Dollar Firm as Key Week Gets Under Way

November 01, 2021
  • A pivotal week for the U.S. begins; ISM manufacturing PMI reading for October will be reported; possible House floor votes on both of President Biden’s fiscal packages planned for tomorrow may be delayed
  • Germany reported weak retail sales; Brexit tensions remain high
  • The ruling LDP’s election victory signals steady as she goes; RBA still has not intervened to maintain the 0.10% yield on the targeted April 2024 bond; emerging Asia reported solid October data overnight

The dollar continues to firm as an important week for the U.S. begins. DXY traded at a new high for this move today just above 94.30, moving above the 93.50-94.00 trading range that has largely held since mid-October. The euro is trading heavy near $1.1570 as the post-ECB euphoria wears off, while sterling is trading at the weakest level since October 13 near $1.3640 ahead of the BOE meeting Thursday. USD/JPY is modestly higher near 114.55 as weekend elections signal steady policy ahead (see below). We expect U.S. yields and the dollar to continue rising. This week’s FOMC meeting and jobs report could prove to be the catalyst as both are expected to be dollar-supportive.

AMERICAS

A pivotal week for the U.S. begins. Not only does the FOMC meet, but we also get key U.S. data for October. The ultimate fate of the two fiscal packages may also be determined. At this juncture, we believe all of these events are likely to generate dollar-positive outcomes. Bottom line: the U.S. economy remains strong, wage and price pressures remain high, and the Fed is ready to begin removing accommodation.

ISM manufacturing PMI reading for October will be reported. It is expected at 60.5 vs. 61.1 in September. Keep an eye on the employment component, which was 50.2 in September. Services PMI will be reported Wednesday and is expected at 62.0 vs. 61.9 in September. Here, the employment component stood at 53.0 in September. These are important clues for Friday’s jobs report, where consensus sees a solid 450k jobs added vs. 194k. Of note, the Fed regional manufacturing surveys were mostly stronger in October, while the Chicago PMI came in at a whopping 68.4 last week, the highest since July. September construction (0.4% m/m expected) will also be reported, while Canada reports October Markit manufacturing PMI.

Reports suggest that possible House floor votes on both of President Biden’s fiscal packages planned for tomorrow may be delayed. Ahead of that vote, a meeting of the House Rules Committee was supposed to take place today but that has been postponed as weekend wrangling has carried over into this week. Until that committee vote has been completed, the floor vote won’t be held. The bipartisan $550 bln infrastructure bill has already been passed by the Senate but was blocked again last week by House progressives until a final deal has been hammered out for the more contentious “human infrastructure” bill that is currently seen at $1.75 trln. Of note, Senator Sanders called on his Senate colleagues to first craft a compromise before the House floor votes, putting pressure on Manchin and Sinema to fall in line so as to avoid an embarrassing fail.

EUROPE/MIDDLE EAST/AFRICA

Germany reported weak retail sales. September sales were expected to rise 0.4% m/m but instead plunged -2.5% vs. a 1.2% gain in August. German data in particular have been softening and sales data suggest that the economy lost further momentum as it went into Q4. Can the ECB really contemplate removing stimulus when the eurozone’s largest economy is staggering? If anything, soft data will give Lagarde and the doves more leverage to maintain QE after PEPP ends in March. The account of last week’s ECB meeting will be of great interest as markets try to figure out what the bank will do at the next meeting December 16. For now, the euro has given back all of its post-ECB gains, which suggests that markets (like us) are doubting the bank’s hawkish stance.

Brexit tensions remain high. U.K. Brexit Minister Frost wrote that the EU had behaved “without regard to the huge political, economic, and identity sensitivities involved” in the region by enforcing the Northern Ireland Protocol too strictly. Frost added that this in turn has begun to damage the 1998 Good Friday Agreement that largely brought peace to the region. The problem with this argument is that the U.K. chose to leave the EU knowing full well that it would be impossible to square the circle with regards to Northern Ireland with the UK leaving, some sort of hard border with Ireland became inevitable. Then, the U.K. agreed to the Northern Ireland Protocol in order to seal the deal and it is now facing the terrible consequences of its decision. This is purely an “own goal” and cannot be blamed on the EU. Elsewhere, final UK October manufacturing PMI reading rose a tick from the preliminary to 57.8.

ASIA

The ruling LDP’s election victory signals steady as she goes. With his party maintaining its absolute majority in parliament, Prime Minister Kishida has won a mandate to govern. However, the LDP did lose seats overall and so he will remain under pressure to deliver results quickly with regards to the pandemic and the economy. The gambit not to push through a fiscal package ahead of the vote appears to have paid off, but that is now number one on the agenda as Kishida should work to deepen his support. With election out of the way and the results seen as market-favorable, Japan asset markets are likely to return to recent trends: higher equities, a weaker yen, and somewhat higher JGB yields.

The RBA still has not intervened to maintain the 0.10% yield on the targeted April 2024 bond. The yield is currently around 0.71%, down a bit from last week’s peak near 0.80% but still well above the 0.10% target. Due to the lack of any action by the RBA, markets expect the bank to abandon Yield Curve Control tomorrow and tacitly acknowledge that liftoff is likely to come before the current guidance for 2024. If this were to happen, AUD would likely strengthen and so the economy would face a double whammy of higher interest rates and a stronger currency. That said, AUD has stalled out just above the .75 area and suggests that the currency markets are looking beyond the RBA decision. Of note, the swaps market is pricing in around 75 bp of tightening over the next twelve months.

Emerging Asia reported solid October data overnight. Korea reported trade data. Exports rose 24.0% y/y vs. 28.5% expected and 16.7% in September, while imports rose 37.8% y/y vs. 43.0% expected and 31.0% in September. Elsewhere, Caixin reported October manufacturing PMI for China. It was expected to remain steady at 50.0 but instead rose to 50.6. This was welcome news since earlier this weekend, official PMI readings came in weaker than expected as manufacturing fell to 49.2 vs. 49.7 expected and 49.6 in September, while non-manufacturing fell to 52.4 vs. 53.0 expected and 53.2 in September. This dragged the composite PMI down to 50.8 from 51.7 in September.

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