Premium for Dollar-Funding is not Helping Greenback Very Much

The cross-currency basis swap continues to lurch in the dollar’s direction,
especially against the euro, and yet the dollar is not drawing much support
from it.
  The increasing cost reflects pressure for the year-end and does
not appear to reflect systemic issues.  Dollar auction by the ECB and BOJ
do not show any strain.  The dollar has a downside bias today against most
of the major currencies.   And is what is true of the day is true for
the week.  Without a recovery in North America today, the Dollar Index
will snap a two-week advance.

Japan’s Tankan Survey completes this week’s theme of confirmation and
strengthening of the synchronized global recovery.
  The FOMC and ECB
lifted 2018 growth forecasts while not signaling a change in the trajectory of
monetary policy.  The large manufacturers in Japan’s Tankan survey saw the
diffusion index rise to 25 from 22.  It was slightly better than expected
and the best in over a decade.  Small manufacturers saw the largest
improvement (15 from 10).   The disappointing large all-industry
capex plans (7.4% vs. 7.7% in September) did not offset the broader

The Bank of Japan meets next week.  Whatever confusion there may
have been over recent remarks by Kuroda has eased.  Some thought that
Kuroda was beginning to prepare the market for a change in policy, perhaps a
higher target for the 10-year yield.   He referred to concepts that
emphasized that too low of interest rates could deter bank lending and
profitability, weakening rather than strengthening the financial

However, now many have come around to our understanding that it placed in
its proper context. 
With a new alignment among the BOJ directors, the
challenge does not come from the resistance to Kuroda, but those who want to do
even more to achieve the inflation target.  The content of refutation has

Meanwhile, the dollar found support at JPY112.00.  There is a
$1.2 bln option struck there that expire in New York today.  There
are large options struck every 25 pips to JPY113 that will be cut

The euro is consolidating yesterday’s sell-off.  A margin new
low of $1.1765 was recorded in Asia, marking a full cent decline from the
initial attempt to rally the euro on the ECB.  However, some ideas that
the ECB could raise rates as early as H1 19 had to be reconsidered given the
staff forecasts and Draghi’s comments.  The euro has a firmer tone in the
European morning to probe the $1.1800 area.   There also are some
large euro options set to expire.  The DTCC record 2.9 bln euro option
struck at $1.18 and more than 500 mln euro struck every quarter cent through
$1.1875.  On the downside, the is a 764 mln euro options struck at $1.1750
that will be cut today.  

Sterling is trading with a heavier bias.  Session lows are being
recorded in the European morning.  The EU Council is now widely expected
to signal that the next stage of negotiations can begin next year.  The
next few months will likely be about the transition period the UK seeks. 
During that period, the EU will insist nothing changes; that the UK leaves, but
it still must adhere to all the EU’s rules and financial

Among these rules are that there can be no new trade deals, and yet, upon
exiting, the UK will no longer be party of the EU common market or its trade
treaties with others. 
This is cited as an example of the complexity
that is likely even in the discussion of the transition.  At the same
time, among EU leaders there seems to be an appreciation of the precarious
nature of May’s government.  As this week’s defeat shows, she is being
squeezed on all sides.  However, if she is toppled, it would slow the
process further, and her successor could be from the harder Brexit wing of the

There are a couple of maturing sterling options to note.  There
is a strike at $1.34 for GBP410 mln, and a $1.3452 strike for GBP305 mln.
  Recall yesterday’s low was $1.3385, but the week’s low was nearer

The dollar-bloc is finishing the week with a firm tone.  In New
Zealand, both monetary policy (new RNBZ chief) and fiscal policy does not look
nearly as extreme as some had feared after Sept election.  Bank of Canada
Poloz comments yesterday were seen as encouraging expectations for another hike
next year.  We have one penciled in for near mid-2018.  Australia’s
strong employment data overshadowed weakness in retail sales.  Note that
the weekend election in Sydney could restore Prime Minister Turnbull’s majority.  

The US reports the Empire State survey and industrial production. 
The TIC data will be reported at the close of trading.   However,
yesterday’s strong retail sales report boosted forecasts for Q4 GDP and today’s
data won’t change this.  The focus is on the US tax changes as the bill
may be finalized later today.  As we suggested before, the risk that the
reconciliation process undermines the delicate balance struck in the Senate
appears higher than many may appreciate. 

In South Africa, the ANC will choose a new leader Sunday. 
Investors clearly prefer Ramaphosa to Dlamini-Zuma.   The markets can
be expected to respond accordingly.   The BJP is expected to carry
the election in Modi’s home state of Gujarat.  Its defeat would weigh on
investor sentiment.  Lastly, we note that Russia central bank delivered a
large than expected cut of 50 bp.  The key rate now stands at 7.75%. 


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