The Dollar's Surge Continues

Overview: The dollar's surge continues. Most G10 currencies are off 0.45%-0.65%. The US dollar is trading above CAD1.40 for the first time since the pandemic, but the Canadian dollar is faring the best of the G10 today (~-0.15%). Since US election, it is the only major currency not to have fallen by at least 2%. All the emerging market currencies are lower today, as well. The greenback is being underpinned by the continued rise in US rates and ideas that trajectory of Fed policy may be tempered by the new administration. The US two-year yield is straddling the 4.30% area. Despite a 25 bp Fed cut last week, the two-year yield is 15 bp above the pre-election rate. The US 10-year yield is edging toward 4.50%. It was below 4.30% last Monday. The Fed funds futures strip imply a 3.82% effective Fed funds rate at the end of next year. That is 20 bp higher than it was last Monday. 

The MSCI Asia Pacific Index fell for the fifth consecutive session. Of the large markets, only South Korea, Singapore, and Australia were exceptions. However, Europe's Stoxx 600 is up a little more than 0.5% after retreating in the past two sessions. US index futures are steady to slightly higher. European bonds are mixed. Greek, Spanish, and Italian yields are softer while the others are a little firmer. The 10-year UK Gilt yield is up nearly three basis points as it builds a foothold above 4.5%. Gold's sell-off continues. It is off for the fifth consecutive session and is off $160 over the run. It reached a three-month low near $2537. The yellow metal consolidated around $2500 from mid-August through mid-September. January WTI is trading quietly in a narrow range (~$67.75-$68.45). 

Asia Pacific

Australia reported 16k increase in employment in October, of which 9.7k were full-time positions. Both were a little less than expected. The participation rate slipped to 67.1% but the unemployment rate was unchanged at 4.1%. The futures market has pushed out the first rate cut to July 2025. It had been in May until November 6. However, this shift in interest rate expectations is not lending support to the Australian dollar, which is trading at new three-month lows. Japanese investors sold JPY5.7 trillion yen (~$36.6 bln) of portfolio investment in the week that ended November 1. This was a record amount of foreign bonds (~JPY4.56 trillion) and the most foreign equities in two years (~JPY1.17 trillion). The yen did not rise that week, but rather declined for the fifth consecutive week. The unwinding of currency hedges, especially of the bond investments, could have limited the impact on the exchange rate. There also were other sellers of yen. In the week through November 8, Japanese investors returned to the foreign bond market, but JPY1.72 trillion but sold another JPY922 bln of foreign stocks. The yen rose last week. 

Encouraged by a firm US 10-year yield and not particularly concerned about the risk of intervention, the market took has taken the dollar above JPY156.00 today. There may be some resistance in the JPY157.00-JPY157.50 area but the sights are set on JPY160. The Australian dollar is trading at a new three-month low slightly below $0.6455. The low for the year (~$0.6350) was seen early July and that seems to be where it is headed. The Aussie is fraying the lower Bollinger Band (~$0.6470). The weakness of the yen and broad dollar strength in general proved too much for the Chinese yuan. The dollar recorded the session low yesterday in North American turnover near CNH7.2130. It recovered back to the session high of almost CNH7.25 and set a new high since July today near CNH7.2665. The PBOC again protested the weakness of the yuan by setting the dollar's reference rate much lower than expected. The dollar's fix was set at CNY7.1966 (CNY7.1991 yesterday). The average in Bloomberg's survey was CNY7.2325. 

Europe

Europe grows in crisis, goes the old saw, but is the re-election of Trump in the US a crisis? The EU has pivoted but not necessarily in the direction of a greater union, even though many governments, and notably in Germany and France, are weak. The EC will allow unused cohesion funds to be repurposed for defense purposes. Less than 5% of the cohesion funds have been spent as most countries had prioritized using the recovery funds first as they expire in 2026. Germany's federal election will be held on February 23. The CDU will likely lead the next government, and the bar of new joint bonds seems set exceedingly high. Separately, Germany's largest union, IG Metall struck a two-year deal with employers for a 2% wage increase next year and 3.1% the following year (and a one-off 600-euro payment). Initially, the union sought a 7% increase over 12 months. Meanwhile, France's budget minister announced willingness to change the budget proposals to reduce the intended tax on employers and will modify plans to delay index of public pensions to inflation. Lastly, note that the UK publishes September and Q3 GDP tomorrow. The economy is expected to have grown by 0.2% in September and 0.2% in Q3.

The euro and sterling are falling for the fifth consecutive session today. The euro was sold to almost $1.0555 yesterday, and to almost $1.0500 so far today, a new low for the year. It has not traded above $1.0570. In September-October 2023, the euro carved a bottom around $1.0450. The euro settled for the third consecutive session below the lower Bollinger Band (~$1.0615 yesterday and ~$1.0560 today). Sterling also struggles to sustain even modest upticks. It fell through $1.28 on Tuesday and took out $1.27 yesterday. It is near $1.2630 in the European turnover. Sterling has been sold through the August low (~$1.2665), where about GBP440 mln options expire today. Another GBP400 mln of options at $1.2650 also expire today. Below there, initial support may be closer to $1.26, which it has not traded below since mid-May. Sterling settled below its lower Bollinger Band (~$1.2770) for the second consecutive session. It is found slightly above $1.27 today.

America

Producer price inflation is likely to tick up, but the importance of today's report is not so much about producer inflation. This may become more of an issue if/when producer price increases surpass the CPI. The importance of today's PPI is the implication for the personal consumption deflator, which the Fed targets. Weekly jobless claims may be of more interest than usual after a new cyclical high for continuing claims were reported for the last full week of October. Later today, the central bank of Mexico meets, and despite the peso's weakness, a quarter-point rate cut is the most likely scenario. It would be the fourth cut in the cycle that began in March when the overnight rate was 11.25%. Mexico's CPI stood at 4.76% last month, which is about half-of-a percentage point higher than a year ago. On the other hand, at 3.80%, the core rate is 170 bp below where it was in October 2023. Meanwhile, the Canadian government's decision to force the ports and dockworkers to end their strike/lockout and submit to an arbitration process antagonizes the NDP, whose refusal to go along with the Conservative and Bloc Quebecois vote of no confidence, is the main reason the minority Liberal government is still in power.

The US dollar is trading above CAD1.40 for the first time since May 2020. The Covid-inspired high was a little above CAD1.4665 in March 2020. It is difficult to identify the yesterday's driver, and the US two-year premium over Canada narrowed by around seven basis points, the most in nearly a month. Recall that last week, the greenback's five-week rally ended with about a 0.25% pullback and that is including the 0.35% US dollar advance before the weekend. The US dollar has rallied for the past four sessions, but since the US election, the Canadian dollar is the best performing G10 currency. It is now the only G10 currency that has fallen less than 2% since the US election. The euro has been the hardest hit and is off about 3.85%. There are about $765 mln in options at CAD1.40 that expire today and another stack for $635 mln than expire there tomorrow. The Mexican peso consolidated its recent losses yesterday and enjoyed a firmer tone within Tuesday's range. Among Latam currencies, only the Chilean peso joined the Mexican peso in appreciating against the dollar yesterday. The Chilean peso rally (~0.65%) came despite the continued slide in copper prices, which are off about 8% in the four-day slide. The Mexican peso rose by about 0.3% yesterday, the first gain in four sessions. However, the peso, like all the emerging market currencies are trading softer today. The week's high so far was set Tuesday near MXN20.70 and last week's high was slightly below MXN20.81.  

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