Dollar Mixed Ahead of ECB

(from my colleagues Dr. Win Thin and Ilan Solot)

The dollar is mixed on the day, but moves have been modest ahead of the ECB meeting. The Euro recovered to trade just above the $1.25 area and sterling is hovering just around $1.5950. The Australian and New Zealand dollars are outperforming at $0.8610 and $0.7740, respectively. 

The dollar briefly trade above ¥115.50 before falling back to near ¥114.50. In the EM space, the ruble continues to lose ground as markets test the central bank’s new intervention regime, while MYR and ZAR are outperforming. The MSCI Asia Pacific index was down 0.5%, with the Nikkei losing 0.9%. EuroStoxx 600 is down 0.5% near midday and S&P futures are pointing to a slightly negative open.

The ECB meets today and is not expected to change policy. It may be difficult for Draghi to take fresh initiatives now. The second TLTRO is a month away, and the take down is expected to be more than twice the first. The covered bond purchase program is operational (it has even entered the new issue market) and the ABS purchases will soon begin. There are some indications that the pace of contraction in bank lending is continuing to slow. Both the supply of credit and the demand is improving according to the ECB's own surveys. The euro's decline will also be helpful. Earlier, Germany reported September orders at just 0.8% m/m vs. 2.3% consensus. However, the result was partially mitigated by the revision to the August print from -5.7% to -4.2%. 

The Bank of England meets today and is not expected to change policy. And as we like to point out, when it does nothing, it says nothing. The BOE inflation report due out November 12 should provide more color, as will minutes from today’s meeting that will be released November 19. In terms of UK data out today, Halifax’s housing survey showed that prices fell in October by 0.4% m/m, the first decline since June. On a y/y basis, prices are up 7.6%, with the average price at £186,135. September IP came in at 0.6 m/m vs. 0.4% consensus and manufacturing production at 0.4 m/m vs. 0.3% consensus.

The won-yen story is back after Vice Finance minister Hwan stated that authorities will manage the won’s move in line with the yen. This is neither new nor unexpected, and we place only moderate weight on this ramp up in rhetoric. First, there will be a lag between verbal and actual intervention. Second, even if the BOK starts to take action, it’s unlikely that the won will keep up or match the yen depreciation so far. Third, the yen has much stronger fundamental reasons to weaken than the won (for example, Korea runs a current account surplus of nearly 6% of GDP, compared with a 1% surplus for Japan). So, this is a factor to watch, but probably more in terms of the won’s performance against other Asian currencies, and adding uncertainty ahead of the BOK meeting next week (November 13).

Australia reported October jobs data overnight. Employment rose 24.1k vs. 20k consensus, while the unemployment rate was right at the 6.2% consensus. The jobs breakdown was favorable, with +33.4k in full time employment and -9.4k in part time employment. Australian data has been mixed this week, with jobs and retail sales coming in firm but trade coming in soft. Iron ore prices continue to sink to new cycle lows, so little relief is seen ahead for exports.

During the North American session, the US reports weekly jobless claims, October Challenger job cuts, and Q3 nonfarm productivity/unit labor costs. Canada reports September building permits (5.0% m/m consensus) and October Ivey PMI (57.3 consensus). Yesterday’s ADP report came in at 230k vs. 220k consensus. Along with a good employment component in ISM manufacturing, the markets are probably leaning towards a firm jobs report Friday. Consensus is currently at 235k. 

Brazil COPOM minutes from last week’s meeting (when it surprised markets with a 25 bp hike) were released earlier today. It cited a less favorable balance of risks to inflation due to the weaker real and increases in regulated prices, with projected inflation getting worse in all the scenarios analyzed by the bank (in the stable and market scenario). Further hikes seem likely, but it will be hard to undo the impression that either the hike or the delay in hiking happened for political reasons. October IPCA inflation will be reported Friday, expected to rise 6.65% y/y vs. 6.75% in September. After the minutes, this IPCA print should give markets a better idea of how much tightening to expect ahead.