Euro Slide Continues, Dollar-Bloc Resilient

The US dollar is broadly mixed.  The euro continued its sell-off.  With today's losses, it has shed nearly 2 cents since last week's high.  The Swiss franc has been dragged lower by the single currency.  The dollar-bloc is resilient as participants have second thoughts about the trajectory of policy, especially in Canada and Australia.  Sterling is also showing some resilience as doubts about extending QE in early November have crept in, despite poor data.   

Disappointing PMI data and a weak IFO survey ensured follow through selling of the euro in the European session. The flash October manufacturing slipped to 45.3 from 46.1 in September and defied expectations for a small improvement. The flash service reading ticked up ever so slightly to 46.2 from 46.1. The consensus expected a larger bounce. This produced a composite reading of 45.8, down from 46.1 and is the lowest since June 2009.

Recall that in the flash report only preliminary German and French data are available. Germany’s report was noticeably weaker than France’s and this was underscored by the IFO survey that saw deterioration in both the assessment of the business climate and expectations. Markit, which conducts the PMI survey, opined that the German PMI is consistent with not only a contraction in Q3 but also in Q4. This is stark contrast with the Bundesbank’s optimism that the euro area’s largest economy expanded in Q3.

The dollar-bloc is generally firmer today. The Australian dollar has been bolstered by three considerations.

First, the HSBC’s China flash manufacturing PMI increased to 49.1 from 47.9. While still below 50, the continued recovery strengthens ideas that world’s second largest economy may have troughed on Q3 and this is seen as positive for the Australian economy and dollar. 

Second, Australia reported higher than expected Q3 inflation and this spurred talk that the RBA may in fact not cut rates when it meets in early next month as many expected. Headline inflation was reported at 1.4% after 0.5% in Q2. The Bloomberg consensus called for a more modest rise to 1.1%. More importantly, the RBA’s trimmed mean reading rose to 2.4% from 2.0%. 

Third, we recognize a high level of M&A activity that may also be helping to explain the Australian dollar’s resilience. Such deals include a Chinese and US companies seeking to boost their presence in Australia as well as an Australian company selling a US-based project. The top three deals amount to around A$4.5 bln.

Separately, we note that the Bank of Canada’s comments yesterday following its decision to leave rates on hold was not as dovish as the Governor seemed to suggest last week. Although time before the economy reaches full capacity was pushed out from the middle of next year to the end, the need to remove some accommodation continued to be recognized.  In addition, another issue was highlighted and that was that household borrowing needs to be curbed. Today’s Monetary Policy Review is likely to highlight these same issues. 

Meanwhile, the Reserve Bank of New Zealand will most likely leave its official cash rate on hold at 2.5% at Thursday’s meeting, the first in which the new governor, Wheeler will preside. There is some risk of a softer tone given that 1) inflation is near 13-year lows, 2) persistent currency strength and 3) the weaker domestic economic trajectory. The New Zealand dollar is trading at one-month lows against its Australian counterpart.

The market may also be having second thoughts about the Bank of England simply extending its gilt buying program when the current operation is complete next month. This may help account for sterling’s modest strength, which coupled with euro’s weakness has seen the cross break below GBP0.8100 for the first time in more than a week. 

Note that the first estimate of Q3 GDP will be released tomorrow and the three-quarter contraction likely ended. While the BOE’s King underscores his commitment to provide additional support to the economy if needed, he also recognized that price pressures may be above target into next year. The BOE’s Dale also seemed to place more emphasis on the funding for lending scheme. Nevertheless, the dismal CBI industry trends survey (-23 in Oct from -6 in September and defying expectations for modest improvement) warns that the growth in Q3 is a bit of a fortune economic fluke and the UK economy is hardly out of the woods.