US dollar bulls had all the fun last week. The 17-member single currency came under a three-prong attack – two from the world’s primary reserve currency and the other one was a calculated self-inflicted wound. Stateside, non-farm payrolls and GDP for Q3 both exceeded expectations. Furthermore, Draghi and company at the ECB decided to cut its cash rate -0.25% to new historical lows. So far, the verbatim list has contributed to the rally of the ‘mighty buck’ against the hapless EUR and other G10 currencies.
However, today the silence is deafening in the currency market as we “remember” and this has allowed the EUR to creep higher. The price action is going against the majority expectations and positions. The partial US market holiday for Veterans Day seems to have temporarily sapped the market momentum, again putting pressure on investor’s weak shorts positions.
There is exactly very little on offer to wholly convince consistent active trading. Historically, the first full trading day after a non-farm report tends to end up being the month’s quietest trading session. Combined with the partial shutdown for US Memorial Day, today so far is shaping up to be no different. Investors should expect some of the currency moves to have both volume and volatility concerns. The latest EUR demise began on the final day of October when the flash CPI print came in well under the wire at +0.7% vs. +1.1%. The EUR bulls should not be holding out for any upward revisions. History indicates that the flash print is very much “bang-on.”
China’s inflation, IP growth both accelerated over the weekend. Inflation is now registered at an eight-month high (+3.2%, y/y) last month, and just below market consensus for +3.3%. One of the bigger contributions to headline numbers continues to be food inflation (+6.5%, y/y), which added +2.1% directly to the headline, while non-food inflation remained at +1.6% and service inflation increased to +3.1%. The PBoC has a tough job maintaining perception.
Will Chinese policy leaders avoid symbolically significant measures, such as interest rate or the reserve requirement ratio to curb their problems or will they continue to drain liquidity through open market operations? Tighter monetary policy has been highlighted by new loan data at CNY506.1b compared with a forecast of CNY600b. The PBoC is obviously worried about inflation in Q4. According to analysts “the slow growth of new loans has been matched by slower growth in the total social-financing aggregate.” This is a broad measure of liquidity throughout the Chinese economy. Obviously the APAC members feel anything that China may implement that impedes growth first.
Meanwhile, Chinese industrial production (IP) growth accelerated to +10.3%, y/y in October, beating the consensus of +10.0%. On seasonally adjusted basis, IP grew by +0.9% mom, higher than its prior of 0.7%. The Yuan was largely steady earlier this morning, as the PBoC guided the currency slightly stronger (6.1390). State banks continue to buy the USD, curbing a rapid Yuan rise. Investors will be expecting headlines from the Third Plenum over the coming weeks – possible financial and economic reform. The four-day meeting officially ends tomorrow. But. Will wide range reform follow that will suit foreign investors? Major reforms are difficult to implement even in an authoritarian system.
The highlight of the week will be Janet Yellen’s Senate hearing on Thursday. It should again be the “war of the word” where a percentage of the market expects her to restate her most recent message that “tapering does not mean tightening,” with potential references to forward guidance as a policy tool – by day’s end the market continues to search for clarity. The dollar continues to be in safe hands and especially after last weeks US data a December taper remains on the cards, further supporting the “mighty buck” against both the EM and G10 currencies.
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