09/29/2014 THE BIG PICTURE Dollar rally continues Last week I pointed out that the DXY index had risen for 10 weeks in a row, the first time that had happened since exchange rates were floated in 1971. Make that 11 weeks now. The DXY index was up 1.35% last week, the third highest rise in the 11-week streak, meaning it’s not showing any signs of slowing. USD rose against every currency we track, both G10 and EM. The worst performing currency by far was the NZD, much to my surprise, which collapsed after RBNZ Governor Graeme Wheeler said in an unscheduled statement on Thursday that the level of the currency is unjustified and unsustainable. The comments could be received as a sign that the Bank is likely to intervene to push NZD further down if necessary. The other commodity currencies, AUD and CAD, were also weak but nowhere near the NZD. Weak Chinese data is likely to keep these currencies under pressure, in my view. China’s Q3 GDP is forecast to have fallen far below the government’s 7.5% target, and with weakness in the property market expected to continue, Q4 might not be much better. The government so far is only implementing small, targeted economic support measures, which may help certain sectors but are not intended to lift the entire economy. Against that background, it will be hard for the commodity currencies to rally. Some commodity-dependent EM currencies could also struggle. Oddly enough, everyone’s favorite short, JPY, was the strongest of the G10 currencies last week despite a further slowdown in Japan’s inflation rate, which raises the likelihood of another round of Bank of Japan action. Perhaps that reflects the fact that the dollar is up 4.9% vs JPY anyway since the beginning of September, the most of any G10 currency except the beleaguered NZD and AUD. Within EM, some of the favorite carry currencies, such as BRL, MXN, ZAR and RUB were down about 2% vs USD over the week. But with EUR down 1.5%, it’s hard to say that this represents any more than general USD strength. I see no reason to think that the dollar’s rally will come to an end any time soon. True, there may be ups and downs along the way, but the main driving force – the divergence of monetary policy – is likely to remain in place for the next six months to a year at least. Plus, the historical pattern is for the dollar to rise in the months preceding a rate hike. Thus I expect USD strength to remain the main trend in the market. The key then is to find what currency to short against it, and also attractive cross-currency trades to put on. Today’s indicators: The preliminary German CPI for September is forecast to have remained unchanged at 0.8% yoy from August. As usual the drama will start several hours earlier when the CPI for Saxony is released ahead of the country’s headline CPI. Eurozone’s final consumer confidence for September is also coming out. In the UK, mortgage approvals for August are due out. From Sweden, retail sales for August are expected to rebound on a mom basis. However, given the recent below expectations data the possibility of a lower reading is high which could weaken SEK somewhat. In the US, we get the personal income and personal spending for August, which are expected to have accelerated a bit. The nation’s yoy rate of the PCE deflator and core PCE are forecast to have slowed, in contrast with the unchanged 3rd estimate of Q2 core PCE in Friday’s GDP figures. Pending home sales for August are expected to drop, a turnaround from July and in contrast to the yoy rate which is projected to rebound. The mixed data are in line with the recent varied housing sector figures and don’t seem to shed some light on the latest housing activity. The Dallas Fed manufacturing index is also released. Chicago Fed President Charles Evans speaks. graphRest of the week: The highlight will be the European Central Bank policy meeting on Thursday. The Bank, at its September meeting, cut all three of its main interest rates and introduced bond buying programs to spur growth and stave off the risk of deflation. The details of these programs will be announced after the Governing Council meeting. Some investors may look for further measures because of the weak data since the last ECB meeting, plus the poor take-up of the first round of targeted long-term lending operations. I doubt if the ECB would take any further steps however and EUR could rally temporarily after the meeting if there are no additional measures announced. On Friday, the major event will be the US non-farm payrolls for September. The market consensus is for a rise of 210k, up from the unexpectedly low 142k in August. The unemployment rate is forecast to remain unchanged at 6.1%, while average hourly earnings are expected to accelerate slightly on a yoy basis. While NFP is one of the most closely watched indicators, it has had surprisingly little long-term impact on the course of the dollar. Whether it beats or misses expectations doesn’t seem to matter a day or two later. Finally, the Bank of Japan Wednesday releases its Tankan business confidence survey for Q3. All the major indices are expected to decline, continuing the across-the-board declines seen in Q2. The steady worsening in sentiment following the hike in the consumption tax may put more pressure on the Bank of Japan to ease policy again.
Posted on: Mon, 29 Sep 2014 09:16:51 +0000
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