Dollar Surrendering Yesterday's Upticks

The US dollar upticks yesterday did not appear to be driven by fundamental considerations, even though the ISM and construction data were favorable, and some estimates for revisions to Q3 GDP due later this week, may have increased to 3.3%-3.4% (from the 2.8% preliminary read). 

Today is seeing yesterday's gains pared, but the market seems more tentative.  The euro's upside momentum stalled in front of $1.3580.  Despite the UK's strong construction PMI (5-year best), sterling stalled shy of yesterday's $1.6440-ish high.    The Aussie rebounded from the pre-RBA dip below $0.9060, but seemed to peter out near $0.9120. 

Heightened speculation of additional action by the BOJ helped lift the dollar to almost JPY103.40 in early Asia, its best level since May.    Asian based selling was pushing the greenback lower as European traders entered the fray.  They gave it one push toward JPY102.60 before dollar buyers reappeared.   

As we have noted, numerous surveys have shown widespread doubts, domestic as well as foreign, that the BOJ can achieve the 2% inflation target in the next fiscal year.  These surveys also indicate that an overwhelming majority expect the BOJ to take additional measures.  Yet Kuroda seems in no particular hurry and most expectations for additional measures are seen 5-6 months off, when the impact of the capital gains tax, and especially the retail sales tax can be seen. 

Meanwhile, yesterday's disappointing Q3 capex report has been followed by disappointing wage data, which are the two main disappointments with Abenomics so far.  Cash earnings rose 0.1% in Oct after the Sept series was revised to -0.2% from 0.1%.  While over-time pay rose, the regular wages continued to fall and in Oct were 0.4% below year ago levels.  They have been falling on a year-over-year basis for almost 1.5 years.  This understates the case, as inflation, at least a partial success for the Abenomics, insofar as deflation has been beaten back, eats away at the purchasing power of those lower regular wages.  On top of this, of course, the retail sales tax is looming and will further erode the purchasing power.  

The Reserve Bank of Australia was the first of the major central banks to meet this week.  The four market sensitive components of the statement (currency, mining, investment and forward guidance) were nearly identical with the last statement.   Separately, Australia reported slightly better than expected Oct retail sales (0.5%) and a larger than expected Q3 current account deficit (A$12.7 bln) and a sharp revision in the Q2 deficit (A$12.1 bln vs A$9.4 bln).  

In terms of the price action, the Aussie seemed to react more negatively to the news of a softer China services PMI than to the RBA or Australian data.  The PMI slipped to 56.0 from 56.3.  The forward looking new orders slipped for the second consecutive month (51.0 from 51.6 in Oct from 53.4 in Sept).    On the pullback, the Aussie held last week's low (~$0.9055) and recovered through the NY close.  However, in order to reinvigorate the short-squeeze we anticipated, the Aussie push through the $0.9160-70 area and this does not look likely today.  

The UK has followed up yesterday's strong manufacturing PMI with an even stronger construction PMI today.  The 62.6 reading (up from 59.4 in Oct) was startling good.  It is encouraging the market to increase the odds of a rate hike by early 2015 as reflected in the short-sterling futures contracts.  It leaves tomorrow's services PMI to round out the trifecta that will point to an acceleration of the UK economy into the end of the year.    The market shrugged off the poor BRC same store sales report (at 0.6% it is at the lows since seasonal decline in April). 

The Bank of Canada meets today and there is little chance that it will change its 1.0% overnight rate.  The forward guidance that helped define Carney's era that had been a date-oriented (as opposed to data) has been dropped as the BoC surrendered its tightening bias in favor of a more neutral stance.  Recall that disinflation has come to Canada as headline CPI (Oct) fell to 0.7% from 1.1%.  The core rate, which has not been above 1.4% since August 2012, stands at 1.2%.   Canada reports the Oct merchandise trade balance today as well.  The C$770 mln deficit that is expected matches this year's average. 

Meanwhile, the US dollar has extended its recent gains against the Canadian dollar and now stands at its best level since late 2010.  Since mid-Sept, when this move began, the Canadian dollar is the second weakest currency, dropping about 3.7% against the US dollar.  The Norwegian krone has lost 4.7% (for the record, the yen has fallen about 3.3% over this same period).   

The Canadian dollar is the only major currency lower against the dollar as the North American session is about to begin.  The Norwegian krone is the weakest of the others.  It was weighed down by a dismal retail sales report.  Oct retail sales fell 1%, rather than increase by 0.2% as the Bloomberg consensus had projected.  The Norges Bank meets Thursday and is widely expected to leave policy on hold at 1.5%.  

It is a light US calendar.  The NY ISM may be of passing interest, given the dearth of other news.  Nov auto sales are expected to recover from the Sept and Oct slippage.  Disappointment will weigh on expectations for the retail sales report due next week.