Six Thumbnail Sketches of This Week’s Dollar Drivers

The week ahead features four central bank
meetings, the PMIs that begin the monthly cycle of high frequency data, and the
US employment report. 
Here was
sketch out the main impulses from the US, EMU, UK, Japan, Canada, and
US:  There are three drivers: politics, FOMC meeting, and
the employment report.  
First, as we saw
before the weekend,  despite most polls and predictive markets showing
Clinton with a large lead, investors realize that as unlikely as a Trump
victory may be the impact could potentially be huge.  In
addition, even though most polls shows the UK referendum was a close
call, many insist that polls underestimate the strength of insurgency
movements.  Barring a specific “smoking gun,” we do not expect
the re-opening of Clinton’s email
investigation to significantly alter voter
The probability of
a Trump victory had already begun stabilizing and recovering a little.  A few swing states seemed fluid
and may have swung toward Trump, but not enough to change the likely electoral
college outcome.  The odds also favor the Democrats taking the Senate by a
slim majority. The Democrats had little chance to garner a majority in the
House of Representatives, and this does not appear to have changed either.
The reaction to
the news in thin pre-weekend activity gave investors a sense of what to
expected our assessment is wrong.  Speculators
will likely sell the Mexican peso, and the Canadian dollar will underperform.
  The euro and yen may be among the biggest beneficiaries.  Stocks
will sell-off and bonds will rally.  
Second, there is
practically no chance that the Federal Reserve changes policy at this week’s
FOMC meeting.  A move this
close to the election would be unprecedented.  The Fed’s forecasts (dot
plot) will not be updated, and there is
no press conference scheduled.  While these obstacles are not impossible
to overcome, they are formidable.  Moreover, the hawks on the Fed
recognize this and do not appear to be pushing for a hike now, but that does not mean that there won’t be any dissents.
 To the contrary, we expect 2-3 dissents.  
The FOMC statement
is unlikely to change substantively.  There will be some minor tweaks
to recognize the recent data and the improved growth.  Last October, the FOMC
statement pre-committed itself to a hike in December.  We don’t think the
Fed has to go to this extreme now.  The market is pricing in a 70%-75% of hikes before the end of the year.  A year
ago the odds were around half as much.  The Fed can indicate that the bar
to a hike is low, needing only continued improvement in the data and no major
negative shocks.  
Third, the US
employment data is one of the most important high frequency economic
reports. It often sets the tone for
the economic data for the entire month, and the Federal Reserve has shown that
it is sensitive to the monthly prints.   We expect job growth slowed a
little, but it will not challenge the
December hike scenario, especially if we are right about the FOMC guidance and
the economic threshold for the second hike in two years.   We expect that
the proximity of full employment and the emerging skills shortage will see wage
pressures continuing to increase.  
As seen with the
initial estimate of Q3 GDP, which at 2.9% was stronger than most forecasts,
there was a little reaction, so too we
expect little sustain reaction to the employment data.  Barring a significant surprise,
it will not impact policy expectations, and there the Fed will see another job report before the December meeting. 
EMU:  The eurozone
reports the three most important macroeconomic data points:  GDP, inflation, and unemployment.  Eurozone
growth in Q3 is expected to be at 0.3%, with the year-over-year pace near 1.6%,
which is close to what economists regard as a trend.
  The preliminary estimate of October CPI is for a continued gradual move
higher (0.5%-0.6%).  However, the risk is that the gain is a function of
energy prices.  A fall in the core rate from 0.8%, which some economists
forecast, would likely counter the headline increase and weigh on the euro on
ideas that it make it more likely that the ECB extends its asset purchases when
it meets in December.  The unemployment rate may slip to 10.0% from 10.1%.
The main weight
on the euro has been renewed focus on the
divergence of monetary policy. This is
not simply a function of high frequency data. 
 Both sides of the policy divergence are in play.  There is a very strong
likelihood that the ECB extends its asset purchases beyond next March. Barring
a significant downside economic surprise or a new global shock, the Fed is
likely to hike rates in December.   The euro has found support near
$1.0850.  There is scope toward around $1.1050 within a near-term
consolidative/corrective phase.  
UK:  Of the four central banks that meet, the Bank of
