Firm Dollar Consolidating, Awaiting US Retail Sales

The US dollar is firm against most of the major currencies, but within
yesterday’s ranges, which seems somewhat fitting amid the light new stream.
 
The high-yielding Australian and New
Zealand dollars are resisting the stronger greenback, while on the week the Aussie and the Canadian dollar
are the only majors to gain.  

After recovering from $1.2130 to $1.2270, sterling
ran out of steam.
    Near $1.22, it is off about 1.8% this
week after last week’s 4.2% drop.  It fell at the start of the week but has been consolidating within
Tuesday’s range  (~$1.2090-$1.2375).  Today’s August construction
figures were weaker than expected at 1.5% on the month.  The median
expectation was for a flat report for the second consecutive month.  The
fact that the July series was revised up to 0.5% offered sterling little consolation.  

Sterling is not the weakest of the majors.  The Swedish krona
has the flag position.  It is off a little more than 2% against the dollar
this week, including about nearly a quarter percent slippage today.  News
this week has played on fears that the economic recovery will falter before
inflation cycle can catch.    CPI figures surprised on the
downside this week after the previous week’s industrial and service production,
and forward-looking industrial orders
were all disappointments. 


Ahead of the US retail sales report, the main economic news has been Chinese
prices, where the surprise was on the upside.
  Consumer prices rose
1.9% in the year through September after a 1.3% rise in August.  The
Bloomberg median was 1.6%.  Food prices are still an important driver,
rising 3.2%.  Non-food consumer prices rose 1.6%.  

More noteworthy was the fact that producer prices turned positive for the
first time since 2012. 
The 0.1% year-over-year increase follows a
0.8% decline in August.  The Bloomberg median was for a 0.3%
decline.    This is
important, especially after yesterday’s unexpectedly weak exports. Some fear
increased risks that China will seek to export deflation.  The higher than
expected inflation readings may keep such anxiety at bay (for the
moment).   

That said, we note that as the onshore yuan played catch-up with the
offshore yuan after last week-long holiday, and recognizing the US dollar’s
strength, the yuan is recording its last week loss since January.
  At
the start of the year, it will be recalled that
Chinese
developments were still shaping the investment climate and risk
appetite.  Chinese stocks rose 2.0%-2.5% this week.  

The MSCI Asia-Pacific Index fell 1.7%  but snapped a five-day losing streak today
with a 0.2% gain
.  The big move in the Asian markets today was the
4.5% rally in Thailand, the biggest in three years
as the smooth transition following the death of the King, while the military
assures stability.  Today’s gains still leave the main index off 1.8% for the week. 

European bourses are higher, led by the
financials.
  The Dow Jones Stoxx 600 is up nearly 1.0%, poised
to break a three-day slide.  The financials are up 1.5%, and Deutsche Bank
shares have recouped yesterday’s 2% drop.  It has quietly strung together
its third weekly advance.  

The euro briefly dipped below $1.10 yesterday, and although there has
been not follow-through selling today, it has not been able to distance itself
from that threshold.
  There was not follow-through buying either after
yesterday’s recovery.  A nearby cap has been formed in the $1.1060-$1.1070
area, ahead of the prior support at $1.1080.    The trendline
that connects the January, June and July lows was violated earlier in the
week.  It comes in near $1.1035, and
a violation on the weekly charts is thought to have greater significance than
only on the daily charts.  

Benchmark yields are higher. 
European bond yields, except for Portugal are 1-2 bp higher.  Portugal’s
yields have fallen five bp on the day and
12 bp on the week as comments from the finance ministry seemed to ease concern
about DBRS review in a week’s time.  It is the only one of the four rating
agencies that ECB accepts that regards the country as investment grade. 
There has been concern that it could lose it.  We suspect that at most,
DBRS will change the outlook from stable to negative.   UK 10-year
gilts were flat coming into today, but the yield is up six basis points. 
It is the third weekly increase in the UK 10-year yield and sixth of the past
seven weeks.  During this seven-week run, the 10-year yield has risen from
56 bp to 1.08%.  

The US 10-year yield is up three basis points on the day.  At 1.78% it
is still a couple of basis points below
the multi-month high set in the middle of the week.     Much
rests on the US retail sales report.  It is not good enough that more
Americans are working a slightly longer week, and getting paid a little
more.  Households need to consume.  

Retail sales are around 40% of overall consumption. 
After a poor August, Americans are believed to have gone shopping again in
September.  The headline may be flattered by stronger auto sales and
higher gasoline prices.  The key, however, is the GDP measure which
excludes those two items and others goods, like building materials.  After
falling for two months, it is expected to
rise around 0.4%.  

The US reports PPI at the same time as retail sales.  Markets are less
sensitive to it.  However, the takeaway, which will likely be underscored next week, US price pressures
are building.  This is not a
“sky is falling” call, just simply point out a gradual trend. 
It may not yet be fully reflected in the
University of Michigan’s inflation expectations measure.  The August
business inventories will also be incorporated
into GDPtrackers and forecasts.   From the Fed, Yellen and Rosengren
speak at a Boston Fed Conference.  Rosengren dissented in favor of an immediate hike.  The market
is more sensitive to the Chair’s remarks, but she may not address monetary
policy in her opening remarks.   But we’ll be watching.  

Disclaimer

 

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