Dollar in Yesterday's Range

The US dollar is weaker across the board today, but largely confined to yesterday’s trading ranges. Short-term participants are getting chopped up while long-term investors seem to have adjusted their positions and awaiting the passing of the significant event risk next week. Japan’s poor Sept retail sales (-3% vs consensus of -0.5%), nor the BOJ’s downgrade of its growth forecasts nor bringing forward the next meeting to next week from mid-Nov able to stop the yen from rising today.

Dollar support near JPY81.20 is holding and although it may be frayed, recent widening of interest rate differentials in the US favor appears to have helped slow the greenback’s descent. North American dealers will inherit the books with the euro near the middle of the $1.3700-$1.4000 trading range. Cable continues to consolidate the post-Q3 GDP gains and remains confined to Tuesday’s broad trading range (~$1.57-$1.59) for the second consecutive day. Emerging market currencies are mostly firmer, though of note the Chinese yuan reference rate was set lower again (4th consecutive session); leaving the yuan at its weakest level of the month.

News that the Federal Reserve conducted a survey of dealer expectations of the initial size of its asset purchases (and reportedly included a “0” option) is being understood in two ways. First, it would seem as a normal part of the Fed’s market surveillance function. Second, others are suggesting that it reflects the fluidity of the situation at the Fed. This second interpretation would seem to imply that what the Fed does will be influenced by what the market expects it to do and those expectations have been largely fueled by comments of a number of Fed officials. A Reuters survey found a consensus favoring an initial $80-$100 bln a month program with the total size ranging from $250 bln to $2 trillion. Given the range of opinion and the more than 30 bp rise in US 10-year Treasury yields over the last three weeks, the only thing that seems clear is that whatever the Fed does next week, substantial headline risk will remain.

Ironically, the BOJ provided some details about the assets it will buy under the JPY5 trillion program announced earlier this month. It has lowered the minimum rating of the corporate bonds it will buy to BBB. It will also buy exchange trades funds and REITS (~JPY500 bln combined). JPY3.5 trillion of the fund will be used to buy government paper. In contrast, most expect the Fed to limit its asset purchases solely to Treasuries.