 now.  There is near-term scope to see
JPY103.60-JPY103.80.  

Sterling is firmer but has thus far
been unable to build on yesterday’s recovery.
  Sterling had fallen to
almost $1.2080 following Chancellor of the Exchequer Hammond indicating no
encroachment on BOE’s independence, and that a request for more QE would not be rejected.  Carney did not add much new
in his testimony before the House of Lords yesterday.  Acknowledging that the central bank does not have a target for sterling, but
it is not indifferent to it, is boilerplate central bank mantra.  His
aversion to negative interest rates is also well appreciated.   

By not extending yesterday’s gains, sterling is extending its streak to
five sessions that it has not risen above
the previous day’s high. 
Yesterday’s
high was near $1.2245, and Monday’s was
$1.2250.   A break of this area may prompt a move toward $1.2300. A push through $1.2330 would be more meaningful
from a technical point of view.  

The Australian dollar leads the majors higher, helped by a slightly
firmer than expected Q3 CPI, which dashes any lingering ideas that the central
bank could cut rates again.  
The Australian dollar is bumping up
against its nemesis around $0.7700 that has been an effective for several
months even though it has been frayed on
occasion.    We expect it to
largely remain intact
.  

The headline CPI rose 0.7% on the
quarter up from 0.4% and more than 0.5% expected. 
The year-over-year
rates are 1.3%, up from 1.0%.  
There was not the same improved in the trimmed mean and weighted median
measures.  And for a good reason.  
There were a couple significant
outliers.  Fruits prices were up 19.5%.  Electricity was up
5.4%.    The central bank has indicated that inflation is not
the key presently.  Provided that growth remains firm and labor market
holds up, there is no reason to mechanically cut
interest rates
.  

Australia’s CPI is suggestive of something else as well. Tradable
goods prices were up 0.7%, while non-tradable goods prices were up 1.7%. 
  If we can generalize from this, countries in which exports plus imports
are a smaller percentage of GDP, they may experience more inflation pressures.
  

There are two talking points in the capital markets today. 
First, is the disappointing earnings and guidance from the world’s largest
company.  Apple reported its first
decline in annual profits for the first time in 15 years.  This is a factor that appears to be spurring
profit-taking in stocks.  Nearly all of Asia’s markets were lower; the Japan eked out a small gain. 
The MSCI Asia-Pacific Index finished fractionally lower for the first this
week.    The selling pressure was stronger in Europe, and the
Dow Jones Stoxx 600 is off nearly 0.9%, led by energy.  

That is a good segue to the other talking point.  Oil prices are
extending this week’s losses.  Brent and WTI are off about 1.4% to their
lowest level in three weeks.  There are two drivers.  API showed a
4.8 mln barrel build in US crude inventories.  Today’s DoD estimate is looked upon for confirmation.  In addition, Russia seems to be balking at
participating with OPEC’s effort to cut
output.  

The decline in oil may also have more impact in the foreign exchange
market, outside of being an additional weight on the Canadian dollar, Norwegian
krone, Mexican peso, Malaysian ringgit, and Russian rouble.
  If the
decline in oil prices drag yields lower, especially in US Treasuries, it could
extend the US dollar’s correction.  Although the FOMC meets next week, few
if any expect the Fed to move.  Those who do expect a hike see it in
December.  That is a long time in the foreign exchange market.  

Today’s US data will do two things.  First, it will allow last
minute tweaks to Q3 GDP, where the government provides its first estimate
before the weekend.  The September trade balance and (wholesale and
retail) inventories will be useful for this.  Second, the data will also
provide some insight into the start of Q4.  Markit’s preliminary services
and composite readings for Oct will be published.
  We advise paying close attention to US yields, which remain firm in
European turnover.   Indeed, the two-year yield is at its best level
since the five-month high was made a
couple of weeks ago.  The 10-year yield is steady near 1.76%.  It has
not been below 1.72% since October 11.  









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