Dollar Still Under Pressure as New Week Begins

November 06, 2023

Win Thin

There are no major U.S. data releases this week; the Fed is happily allowing the markets to embrace its dovish stance; we believe the U.S. economy remains fairly robust
Final October eurozone services and composite PMIs were unchanged from the preliminary; Germany reported solid September factory orders
BOJ released minutes of its September 21-22 meeting; Governor Ueda sounded dovish

The dollar is trading lower as markets continue to embrace the dovish Fed narrative. DXY is trading lower for the third straight day near 105 and is nearing a test of the September 20 low near 104.665. Break below 104.621 sets up a test of the August 30 low near 102.936. The euro is trading higher near $1.0750 and clean break of $1.0755 sets up a test of the August 30 high near $1.0945. Sterling is trading higher near $1.2415 and clean break of $1.2475 is needed to set up a test of the August 30 high near $1.2745. USD/JPY is trading heavy near 149.60 despite dovish comments from BOJ Governor Ueda (see below). While the dollar is likely to remain under pressure near-term, we believe markets are getting carried away with the dovish Fed narrative. 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. Eventually, the Fed (and the market) will have to acknowledge this.

AMERICAS

There are no major U.S. data releases this week. As a result, markets will surely run with the soft landing theme and push UST yields and USD lower for the time being. Markets are already moving Fed easing expectations forward but we don't think it's going to be smooth sailing, not when inflation remains elevated. October CPI data out next week may be problematic for the dovish Fed narrative. The Cleveland Fed's Nowcast model suggests headline will ease to 3.3% y/y vs. 3.7% in September but core will pick up a tick to 4.2% y/y and remain there in November.

The Fed is happily allowing the markets to embrace its dovish stance. WIRP suggests only 10% odds of a hike December 13, rising modestly to top out near 15% January 31. More importantly, the first cut is about 50% priced in for May 1 and fully priced in for June 12. We continue to believe that this dovish rate path is very unlikely given how persistent price pressures have been. Despite the risks, we expect Fed officials to continue pushing its dovish narrative. Cook speaks today.

We believe the U.S. economy remains fairly robust. The New York Fed’s Nowcast model was just updated to 2.41% SAAR for Q4 vs. 2.79% previously. This is still above the Atlanta Fed's GDPNow estimate of 1.2% SAAR, which will be updated tomorrow.

EUROPE/MIDDLE EAST/AFRICA

Final October eurozone services and composite PMIs were unchanged from the preliminary. Headline services remained at 47.8 and composite remained at 46.5. Looking at the country breakdown, Germany’s composite rose a tick to 45.9 while France’s fell to 44.6 vs. 45.3 preliminary. Italy and Spain reported for the first time and their composite PMIs came in at 47.0 and 50.0, respectively.

Germany reported solid September factory orders. Orders came in at 0.2% m/m vs. -1.5% expected and a revised 1.9% (was 3.9%) in August. The y/y rate came in at -4.3% vs. -3.0% expected and a revised -6.3% (was -4.2%) in August. IP will be reported tomorrow and is expected at -0.2% m/m, the same as August.

ECB tightening expectations remain subdued. WIRP sees no odds of a hike December 14. After that, only cuts are priced and the first one is around 80% priced in for April 11. Guindos, Holzmann and Nagel speak today.

ASIA

Bank of Japan released minutes of its September 21-22 meeting. There was no change to policy then, as most members thought that meeting the 2% inflation target in a sustainable manner was not yet in sight and so the BOJ needs to continue patiently with monetary easing. One member said the target was clearly in sight. Most members thought long-term interest rates had been relatively stable and saw no need for an additional tweaks to YCC. Of note, Bank of Japan releases the summary of its opinions from its October 30-31 meeting Thursday.

Governor Ueda sounded dovish. In a press conference, he said “The likelihood of realizing the outlook for achieving the price stability target of 2% seems to be gradually rising” but added that “sustainable and stable achievement of the price stability target is not yet envisaged with sufficient certainty at this point.” Ueda added that there are still uncertainties regarding the outlook for attaining a virtuous inflation-wage cycle and that the bank will continue with monetary easing patiently. He doesn’t expect the 10-year JGB yield to move well beyond 1% and that financial conditions remain sufficiently accommodative even after the YCC tweaks. Ueda’s dovish remarks pushed out BOJ liftoff expectations out to April 26 vs. March 19 previously.

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