The US dollar is on its back foot. It was
already sporting a softer bias and the FOMC minutes were read with a dovish twist. A Wall Street Journal poll found 64%
of economists expect a hike in December, and while the minutes might not
substantively change that, the confidence is weak.
While most Fed officials see the
conditions for lift off having been met
or soon to be, the concern is that the downside risks increased as well. On surprise contained in the minutes was the
repeated references to the dollar. According to Bloomberg, the dollar was
mentioned at least two dozen times in the September minutes twice as much as it
was cited in the minutes from the July meeting.
There was never a very strong chance of an October hike. In fact, only one of 64 economists participating in
the Wall Street Journal survey envisioned an October hike. In order to boost confidence in a December move, many
economists want to see stronger jobs data, easing of the dollar's momentum
(which seems to be happening), and greater stability in China and emerging
markets. It may take some time for these conditions to
materialize.
That said, the Fed continues to view the
impact of the dollar's strength and the decline in oil prices to have a
temporary impact on inflation. The dollar is posting new lows for
the week against the major currencies, but the yen, and many emerging market
currencies as well. Brent, which finished last week near $48, tested $54 today
while the November light crude futures is above $50 a barrel of the first time
since late July. This is nearly 10% above last week's close.
The less than hawkish signal from the Fed, coupled with the rally in oil and
commodities more broadly, rekindled the upside momentum in the dollar-bloc
currencies, which had flagged near mid-week. The Canadian dollar has gained about 1.6% this week
against the US dollar, nearly a third is being recorded today. Higher oil
prices, a smaller Canadian interest rate discount to the US, and the generally weaker tone for the greenback is
taking its toll.
Canada reports September jobs data today. The consensus expects a 10k increase
in jobs, leaving the unemployment rate at 7.0%. We suspect there are
downside risks. Given the weak growth of the Canadian economy, the 54.4k
full-time positions created in August is unsustainable. In addition, like the US, the participation
rate in Canada is low. The
consensus forecast is for it to slip back to 65.8% from 65.9%, keeping it
bouncing along the trough, but also warning of upside risks to the unemployment
rate. Afterward, the Bank of
Canada will release its senior loan officer survey. Separately, Bank of
Canada Governor Poloz is speaking over the weekend.
The US dollar is at its lowest level
against the Canadian dollar since late-July. It is approaching the 100-day
average (~CAD1.2890), which it has not traded below since late-June. It
also corresponds to a retracement
objective of the rally since the May lows (~CAD1.2870). A break of this are
could spur a move toward CAD1.2700.
There were a few economic reports in
Europe to note. First, the UK reported weaker than
expected construction output (-4.3% in August compared with consensus forecasts
of a 1.0% rise). The UK also reported a larger than expected overall trade
deficit. The August shortfall was GBP3.268 bln. This was nearly a third larger than the consensus expected, and the July
series was revised to a GBP4.436 bln
deficit from GBP3.371 bln. The BOE minutes suggest there is no urgency
to hike rates, Governor Carney continues to insist it is getting closer.
Sterling is higher for the fourth consecutive session. It has
approached the 50% retracement objective of the drop in the second half of last
month near $1.5385. A break above here would target $1.5450.
Second, while many countries reported weak
industrial output data for August, France surprised on the upside. Industrial
output was expected to have risen by
0.6%. Instead, France reported a
1.6% increase. Manufacturing output rose a surprisingly strong 2.2%
(consensus was 1.0%), which is the largest rise
in more than two years. Overwhelming the consensus forecasts by such a
magnitude offsets the small downward revisions in the July series.
Third, Italy is more of the broader
pattern. Industrial output fell 0.5% in August. The consensus
was for a 0.3% decline, following a 1.1% rise in July. The area's
aggregate figures will be released next week,
and a 0.5% fall is expected, which would offset the 0.6% gain in July.
Meanwhile, the euro is moving above
the $1.1325 area, and the next target is
near $1.1400.
Fourth, Norway firm inflation figures. September CPI rose 0.6% for a 2.1%
year-over-year rate. This was a little below expectations, but still the envy
of many countries. The underlying rate, which adjusts for tax changes and
excludes energy rose 0.8% for a 3.1% year-over-year pace. The main concern of Norges Bank is not inflation
but growth. Still, the quickening of underlying
inflation may steady the central bank's hand.
Major Currencies, but Yen, at New Highs before the Weekend
Reviewed by Marc Chandler
on
October 09, 2015
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