Dollar-Bloc Run Continues, Sterling Shines

Since the Federal Reserve left rates on hold on September 17, the dollar-bloc currencies have outperformed the euro, yen, and sterling, all three of which are lower against the dollar.  So far this week the New Zealand dollar is the strongest, rising 2.8%, followed by the Australian dollar's 2.1% gain.  The Canadian dollar is up 1%.  

Higher commodity prices, including oil and copper, are lending support.  The EIA's warning that US output will slip through the middle of next year helped lift the November light sweet crude oil futures contract to almost $50.  This is its highest level since late-July.  The New Zealand dollar was aided by a good dairy auction.  Yesterday the RBA signaled no urgency to cut rates.  

The US dollar briefly slipped below CAD1.30 for the first time since mid-August. Support is seen in the CAD1.2950-CAD1.2980 area.  A move back above CAD1.3050-CAD1.3065 would stabilize the technical tone.  The Aussie poked through $0.7200.  Last month's high near $0.7280 is the next target.   Finishing the North American session today below $0.7200 would be disappointing.  The New Zealand dollar has risen nearly four cents since September 23.  The August highs in the $0.6690-$0.6710 area is the next target, but seems too far today, even though the intra-day technicals warn of the risk of new session highs. 

Sterling has gained 0.5% today to $1.5310 to test the 20-day moving average.  There are two main forces lifting it.  First, the bulls get excited by news that Anheuser-Busch was raising its bid for the UK's SAB Miller to GBP68 bln.  We are typically skeptical of the direct investment boost as corporations can borrow and need not buy the target currency.  However, it seemed to have lifted sentiment before the other force was clear.  That other force was news that despite the softness in the manufacturing PMI, industrial output rose 1.0% in August.  The consensus forecast was a for a 0.3% increase.  The 0.4% slippage in July was pared to only 0.3%.  Manufacturing itself was up 0.5%. The consensus was also for a 0.3% increase.  

In contrast, both German and Spanish industrial output figures disappointed.  German industrial production fell 1.2% in August.  The market expected a small gain.  The disappointment may be mitigated by the upward revision in July to 1.2% from the 0.7% increase initially reported.   However, yesterday's drop in factory orders (-1.8%) and the sharp downward revision to July ( to -2.2% from -1.4%) warns against shrugging it off.  Industrial output in Spain fell 1.4% in August.  The consensus was for a 0.4% decline.  The year-over-year rate stands at 2.7% in Spain compared with 2.3% in Germany. 

Last Friday's range in the euro, $1.1150-$1.1320 remains intact this week.  The euro is also holding below the trendline drawn off the August spike high to almost $1.1715 and the September high near $1.1460.  It was tested last Friday and again today when it comes in near $1.1300. 

As widely expected, the BOJ left policy alone at the conclusion of its two-day meeting.  Some who expect the BOJ to ease later this month anticipated some preparation in the form of a reduced economic assessment, but this did not materialize either.   Although the US equity market snapped a five-day advance, Japanese stocks extended their rally into the sixth session. 

It is not a market mover today, but it is notable that Norway's minority coalition government has indicated that it will withdraw funds from the ~$830 bln sovereign wealth fund.  It intends to spend NOK208 bln (~$25.2 bln) for its oil fund, which is just above what it expected to receive from its offshore oil and gas fields.  The difference is about NOK3.7 bln.  Of course, the fund's investments also generate cash flow in the form of dividends and interest on its fixed income portfolio.  Overall the oil fund is expected to still have more assets under management at the end of next year.   Note that the Norwegian budget assumes Brent oil averages $52 a barrel this year and $53 next year.  

The US economic calendar is light, and Williams is the only Fed official scheduled to speak, and his views are now well known.  He continues to favor a hike this year.  Many observers were shocked by yesterday's US trade figures and revised down Q3 GDP forecasts  in response.  However, note that earlier released flash merchandise trade figures were even worse, and it was in response to that report that the Atlanta Fed's GDPNOW was cut from 1.8% to 0.9%.  However, the trade report was not at bad, and the GDPNow tracker was lifted to 1.1%, which is still below market expectations.   Separately, note that the Republicans in the House of Representatives will choose a new Speaker today to replace Boehner.   This is important for legislation through next year’s national election.  It could also be significant in terms of the debate over TPP.  

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