England is the most likely to change policy. There
are a few economists that expected the MPC to deliver a 10-15 bp rate cut.
 We expect no change in policy.  Carney has been clear about his
distaste for negative rates.  This means
that there is scope for one more and a small one at that.  The does not
have to be a hurry to deliver it, and it probably wouldn’t have much economic impact in any event.
 Although the economy continues to show little impact from the late-June
decision to leave the EU, the growth risks are on the downside and inflation on the upside.  Carney was also clear.
 Sterling is not a target of policy, though that does not mean the BOE is
indifferent to it.  Since the flash crash, it has begun stabilizing at
lower levels against the dollar and the euro. 
The November
inflation report will be issued at the
conclusion of the BOE meeting.  
It has taken on new importance amid speculation that Carney may use that forum
to announce his plans. There is much
speculation in the UK press that Carney may resign.   The ostensible
reason is the broad criticism from government and several MPs.   We
suspect that what is really at stake is whether Carney signs on full-term
(2021) or keep to the initial agreement to leave in 2018.  Nevertheless,
if we are wrong and Carney does step down early,  investors will see this
as a result of the encroachment on the central bank’s independence, and take
sterling lower  
Ahead of the BOE
meeting, the UK’s three PMIs ( manufacturing, construction, services) will be
released.  Sterling is not
being driven by the high frequency data, but by the prospects of the UK losing
access to the single market.  The economy is presently growing near-trend,
and the expected softening of the PMIs will likely be minor.  
Japan:  The Bank of Japan recently adopted a new policy
framework.  This week’s
meeting is too soon to expect new changes.  Two of the 43 surveyed by
Bloomberg expect the BOJ to take the negative deposit rate, which applies to a relatively small fraction
(compared with other central banks) of reserves, to minus 20
bp.   There is some speculation that the BOJ could push out again when it
will achieve its inflation target.   We argue the BOJ may be better served
to adopt the practice of other major central banks and have a medium-term inflation target, rather than a
date-specific target. 
Canada:  The Fall Economic Statement on November 1
may not appear on many economic calendars,
but it is an important input to monetary policy.  Given the central bank’s recent
cut in its GDP forecasts (to 1.2% this year from 1.4% and 1.8% next year from
2.2%) may induce the government to provide more fiscal stimulus, in addition to
details for its infrastructure spending. Governor Poloz acknowledged that
easing was actively discussed at the last
Bank of Canada meeting. If the government does not provide more fiscal support,
such discussions will likely continue.  
Canada is one of
the only high income countries that reports monthly GDP figures.  Shortly before the Fall Economic
Statement, the August GDP estimate will be
reported.  A small gain (~0.1%-0.2%) is expected, owing primarily
to manufacturing and wholesale trade.  Mining (including oil and gas)
recovered from the spring wildfires earlier and growth has flattened.  
Still, the Bank of Canada’s monetary policy review earlier this month offered a
modest 3.2% Q3 GDP forecast.  If the economy does expand by 0.2% in
August, the forecast would seem to anticipate a weaker September. 
At the end of the
week, Canada, like the US reports October jobs.  The outsized 67.2k headline gain
in September was misleading.  It was three-quarters part-time jobs.  
 Job losses in the service sector are expected to produce an overall 10k
job loss in October. The unemployment rate is expected to hold steady at
7.0%.   At the same time, Canada reports its September trade balance.
 The trade performance is gradually improving,
and the trend is likely to remain intact.   We do not see an immediate
impact from the free-trade agreement with the EU.  

Australia: The Reserve Bank of Australia meets on November 1.  Some economists expect a rate cut, but we do
not.  Former Governor Stevens and his successor Lowe indicated that
the RBA would not respond mechanically to
the undershoot of inflation. They have indicated provided growth, and the labor market does not deteriorate, the RBA is not in anxious
about cutting rates further from the record low levels.  The housing-related data remain firm.  The Australian dollar remains resilient even
though $0.7700 ceiling is proving formidable. 
Australia’s relatively high-interest
rates and AAA rating are important attractors. 
The rally in industrial metals and better terms of trade are frosting on
the fundamental cake. 


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