Dollar Starts Softer

Overview: The dollar is beginning the week on a soft note, despite the modest backing up of yields over the last couple of sessions and better than expected data, including Black Friday sales and the preliminary November PMI. It is sporting minor losses against all the G10 currencies, but the Canadian dollar, which is the weakest of the major currencies this quarter and month. The greenback is also lower against most emerging market currencies, but the Turkish lira and Chinese yuan. Gold is extending its two-week rally and reached $2018, its best level since mid-May. Ahead of the delayed OPEC+ meeting, January WTI is heavy near $74 a barrel. Last week's low was near $73.80 and this month's low was around $72.40. 

Global equities are weaker. Shadow banking woes weighed on Chinese shares, but Taiwan led the region's losses following the opposition's failure to agree on a single candidate for next month's election. This raises the risk of more intimidation action by China. Europe's Stoxx 600 is threatening to end a three-day rally. It had reached two-month highs ahead of the weekend. US index futures are trading with a slightly heavier bias. The 10-year US Treasury yield is steady after edging up three basis points last week. European benchmark yields are mostly 3-5 bp lower, unwinding most of last week's increase. 

Asia Pacific

Beijing is stepping up its efforts to stabilize the property market and ease pressure on Chinese banks. Under consideration are several measures that include a CNY1 trillion (% of GDP, or ~$140 bln) support for public housing and urban renewal and allowing banks to offer unsecured short-term loans to qualified developers for the first time. These are ostensibly working capital loans. Policy makers are said to be finalizing a list of 50 property developers that will be eligible for new support. Reports suggest Beijing is also discussing a mechanism that would allow a single lender to take the lead to support a specific distressed developer by coordinating with other lenders. One industry estimate is that it would take CNY3.2 trillion (~$445 bln) to complete that remaining housing units. Earlier efforts, such as easing mortgage rules for homebuyers, reductions in down-payments, income tax rebates, and a CNY200 bln special loan package to help finish building projects failed to turn around activity and sentiment. 

The Japanese economy contracted by 0.5% quarter-over-quarter in Q3, well below expectations for a 0.1% decline in output. The government followed that up with its first downgrade of its economic outlook in ten months. It seemed to blame weak demand in the world economy, notably China, but Q3 GDP weakness was not just due to weaker net exports but also a decline in consumption and business investment. Meanwhile, Japan's headline inflation accelerated in October, as hinted by the Tokyo CPI figures, and at 3.3% is above US CPI (though, of course, measured differently).

The dollar recorded a three-day low against the yen (~JPY148.80) in late Asia Pacific turnover, but quickly snapped back to around JPY149.35 early in Europe. Yet it is struggling to maintain that upside momentu, It had been in a narrow range of about JPY149.00-JPY149.70 in recent days. The consensus is highly convinced that the BOJ raises rates next year and this may see some market segments sell into dollar rallies. The Australian dollar extended its two-week rally, nearly 3.5% rally today, edging up to $0.6600. It is the best level since August 10. It met the (50%) retracement of the decline since the mid-July high (~$0.6900) and it is fraying the 200-day moving average (~$6585) but has not closed above it is since late July. The next retracement (61.8%) is near $0.6660. Still, we note that the intraday momentum indicators are stretched and some backing and filling in North America today would not be surprising. Meanwhile, the greenback appears to be forging a base against the Chinese yuan. A four-month low was recorded last week near CNY7.1265. On November 22, the dollar traded in a roughly CNY7.1365-CNY7.1650 and has been in that range since. The PBOC set the dollar's reference rate at CNY7.1159 (CNY7.1151 on Friday) and the average in Bloomberg's survey was CNY7.1465.

Europe

The rating agencies are busy at the end of the week. Fitch will update its assessment of Greece (possible upgrade, which would match S&P's decision last month), Ireland (may also be upgraded from AA- with a positive outlook), and the UK (looks most likely to be unchanged at AA-). S&P reviews Poland (likely unchanged at A-), France (likely unchanged at AA), and Lithuania (its A+ rating may be at risk though the outlook was stable). Moody's assesses Finland and will likely maintain the A+ rating, which is shared by the other major rating agencies. Germany and Spain are reviewed by DBRS (likely unchanged at AAA and A, respectively, though given the fiscal developments in Germany discussed below, and the shroud of uncertainty now could spur some more cautionary language.

