US Dollar Weighed Down by Dovish Fed Governors

Yesterday's mostly counter-trend moves ended abruptly.  A second governor of the Federal Reserve voiced opposition to the intimation by Yellen and Fischer, and several regional presidents that the a rate hike is still appropriate this year.  This helped renew the downside pressure on the dollar.  It is lower against all the majors and most emerging market currencies today. 

Global equities had enjoyed gains since the start of the month.  Advancing streaks were snapped yesterday, and follow through selling is being seen today.  Equity market weakness and lower bond yields are helping lift the yen.  The dollar is trading at its lowest level against the yen since September 29's JPY119.25 low.   Of note, the Nikkei gapped lower and closed below 18k.  It completed a 38.2% retracement of the rally from late-September.  The 50% retracement is found near 17670.  An old gap (October 5 higher opening) extends to 17775.    

The Japanese government lowered its assessment of the economy, including industrial production.  Although it says the recovery is continuing, it recognized that it was experiencing "weak pockets." Still, the assessment fanned speculation that pressure was mounting on the BOJ to ease policy further when it meets at the end of the month.  

Speculation is also increasing that China will ease further too.  The focus today was on inflation or the lack thereof.  Specifically, September CPI eased to 1.6%.  The Bloomberg consensus was for a 1.8% pace after 2.0% in August.  Food prices moderated (2.7% from 3.7%) and non-food prices edged lower (1.0% from 1.1%).  Producer prices fell 5.9% year-over-year, in line with expectations, and continuing the streak that is approaching four years in duration. 

Separately, we note that China continues to make reforms that may enhance its chances of joining the SDR.  Reports suggest China is planning on extending the hours of its onshore yuan trading, perhaps by the end of next month.  It would allow an overlap with Europe by extending the Shanghai session to 11:30 pm, seven hours later than current hours.  

The Australian dollar had approached $0.7400 at the start of the week.   It dipped below $0.7250 yesterday and to $0.7200 today before recovering.  China's weak import data yesterday (despite an increase in iron ore), weighed on the Aussie.   News that one of Australia's largest banks increased the variable rate mortgage rate by 20 bp fanned speculation that the RBA would likely counter such tightening by cutting rates again.   The derivatives market is now pricing in about a 50% chance of a cut next month.  Amid the generally weaker US dollar, the Aussie recovered to almost $0.7280, but European dealers seem happy to sell it on the bounce.  A break of $0.7200 targets $0.7160, and possibly $0.7100.  

The New Zealand dollar is easily outperforming the Australian dollar today.   RBNZ Governor Wheeler warned that further easing may be necessary, but his caveats were such that mitigate any sense of urgency.   Wheeler expressed concern about fueling a property boom just as the Real Estate Institute of NZ reported that house sales up 38.3% year-over-year and the median price have risen 15.4% year-over year in September.  Auckland median prices are up more than a quarter from a year ago.  The Kiwi is trading at its best levels since early-July. 

Sterling posted a potential key reversal yesterday, trading on both sides of Tuesday's range, and then finished the 24-hour session below Tuesday's low.  The weaker US dollar and unexpected fall in UK unemployment have helped sterling recoup the lion's share of yesterday's losses.  The $1.5380 remains technically important.  Sterling has flirted with this area in recent sessions but has not managed to close above it.   

The claimant count rose 4.6k.  The market was looking for a small decline.  It is the third increase in past four months.  The market focused on the declining in the ILO measure of unemployment which unexpectedly fell 5.4% from 5.5%.  It is the lowest level since mid-2008.   Weekly earnings growth excluding bonuses rose 2.8% in the 3-months through August.  It had been expected to firm to 3.0%. 

The market seemed to shrug off the 0.5% decline in the euro zone’s August industrial output. This matched the consensus expectation, by the year-over-year rate (workday adjusted) fell to 0.9%, half of what the consensus expected.  The July data was revised to show a 0.8% monthly rise (from 0.6%) though the year-over-year rate was revised to 1.7% from 1.9%.  The euro edged higher to almost $1.1430, its best level since September 18.  A break of $1.1460, the high from then, could spur a move toward $1.1500, around where barrier options are believed to have been struck. 

The North American session features US retail sales, PPI, and the Fed’s Beige Book.  Retail sales are the most important.   It picks up about 40% of US consumption with is still around 2/3 of US GDP.  The key here is measure excludes autos, gasoline, and building materials.  It is used directly for GDP calculations.   Consumer spending was the main reason why Q2 GDP was revised up.  Consumption in Q3 appears to be holding up.    With practically no one looking for an October move by the Fed, barring a significant surprise, it is unlikely to have more than a momentary impact. 

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