Dollar Remains Under Pressure as New Week Begins

November 27, 2023
  • The dovish Fed narrative continues to drive global markets; yet we continue to see underlying strength in the economy; November Dallas Fed manufacturing survey and October new home sales will be reported
  • U.K. CBI reported a solid distributive trades survey for November; BOE continues to push back against the dovish narrative; Israel is expected to keep rates steady at 4.75%; Nigeria will switch to inflation targeting and changes are afoot in the FX market
  • RBA appointed a foreigner as Deputy Governor; the overhaul of the RBA will continue this week

The dollar remains under pressure as the new week begins. DXY is trading lower for the second straight day near 103.274 and is on track to test the August 30 low near 102.936. The euro is trading higher near $1.0945 and is on track to retest the key retracement objective near $1.0960. Break above would set up a test of the July 18 high near $1.1275. Sterling is trading higher near $1.2620 and is on track to test the August 30 high near $1.2745. USD/JPY is trading lower near 149 failing repeatedly to break above stiff resistance near 149.70. With the dollar rally stalled, it will take some firm real sector data to challenge the current dovish Fed narrative. We stress that the U.S. economy continues to grow above trend even as the rest of the world slips into recession, while price pressures remain persistent enough that the Fed will not be able to cut rates as soon and by as much as the markets think. That said, the dollar remains vulnerable until we see a shift in market expectations for the Fed and that may be a 2024 story.

AMERICAS

The dovish Fed narrative continues to drive global markets. Until we get some strong U.S. data to challenge this narrative, markets will be more than happy to continue running with this trend into year-end. Data this week are unlikely to provide much in the way of a challenge, as the PCE data are expected to show continued disinflation. Yields are likely to remain under pressure and that will continue to take a toll on the dollar.

Yet we continue to see underlying strength in the economy. The Atlanta Fed’s GDPNow model is tracking Q4 at 2.1% SAAR and the next update will come Thursday. Elsewhere, the New York Fed’s Nowcast model is tracking Q4 at 2.2% SAAR and the next update will come Friday. Despite the Fed’s tightening campaign, the economy continues to grow at or above trend at a time when below trend growth is needed to limit inflation. Given the ongoing looseness in financial conditions, it’s hard to see how we can get to sub-2% growth anytime soon.

Regional Fed surveys for November will continue rolling out. Dallas Fed manufacturing will be reported today and is expected at -16.0 vs. -19.2 in October. Richmond Fed manufacturing will be reported tomorrow and is expected at 1 vs. 3 in October. Richmond Fed and Dallas Fed services will both be reported tomorrow as well.

Housing data will remain in focus. October new home sales will be reported today and are expected at -4.7% m/m vs. 12.3% in September. September FHFA and S&P CoreLogic house prices will be reported tomorrow. October pending home sales will be reported Thursday and are expected at -1.0% m/m vs. 1.1% in September.

EUROPE/MIDDLE EAST/AFRICA

U.K. CBI reported a solid distributive trades survey for November. Total reported sales came in at -9 vs. -21 in October, while retailing sales came in at -11 vs. -36 in October. Total reading was the best since April, while retailing was the best since June. This continues a string of largely stronger than expected data. While this is good news for the economic outlook, it suggests that BOE rate cuts bets are overdone.

The Bank of England continues to push back against the dovish narrative. Governor Bailey said that while the recent drop in inflation was welcome, he stressed that “We do have to get it down to 2% and that’s why I have pushed back of late against assumptions that we’re talking about cutting interest rates or we will be cutting interest in anything like the foreseeable future because it’s too soon to have that discussion.” Bailey added that bringing inflation back to target is a “game of two halves” that are not equal and that “The second half, from there to two, is hard work and obviously we don’t want to see any more damage.” WIRP suggests less than 5% odds of a hike December 14, rising modestly to top out near 15% February 1. Looking ahead, a cut is about 45% priced in for June 20 and nearly priced in for August 1. Ramsden speaks later today.

Bank of Israel is expected to keep rates steady at 4.75%. At the last meeting October 23, the bank kept rates steady and said that the impact of the war was still unknown but stressed that the economy was “strong, stable, and based on solid foundations.” The bank added that "In view of the war, the monetary committee's policy is focusing on stabilizing the markets and reducing uncertainty.” The markets responded well to this message and the shekel bottomed on October 26. Since then, it has appreciated nearly 10% vs. the dollar.

The Central Bank of Nigeria will switch to inflation targeting. In his first speech since taking over in September, new Governor Olayemi Cardoso said “The Central Bank of Nigeria is committed to achieving monetary and price stability. We will tackle institutional deficiencies, restore corporate governance, strengthen regulations and implement prudent policies.” Cardoso said policymakers would embrace orthodox central banking practices and that “As part of this new focus, the CBN has just approved the adoption of an explicit inflation-targeting framework to enhance the effectiveness of monetary policy. The CBN will provide forward guidance, enhance transparency and maintain effective communication with the public to anchor expectations.”

Most importantly for foreign investors, changes are afoot in the FX market. Cardoso said the bank will develop new FX guidelines and procedures after holding extensive consultations with the FX market. He added that the central bank is in the process of clearing the existing backlog of dollar demand, noting “We have initiated the payment of unsettled forward foreign-exchange obligations, and these payments will continue until all obligations are cleared.” These are all long-overdue measures that are needed to restore confidence in Nigeria. Of course, implementation risk remains high. One good sign would be an immediate rate hike as the policy rate has been stuck at 18.75% since July even as inflation continues to rise.

ASIA

Reserve Bank of Australia appointed a foreigner as Deputy Governor. In a first for the bank, Bank of England Executive Director for Markets Andrew Hauser fills the post left vacant after Michelle Bullock moved up to become Governor. He will serve a five-year term but is expected to miss the December 5 meeting. Treasurer Jim Chalmers said “Mr. Hauser brings international expertise in macroeconomics, markets and central banking operations from his distinguished career spanning over 30 years at the Bank of England. His appointment strikes the right balance between providing deep central banking experience and offering a fresh, global perspective.”

Theoverhaul of the RBA will continue this week. Reports suggest the government will introduce legislation that addresses many of the recommendations made in the independent review. Treasurer Chalmers confirmed that the legislation would introduce a dual mandate of price stability and full employment as well as eliminate the power of the Treasurer to overrule RBA policy decisions. Other changes do not require legislation, such as the recent decision to move to eight meetings a year in 2024 from eleven currently.  

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