Dollar Mostly Softer

The US dollar is trading heavier after extending its post-FOMC gains that saw the euro and sterling record two-week lows yesterday.  The euro extended its recovery that was marked by yesterday's outside session.  Its gains have stalled in front of the 20-day moving average (~$1.1235) and the first retracement objective of its decline since last Thursday.  

Sterling has also stabilized, but its recovery is more muted and fragile BOE Broadbent's comments yesterday raised questions about the average weekly earnings growth, suggesting that it may be linked to a changing composition of new jobs.  Initially during the early part of the recovery, low-skilled and low paid jobs were in greater demand.  Now the focus is on higher-skilled and higher paid jobs.  In addition, the drop in tax receipts last month and weak export orders (via CBI) warn of a further loss in economic momentum.  Ideas that the BOE could hike rates this year have been dashed, and several houses have pushed the BOE's lift-off into Q2 and Q3 next year.  Sterling needs to rise back above the $1.5300-20 area to take-off the downside pressure, which still exists despite the modicum of stability.  

Japanese markets re-opened after the three-day holiday.  The Nikkei played catch-up, dropping 2.75%.  Japan's flash manufacturing PMI fell to 50.9 from 51.7.  This was a bit worse than expected, and of note there was a sharp drop in export orders that were linked to China.  The dollar is trading inside yesterday's range against the yen as the coiling price action continues.   The JPY119.60 area offers support while the JPY120.20-JPY120.40 area marks immediate resistance.  

The Norwegian krone is the weakest of the major currencies, losing 2% against the US dollar in response to the 25 bp rate cut.  While we had played up the risks, the consensus was opposed.  The market was also unprepared for the dovishness of the Norges Bank, which, in effect, adopted an easing bias.  In an unusual turn of events, the Swedish krona is the strongest of the majors, gaining about 0.4% against the dollar, helped by cross rate demand.  

There continues to be much talk about VW emissions scandal, and although some observers suggest the euro is vulnerable because of it seems like a stretch.  Signals from three ECB officials yesterday (Draghi, Nowotny, and Jazbec) that it is too soon to expand, extend or alter the composition of its asset purchase program helped the euro bottom yesterday just ahead of a key technical level near $1.1080.  

The German IFO was upbeat though it might be too early to pick-up the knock-on from VW.  The assessment of current conditions deteriorated (114.0 vs 114.8), but the expectations were lifted, suggesting only a soft patch (103.3 vs 102.2) and the assessment of the business climate improved (108.5 vs 108.3).  The consensus had expected further weakness.  

The ECB launched its fifth tranche of TLTRO today, but demand is expected to have cooled considerably.  In the first four tranches, about 384.2 bln euros have been borrowed.  Spanish and Italian banks account for about half of the draw.  The consensus was for the facility to be tapped by another 50-60 bln euros, but the banks only took down 15.5 bln euros.    

The ECB staff cut its GDP and inflation forecasts earlier this month.  Officials recognize new downside risks.  That also may justify doing more, but there are also technical reasons pushing the ECB in the same direction.  The TLTRO channel appears to be nearly exhausted.  It ABS purchases appear to be coming more difficult.   This may push the ECB in the direction of changing the composition of the asset it is buying.  

Nokkie's losses today give make it the weakest of the majors since the FOMC meeting, edging out the Australian dollar.  The Aussie traded near $0.7280 after the FOMC, and today it has been sold back below $0.7000 for the first time since September 10.    China's flash Caixin PMI coupled with speculation of 1-2 more rate cuts by the middle of 2016 have taken a toll.  RBA official (Heath) highlighted the limited impact on investment from lower interest rates.   In addition, with Fonterra raising its payouts and stronger than expected New Zealand exports (despite a widening of the trade deficit) has seen the Aussie drop 1% against the Kiwi.  

There are three US economic reports that will provide headline risk today.  Weekly initial jobless claims may tick up after the low 264k print last week.  Note that the four-week moving average used to smooth the high-frequency time series stands at 272k.  The cyclical low set in July was 266k.  The US will report August durable goods orders.  A soft report is expected, and this could weigh on Q3 GDP forecasts, which the Atlanta Fed says is tracking about 1.5%, well below consensus.   The US also reports new homes sales.  New homes sales were running at a 507k annual unit pace in July compared with 403k in July 2014.  The consensus is for a small increase to 515k, but after the disappointing existing home sales, the risk appears on the downside.   

Yellen delivers a speech at Amherst College after the markets close today.  The market knows that the Chair’s assessment will not change from last week’s FOMC meeting.  However, her comments will be scrutinized for any hint of what the Fed is looking at to determine the timing of lift-off, which 13 of the 17 Fed officials still see this year.  Must market-based measures of inflation rise?  What if the Chinese stock market remain volatile?  Can the Fed raise rates if US stocks are weaker?  

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