Dollar Goes Nowhere Quickly

The US dollar has been confined to extremely narrow ranges against the euro, yen, and sterling.  To the extent that there is much action in the foreign exchange market, it is with the dollar-bloc and emerging market currencies.   

The Canadian dollar was whipsawed by comments from the Bank of Canada.  A reference to waiting for 18-months initially sent the US dollar from near CAD1.3380 to CAD1.3280.  As Governor Poloz clarified his remarks, linking the reference closing the output gap rather than monetary policy per se.  It recovered to CAD1.3360 before consolidating.  

Higher metal prices, including a 6% rally in iron ore, a record high in coking coal, and a five-year zinc may have provided the latest excuse to buy the Australian dollar.  It is the strongest of the majors today, gaining around 0.4% against the greenback.  It has traded on both sides of yesterday's range but is likely to hold below the key $0.7700 cap that has marked the upper end of the range over the last several months, ahead of the Q3 CPI to be reported in early Sydney on Wednesday.  

The higher metal prices are also helping lift the South African rand.  It is the strongest of the emerging market currencies today, gaining 0.65% against the US dollar.  On the other hand, the South Korean won is the only emerging market currency outside of the Chinese yuan that has slipped against the US dollar today.  The 0.2% decline in the won comes despite a preliminary Q3 GDP that was a little better than expected.  The 0.7% quarter-over-quarter growth was a little better than expected, though off from the 0.8% expansion in Q2.  The year-over-year pace was 2.7%, again slightly better than expected, but off the 3.3% pace since in Q2.   Next exports were a drag.  

Perhaps the weakness of the yen has acted as a drag on the Korean won.  The yen is the weakest of the majors after the Canadian dollar.   The US dollar is knocking against the highs from earlier this month near JPY104.65.  That is the highest level since late-July.  Since the early in the Asian session, the dollar has been in a JPY104.35-JPY104.45 range for the most part.  

The driving force is the rising US rates and increased expectations that the Fed will hike rates in December.  The CME and Bloomberg calculations put the odds of a hike before the end of the year around 68%-70%.  The odds are roughly double what they were a year ago at this time.    The US-Japanese 10-year spread is near 184 bp, the upper end of where it has been since the UK referendum.  The US 2-year premium over Japan is near 110 bp, which is also among its best levels since Q2.  

The driver is the same for the euro, with an additional twist.  The market is more confident that the ECB will extend its asset purchases in December than it is about additional measures by the BOJ this year.  The US-2-year premium over Germany is near its best levels since the financial crisis, and the 10-year premium is near the largest since Q1.  

Yesterday's stronger than expected flash eurozone PMI was unable to do more than steady the euro in its seven-month trough.  Today's recovery in the German IFO survey barely elicited a reaction from the single currency.   It has been confined to less than a third of a cent within yesterday's ranges.  Some buying has emerged in the $1.0870 area for three sessions now.  However, lower highs are being recorded, and the euro has been unable to resurface above $1.09 since the European session last Friday.   

The IFO business climate (current assessment and expectations) improved more than expected (110.5 vs. 109.5 in Sept) and is at its highest level in 2.5 years.  The Bundesbank warned that the slowdown in Q3 was temporary.  The recent data lends support to this optimism.  

The US economy also appears to have begun Q4 on a positive note, but the NY Fed GDPtracker warns of another quarter of sub-2% growth.  Yesterday's flash Markit manufacturing PMI rose to its highest level in a year.   The October Empire State manufacturing survey did disappoint, but the Philadelphia survey was better than expected.   Today the Richmond Fed reports alongside the S&P CoreLogic (formerly CaseShiller) and the Conference Board's measure of consumer confidence.  The September reading was at new highs since the crisis, and a small pullback would not be surprising.  Lastly, Atlanta Fed's Lockhart appears to the be the last Fed speaker ahead of the blackout around next week's FOMC meeting. 

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