Euro, Sterling and Yen Stabilize, while Antipodean Currencies Extend Losses

Overview:  The US dollar is narrowly mixed against the major currencies.  The dollar-bloc currencies are softer,  with the Australian and New Zealand dollars pushed lower by poor data.  The euro is posting corrective upticks after the $1.15 area held yesterday, and Italy may cut the budget deficit projected for 2021.  The dollar eased to a three-day low against the yen, but ranges are tight.  Sterling is recovering back to $1.30. Among emerging market currencies, the central and east European currencies are being helped by the euro’s recovery, while poor CPI is weighing on the Turkish lira.  The Indian rupee has yet to stabilize and fell to new record lows today.  Singapore’s poor Nikkei PMI fell to 49.6 from 51.1 in August.  It is the first sub-50 reading in two years, and as a regional hub, Singapore’s contract likely is a poor omen.   Hope that EC President Junker is wrong and Italy is not headed for a Greek-like tragedy has helped Italian bonds and stock stage a recovery today.  Italy’s stocks are up about 0.5%, a little more than the Dow Jones Stoxx gain of about 0.3% in late morning activity.  Italy’s 10-year bond yield is off 10 bp to 3.34%, while core bond yields are around two basis points higher.   Oil prices are firm. US shares are trading higher in Europe, and the S&P 500 is trading about 0.25% better.

EMU PMI:  The eurozone service and composite PMI were reported.  The service PMI was in line with the flash (54.7), but the composite was revised slightly lower to 54.1 from 54.2.  The signal, however, is broadly the same.  The composite is the lowest since November 2016.  Germany disappointed.  The final Germany services PMI was revised to 55.9 from 56.5 of the flash.  The composite was revised to 55.0 from 55.3 (and 55.6 in August).  France surprised to the upside with services revised to 54.8 from 54.3.  This lifted the composite to 54.0 from 53.6 (and 54.9 in August).  Spain softened a bit too, with services PMI slipping to 52.5 from 52.7, and the composite falling to 52.5 from 53.0.  Italy offered a pleasant surprise.  The services PMI rose to 53.3 from 52.6 and the composite improved to 52.4 from 51.7, snapping a two-month decline.  The manufacturing sector can be seen as partly a function of exports, while services are less traded and more of a read on the domestic economy.  

Euro:  The euro had already been recovering from the approach to $1.15 yesterday, where we noted y technical support but also where a 1.5 bln euro option expiring today was struck.  News that Italy may offer the EU a compromise that would project a 2021 deficit of 2.0% rather than 2.4% encouraged the short-covering.  The euro’s bounce ran out of steam in front of $1.16 in Asia, and the soft EMU PMI saw some light selling in early Europe.  Intraday support is seen near $1.1560, and the market may test the air above $1.16.  Separately, the resignation of France’s Interior Minister does not appear to be much of a market factor.  The environment minister resigned last month. A recent poll put President Macron’s support at its lowest level since he was elected in April 2017.  

UK:   The focus is squarely on Prime Minister May’s speech to the Tory Party Conference.  Boris Johnson encouraged May to scrap the “deranged” Chequers approach and return to last year’s Lancaster speech thrust.  However, neither is acceptable to the EC.  A Brexit without an agreement is still a likely outcome less than six months away.  The PMI readings were a bit softer.  The service PMI fell to 53.9 from 54.3.  The impact on the composite was mitigated by the stronger manufacturing PMI reported earlier.  The composite eased to 54.1 from 54.2.  It bottomed in July at 53.5.  Sterling had been sold to $1.2940 yesterday, its lowest level since September 10.  It has resurfaced above $1.30 in Europe, but it encountering offers near $1.3020.  There are a couple of modest options ($1.2975 for GBP232 mln and $1.30 for GBP443 mln) expiring today.  

Japan:  Japan is rather sidelined at the moment.  Contrary to some expectations, the BOJ left its bond-buying program unchanged today.  It bought JPY1.05 trillion bonds from one through 10-years.  The modest recovery in the yen may have spurred some profit-taking in Japanese stocks.  The Nikkei snapped a three-day advance that had lifted it yesterday to its best level since 1991.  It is off 0.6% today.   The dollar found support near JPY113.50 in Asia and recovered to almost JPY114.00 in Europe before consolidating.  The intraday technicals readings suggest range trading may be the most likely scenario for the North American session.  

