Dollar Stepped on by Euro and Sterling

The general divergence evident over the past couple of weeks is on display today.  The US dollar is weaker against the European currencies, including the euro and sterling, which are trading at new 4-week and 10-month highs, respectively.  The greenback is mostly firmer against the yen, dollar-bloc currencies and many emerging markets currencies. 

The news stream has been encouraging for the euro and sterling, and technical considerations may have also forced some investors from the sidelines.  The UK confirmed Q3 growth of 0.8% and the continued recovery of the British economy.  That recovery is probably one of the more pleasant economic surprises of the year.  The details were constructive, with a broad recovery evident in nearly all the sub-components.  The market seemed to seize upon the news as an excuse to finally push sterling through the $1.6260 double top set in Oct and is quickly going to work on the offers stacked about the $1.6300 area that marked the highs in 2012.    It also corresponds with a trend line drawn off the 2009 and 2011 highs.  

A softer than expected UK CBI sales report (1 vs 10 consensus and 2 in Oct) helped stall sterling there.  That said, a close above $1.6260 will be seen as a technical breakout and ward off serious top pickers.   Chancellor Osborne delivers the Autumn Statement to the House of Commons at the end of next week and the economic data he has is among the best that could be hoped for.  

The euro finished the North American session yesterday on its highs made late in the day.  The market did not seem to new fresh incentive to push the euro higher, but it saw reasons in the  uptick in the German GFK consumer confidence measure and news that an agreement to form a coalition between the CDU and SPD appears to have been worked out (the SPD will have a party vote on it).   It appears likely that Schaeuble will remain as Finance Minister.  So, while the CDU accepted many of the SPD's demands, including a minimum wage (8.5 euros an hour), it may have rebuffed its demand for the critical finance ministry portfolio it had in the last grand coalition government. 

There has been some press reports suggesting that the ECB is considering a new facility whose access is conditioned on new loans.  This would be similar to the UK's funding-for-lending program.  This may be seen as euro bullish because it illustrates the fact that there are a number of other options for the ECB before having to really confront a negative deposit rate or outright bond purchases, which have been the subject of much speculation in the markets. 

We have been arguing that the rise in EONIA is largely month-end pressures and that it will ease back to more "normal" levels early next week.  Some may think that the ECB's failure to sterilize the entire amount of the old SMP purchases yesterday is a sign something more serious taking place.  The ECB was only about to pace 157.7 bln euros rather than 184 bln it had wanted.  Yet we note that same thing happened about a year ago.  This still seems like noise rather than a signal.  

Yesterday, Letta's government in Italy survived a vote of confidence over the 2014 budget (171-135 in the Senate) with the help of the new center-right party.  This helps solidify the government at an important time.  First, possibly later today, the Senate, led by the center-left and the 5-Star Movement, will likely vote to eject Berlusconi.  While there is some risk that Berlusoni will claim being a victim and turn that into political advantage, there seems to be a better chance of a phase of political stability in Italy.  That said, the next challenge probably comes from the center-left itself than the center-right.  The PD will hold its leadership election early next month.  Although Letta's chances look at bit better than a couple months ago, Renzi is seen with the advantage.  

The US sent two unarmed B-52s into the airspace that was claimed by China over the past weekend.  Tensions are set to grow in the region.  China's sole aircraft carrier is heading toward the South China Sea, according to new reports, where there are territorial disputes with other Asian countries, including the Philippines and Vietnam.  If it were moving to the East China Sea, where that islands, and now airspace dispute, are located, the aircraft carrier would likely go through the East China Sea.   As is the US practice as well, China's aircraft carrier is being escorted by four other ships, including two destroyers and two frigates.  

The point of the details is to underscore the heightened tensions that may persist.  It also suggests that the diplomatic advantage China may have accrued by the failure of Obama to attend the ASEAN meetings during the US government closure, has been largely offset by the clumsy move.  Separately, note around the middle of the month Spain's National Court issued a warrant for Chinese officials (including former President Zemin) for genocide in Tibet.  There has been a flurry of diplomatic consultations, but thus far, little sign of retaliation by China.  

In what will be a holiday abbreviated session for many, there are a number of US economic reports and the US Treasury auction will be held earlier.  This week's sales have been well received and with talk of a few Asian central banks intervening and buying US dollars last week and earlier this week, it would not be surprising to see next week's settlement lift the Fed's custody holdings.    

The most two important reports today will be the Oct durable goods orders, where a drop in aircraft orders are expected to have depressed the headline number (-2.0%).  The details are likely to be better.   Also the Chicago Purchasing Manager Index is arguably among representative of such regional surveys.  The Nov reading is expect to have pulled back from the 2-year high of 65.9 seen in Oct.