There seemed to be little market reaction to news of that the far-right in the Netherlands secured more seats (35) than any other party. There may be several reasons for this. The most benign explanation is that given the fragmented nature of Dutch politics (no threshold for representation in parliament), a coalition is inevitable and Wilder and his Freedom Party, are not going to find sufficient coalition partners to form a new government. Also, immigration is a polarizing issue. The Green Left Labor fusion ticked did second best and saw its combined number of seats rise to 26 from 17 previously. In addition, the political winds seem to bolster the support for the right in much of Europe. The AfD in Germany and Le Pen in France are polling well, and Italy's Meloni and the Brothers of Italy (pro-NATO and pro-EU) have been less disruptive than many anticipated.

The move back above 50 in the UK's service and composite flash November PMI reported last week was a surprise and seemed to support the BOE's push back against the aggressive easing the swaps market had discounted. The market had been pricing in nearly 100% confidence of a cut by the end of Q2. Now it is slightly less than 40%. The UK's two-year yield bottomed near 4.44% on November 17 and is now near 4.70%. 

The euro met the (61.8%) retracement of its sell-off from the high for the year set in mid-July last week near $1.0960. Profit-taking knocked it to about $1.0850 but it climbed back to $1.0945 at the end of last week. It remains firm today, though holding slightly below $1.0960. There are options for around 935 mln euros that expire today at $1.0950. Initial support is now seen in the $1.0920-30 area. Sterling pushed above $1.2600 ahead of the weekend for the first time since early September and pushed slightly through $1.2625 today. Options for almost GBP320 mln at $1.2600 expire today. The intraday momentum indicators suggest the session high may not be in place yet. Sterling has moved higher in five of the past six sessions and met the (50%) retracement of its sell-off from the high for the year set in mid-July around $1.2590. The (61.8%) retracement is near $1.2720.

America

US interest rates rose last week but the dollar did not find much traction. The 10-year yield rose nearly a dozen basis points in the past two sessions and the two-year yield rose ten basis points. The implied yield of the December 2024 Fed funds futures contract implies slightly less than 75 bp of easing next year, down from pricing in a 30% chance of 100 bp November 17. Meanwhile, the greenback fell against all the G10 currencies, and the JP Morgan Emerging Market Currency Index rose for the second consecutive week and the sixth week in the past seven. In this cycle, the dollar does not appear to have deviated from the interest rate signal. This would suggest scope for the dollar to recover, and as we have noted, the momentum indicators are getting stretched and key technical objectives have been met. On the other hand, if the dollar does continue to sell-off, it would lend credence to ideas that a larger dollar top has been forged after the mid-July-early October rally. Meanwhile, early indicators suggest strong Thanksgiving and Black Friday sales in US. Today, "Cyber Monday" finishes the five-day period that may account for a little less than a fifth of holiday shopping. The US reports October new home sales and a decline of nearly 5% is expected after a 12.3% surge in September.

This week's Canadian highlight is Friday's November jobs report. The stronger than expected September retail sales data helped send the Canadian dollar to new highs for the month before the weekend. The greenback recorded a low slightly below CAD1.3600 but has recovered to about CAD1.3660 today. Resistance is now seen in the CAD1.3680-CAD1.3700 area. The Canadian dollar continues to be a laggard. It is the only G10 currency that is softer against the dollar today. Mexico revised up Q3 GDP to 1.1% from 0.9% before the weekend, but the peso remained confined to the range from November 21 (~MXN17.0660-MXN17.2690). It is testing the lower end of the range in Europe. Mexico reports October trade figures today. We continue to anticipate at test on the MXN17.00 area, which it has not traded below since early September. Although Mexico runs a trade deficit there are three elements of the context that the market appears to take into account. First, it is a small deficit. Second, exports remain strong despite the appreciation of the peso. Third, the trade deficit is more than covered by worker remittances (due Friday) and offering Mexico a layer of isolation from the whims of global capital markets. 

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