The US dollar is firm but is
not going anywhere quickly.
The lack of fresh interest rate support and uncertainty over the US tax
proposals, which the Brady, the Chair of the House Ways and Means Committee
hopes to have a revised version out after the weekend so the committee work can
begin on Monday.
The popular press seems to
focus on some objections by Democrats, but this misses the point. The Republicans hope to pass tax
reform without relying on Democrats. It is the same strategy employed for
health care reform, and the problem then and the challenge now is within the
Republican Party and its constituencies. A
wing of the GOP wants no increase in the deficit, and another wing wants lower
taxes. Immediately upon the release of the proposals, the National Federal of Independent Business objected
that the bill would not help most small
businesses. The National Association of Realtor objected and homebuilder shares
sold-off yesterday.
Tokyo markets were closed,
which contributed to a subdued Asian session. The Nikkei closed the week with a 2.4% gain after a
2.6% gain the prior week. The Nikkei is sitting on 20-year highs and is on an eight-week run. Foreign
investors are re-weighting toward Japanese shares after having cut exposure earlier in the year. There is some chunky option expires today.
There is $2.2 bln struck at JPY114.00 and another $1.1 bln at JPY114.50.
On the downside, there is an option at JPY113.80 for $400 mln that expire
today.
Many observers think that
the Chinese government may flatter its economic data, and they give private
data more credence.
However, the situation is more complicated,
and this is born out with the PMI. The official measure showed weakness
in the non-manufacturing sector (54.3 from 55.4), but the Caixin measure
reported earlier today showed a modest increase to 51.2 from 50.6.
The more important
development in China was the PBOC's large injection via one-year money that
helped calm the government bond market. The 10-year yield had risen nearly 20 bp in recent days and
the official action this week which injected nearly CNY1 trillion this week,
which essentially replaced the maturing loans. The US dollar closed
higher against the yuan for the second consecutive
session, but all this did was pare its weekly loss to about
0.3%.
The Australian dollar is the
weakest currency on the day, thus far, and is off nearly 0.5%. It was
sold in response to the disappointing
retail sales. Rather than recover from August's 0.5% decline as the
market expected, they were unchanged. The central bank meets next week
but is on a decidedly steady course with a 1.5% cash rate. The Aussie is
nearing support near $0.7665, and a break of it would signal a test on the recent low from late October near
$0.7625 initially.
Sterling continues to trade
heavily and has marginally extended yesterday's losses. It has approached $1.30, where
today there is a GBP694 mln option struck there that expires in NY. Last
month's low was just below $1.3030. Sterling has not traded below there
in two months. The somewhat stronger than expected service sector
PMI (55.6 vs. 53.6 in September). It is the strongest since April.
The composite reading rose to 55.8 from 54.1. It is also a six-month
high. A move above $1.2120 would help lift the technical tone.
While our "one-and-done" view was widely shared, it was by no means universal, but the BOE seemed
even more dovish than many expected. It no longer is threatening to raise rates more than
the market expects, and looking at the short-sterling futures strip, the bias
is toward two hikes by the end the end of
2019.
The euro reached almost
$1.1690 yesterday, its best level since the ECB meeting, but was unable to
close above the $1.1660 important technical level. The single currency has been
confined to less than a cent range this week. The over-extended condition
we warned of is being alleviated by the sideways trading this week.
Between $1.1595 and $1.1600, there are options with a notional value of 1.8 bln
euros set to expire today. There are roughly another 1.8 bln euros
struck between $1.1670 and $1.1700.
The focus in the US is in the monthly employment data. The consensus calls for
around a 300k increase. We suspect the risk is on the upside.
That said, it probably requires more than 370k to excite the market, which
realizes that the data is a payback from the loss of jobs due to weather in
September. Hourly earnings may have also been
skewed from the storm. A 0.2% rise, given the base effect, would see the year-over-year rate slow
to 2.7% from 2.9%. The average this year through August was 2.6%.
Other measures of labor compensation, like the recent Q3 Employment Cost Index,
shows a modest acceleration.
Lastly, we note that Canada
reports its jobs figures as well. With the Bank of Canada warning that the economy may slow
after a strong H1 and has turned decidedly cautious after two hikes in Q3, the
market has reacted strongly to disappointing data. That could be the case
with today's jobs report. In September, Canada created 112k full-time
jobs. Proportionately, this is as if the US created over a million jobs
in a single month.
Disclaimer
Dollar Firms Ahead of What is Expected to Be Strong US Jobs Data
Reviewed by Marc Chandler
on
November 03, 2017
Rating: