After rising to its best level since October 20, the euro reversed
direction yesterday and has extended its
pullback today. The unexpected tick up in US core CPI and better than
expected retail sales may have helped spur the euro losses after three cent
run-up over the past several sessions. There bearish candlestick
(shooting star) leaves the late euro longs in weak hands. However, the
single currency remains above the down trendline drawn off the year’s high,
recorded two months ago, that was violated earlier in the week. It comes
in today near $1.1735. That area is likely to prove important in the
near-term. It corresponds to the five-day moving average (~$1.1740),
which the euro has not closed below since November 8 and is near the 38.2%
retracement of the recent gains (~$1.1745).
Fresh fundamental developments are light. We do note that the
self-imposed deadline of the end of the week to work out the new German
coalition is approaching, and reports
suggest that large gaps remain as the
four-party talks continue. The Green Party has a special conference
scheduled for November 25 to ostensibly vote on
the terms. That said, the prospects that hammering out a coalition
on a national level between such disparate parties as the Greens and the FDP is
too much even for one with Merkel’s political acumen.
If larger coalition talks fail, some suspect that Merkel might be
able to entice the SPD, the current coalition partner back into the fold, but
this looks like a stretch. The alternatives, though, are stark:
an unprecedented minority government or new elections.
However, as interesting as German politics may be, the driver of the euro
may be more economic than
political. On a purely directional basis, the correlation between the
US-German two-year differential and the euro exchange rate is as tight as it
has been all year, with a correlation of 0.85 over the past 60
sessions. After dipping yesterday, the premium is back above 240 bp
today.
Rising US rates also helps explain the dollar’s firmer tone against the
yen. The US 10-year yield is up nearly four basis points. On a
purely directional basis, the dollar’s exchange rate against the yen and
10-year US yields enjoy a correlation of 0.94 over the past 60
sessions. The dollar is trading within yesterday’s range
against the yen but has recovered nearly
a big figures from yesterday’s low just below JPY112.50. A move now above
JPY113.50-JPY113.65 would lift the tone and boost confidence that a low is in
place.
The Norwegian Krone and Swedish krona are the best performing major
currencies against the US dollar today. This seems to be a function of the correction against the euro
after the euro’s recent surge. Sweden’s employment report was largely as expected with the unemployment rate
ticking up to 6.3% in October from 6.2% in September. The number of
unemployed rose slightly. The underlying concern in Sweden is that house prices
have begun softening. Meanwhile, note that the OMX Stockholm 30 equity
index is trying to snap an eight-day
drop, the longest losing streak in six years.
Sterling is also resisting the stronger dollar tone. The
slightly stronger than expected retail sales report helped blunt the negative
impact from the political developments. A media report claims the EU has
ruled out a bespoken trade deal with the UK (like the recently agreed Canadian
free-trade agreement). October retail sales rose 0.1%, excluding auto
fuel and 0.3% with it. Both measures were 0.1% above the Bloomberg survey
median forecast, and the September decline was
also pared by 0.1%. Still,
the year-over-year pace has turned negative for the first time in four years. A
separate report indicated that the demand for autos fell for the seventh month
in October.
Sterling remains stuck in a trading range that had been carved last month
between roughly $1.30 and $1.3320. Since the start of November, it
has not managed to move much above $1.3230. Cross-ate adjustments may be
helping sterling. As the euro posted a shooting star candlestick
against the dollar yesterday, it did the same against sterling. The
euro’s push above GBP0.9000 proved premature,
and it has been set back toward GBP0.8920 today. Support is seen in the GBP0.8875-GBP0.8900.
Australia’s October employment report was mixed. Overall job
growth was disappointing, but full-time jobs grew a strong 24.3k. The
participation rate slipped to 65.1% but and the unemployment rate eased to 5.4%
from 5.5%. On the other hand, soft confidence figures were used as an excuse to sell the New Zealand
dollar. The Aussie broke below $0.7600 yesterday and is straddling the
area today. The Kiwi is testing the week’s low near $0.6845.
The MSCI Asia Pacific Index snapped a four-day swoon with a 0.75% gain.
Japan’s Topix broke its longest losing streak of the year with a 1% gain
today. Strong earnings by Tencent helped lift the Hang Seng Enterprise
Index. European shares are following suit. The Dow Jones Stoxx 600
has not risen since Monday, November 6,
but that seven-day fall may be ending today. The benchmark is up 0.65%
near midday in London.
The US reports weekly initial jobless claims, the Philly Fed survey
(Nov), import/export prices, and industrial production and manufacturing output
figures. Industrial production is expected to have risen about 0.5%,
led by a 0.6% rise in manufacturing. Capacity utilization may rise to
76.3%. Last October it stood at 75.7%. The House of Representatives
is expected to vote on the tax reform bill later today. It appears that
it will pass. The Senate is more
challenging, and one Republican senator has already indicated he will vote
against the bill. The Republicans have a 52-48 majority in the
Senate and cannot afford to lose more than two other senators (the Vice
President casts a vote in a tie). Several Fed officials speak, but the market
has nearly completely discounted next month’s rate hike.