Still Skeptical of Breakouts

We have argued against expecting a near-term breakout of the dollar on the grounds that key issues that have made for broad trading ranges are not going to be resolved yet.  

The dollar is well bid in Europe.  We have done well this week fading the European moves.  Today may prove no exception, even though the US reports the October jobs figures.  More precisely, the employment data will not be sufficient to ease investors anxiety over the looming fiscal cliff.

It is true, as we anticipated, that policy response to Hurricane Sandy has been to tilt the polls a bit more in favor of President Obama.  Some partisans argued the dollar would perform better if a Romney victory was anticipated on grounds that the Fed would not be as accommodative.  We have found such arguments fallacious because they fail to appreciate the logic behind the staggered terms of the Federal Reserve Chairman and the President.   In addition, it is not clear, given the economic forces at work, and the composition of the Federal Reserve and Board of Governors that a consensus for less dovish stance would find a consensus regardless of the chairman.  

Nor has the euro area manufacturing PMI survey provided new information.  At 45.4 it is indistinguishable from the flash reading of 45.3 and, still off further from the 46.1 reading in September.  The fact that both German and French PMIs came in 0.2-0.3 points higher than the flash is immaterial.  They still point to likely Q3 economic weakness spilling over into Q4.  

Of note, Spain's PMI fell to a new 3-month low of 43.5, down from 44.6 in September.  The consensus had expected a decline to only 44.0.  Exports are expanding at 50.1 from 49.1, but it is hardly sufficient to offset the evaporation of domestic demand, which has been further curbed by the recent VAT hike.  

Higher bond yields and weaker economy, which has numerous knock-on effects, including lower tax revenues and higher government expenditures are part of the scenario that could lead Rajoy into formally asking for the assistance that many suspect is inevitable.  But, importantly, he is not there yet.  The heads of state summit in the middle of next month now seems to be the next "window of opportunity".  

At the same time, Greece is becoming more worrisome again.  The issue has shifted from the Troika and back to Greece's domestic politics.  Can the agreement Samaras struck with the Troika win parliamentary support.  The privatization legislation was approved a couple days ago because of the number of abstentions.  Parliament is set to debate the structural reforms and budget in the middle of next week.  It is not clear if a parliamentary majority will be achieved.  The Democratic Left is opposed to the labor market reforms.  Some defections have also been reported from the socialist PASOK party.  

The November 4-5 G20 meeting is itself becoming a non-event because of abstentions.  Neither US Treasury Secretary Geithner (who is more likely than Bernanke not to be in his office in 6 months) not ECB President Draghi are attending.  The French and Brazilian finance ministers are going to miss the meeting.  

It is not immediately clear if the senior Chinese delegation will be attending.  They have boycotted the high level IMF meeting in Tokyo recently and even lower profile trade shows in Japan.  The G20 meeting is in Mexico.   The Governor of the PBOC (Zhou)recently published a book contained a collection of his speeches.  It seen by some insiders as a sign of his likely departure soon-perhaps shortly after the pending transition of power.   Bernanke outlast Zhou too.  

The dollar has been thus far capped in front of the JPY80.50 resistance area we have previously noted.  The euro has approached the lower end of its trading range.  We suspect that nearly regardless of the precise details of the employment report, the euro is a better buy in the $1.2830-50 area than trying to anticipate a downside break.  

The Australian dollar is interesting as it reached a new one-month high near $1.0420 before backing off.  The OIS market appears to be pricing in about a 50% chance of a cut next week.  Prior to the firm CPI data, the market had priced in closer to 80% chance of a cut    Our idea that the broad trading ranges will remain intact suggests the Australian dollar is likely to retreat further from the $1.04 area.  

Even with better than expected construction PMI (50.9 vs consensus of 49.1 and 49.5 in September) sterling is struggling to resurface above $1.6100.  Support is seen near $1.6050, but the bottom end of the range is really below $1.60.  The risk-reward here does not appear as enticing.