Antipodean:  Australia reported a dramatic (13.6%) decline in building approvals year-over-year.  Economists had expected a much smaller decline (~2.5%).  The 9.4% fall in August compares with expectations for a 1% increase.  The weakness in this sector helps explain why the RBA is reluctant to lift rates.  The massive over-subscription (5x) at the government’s auction of 11-year bonds today reflects these domestic concerns as well as the weaker impulses from China.  The Australian dollar is extending its loss (~0.5%) today.  Former support at $0.7200 now becomes resistance.   A break of $0.7140 could spur a test on last month’s low neat $0.7085.  Slower house price increase in New Zealand (4.6%, the slowest since last October) and the drag from the Aussie, kept the New Zealand dollar on the defensive.  A break of $0.6550 could signal a test on $0.6500. 

Emerging Markets:   Turkey’s CPI jumped to 24.4% from 17.9% in August and was above expectations.  On the month, the CPI rose 6.3%.   Producer prices rose nearly 10.9% in August alone, and this lifted the year-over-year pace above 46%.  The market’s response has been tame; taking the lira down by 0.8%.  Still, the dollar’s downside momentum has eased in recent days, and a move above TRY6.10 could confirm that a low is in place.  The central bank meets on October 25, and after a 625 bp hike last time, it may be reluctant to continue to tighten.  The weakness of the PMI (42.7) underscores the coming economic contraction.  After the lira, the Indian rupee’s 0.5% fall makes it the second weakest emerging market currency today.  The central bank meets Friday and is expected to deliver a 25 bp hike.  Poland’s central bank meets today and is expected to stand pat.  

Oil:  The rally in crude prices is an important economic development with broad implications.  It transfers wealth from consumers to producers.  It exacerbates the external imbalances of oil important countries at the moment that funding it has become more difficult.  It acts as a headwind on most economies.  The higher oil prices are compounded by the dollar’s strength, as most countries continue to pay dollars for their oil, and even if Iran, for example, accepts euros for payment, the oil price is quoted in dollars.  Higher oil prices feed into measured headline inflation, which led the ECB to hikes rates twice in 2008 (and will turn out to be the last hike for more than a decade).  However, measures that exclude energy will likely be better behaved.  Separately, API reported a 907k barrel rise in inventories, according to press reports, while the median forecast on Bloomberg is for the EIA estimate to rise three-times more (2.7 mln barrels).  Both gasoline and distillate inventories fell. 

Powell:  A few hours before Federal Reserve Chair Powell spoke yesterday, Amazon announced it would boost the minimum wage it pays its 350k workers and seasonal help (which includes Whole Foods) to $15 an hour.  Amazon was not the first but a laggard.  Walmart, Target, and Costco had a previously lifted their minimum wage.  Sanders had made it a rallying cry of his 2016 presidential bid.  Is it inflationary?  Probably not, and Powell played down domestic inflation worries, which means that the gradual pace of rate hikes is still appropriate.  We have suggested, recognizing the irony of Great Financial Crisis, that the US economy is in what was called The Great Moderation.  It is characterized by relatively longer and flatter business cycle.  Powell seemed to concur:  “The historically rare pairing of steady, low inflation and very low unemployment is a testament to the fact that we remain in extraordinary times.  It begs the question of whether what some economists have called the “new normal” is really new.  Or to pose the question differently, how extraordinary are these times?

North America:  Canada’s economic calendar is sparse today, while the US see both the service PMI and ISM reports and the ADP jobs estimate. The PMI/ISM is expected to be mixed but is not likely to change views on the US economy.  The ADP is expected to show improvement after the 163k seen last month, which itself could be revised higher.  Yesterday, three Fed officials spoke, and today and another four speak as does Chairman Powell again.  Among the other Fed speakers, Governor Brainard is an important voice.  From being on the dovish side, she appears to have rejoined the middle.  The same could be said of Chicago’s Evans.  Mester’s views are known, leaving Richmond’s Barkin as less well known by investors and hence, arguably of greater interest.  


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