Dollar Extends Last Week's Pullback Amid Corrective Pressures

The US dollar is extending the pullback seen before the weekend. There does not appear to be a shift in fundamental considerations. The October jobs report confirmed the trend improvement in the US labor market continues, and will still most likely lead to a Fed rate hike in the middle of next year. Meanwhile, it is clear that the ECB will most likely take additional measures to ensure the expansion of its balance sheet. The BOJ is just beginning the acceleration of its balance sheet expansion.

Nevertheless, without key economic data until later in the week, technical considerations move into ascendancy, and there is scope for additional modest gains in the foreign currencies. That said, there is talk of large option strikes at $1.25 (~$2.2 bln) and $1.2550 (~$3.1 bln) that will likely restrain the euro. Sterling can edge higher, though the $1.5935-50 area detered stronger gains today. As for the yen, the JPY115.60 area approached in the second half of last week seems quite distant now. Initial dollar support is seen in the JPY113.50-75 band.

While all the major currencies are gaining against the dollar today, the Norwegian krone is clearly the strongest, gaining 1.1% against the greenback and about 0.8% against the euro. The trigger was the somewhat firmer than expected underlying inflation print (2.5% year-over-year in October vs. consensus for 2.3%), though the headline increase of 0.1% for a 2.0% year-over-year rate was in line with expectations. Note that underlying rate excludes energy and taxes.

There had been some speculation that the Norges Bank could cut interest rates, but this was never a strong view, and today's inflation print suggests that it is unlikely to materialize at the next meeting on December 11. The euro has fallen to test its 20-day moving average against the krone (~NOK8.423). Below here is a retracement objective near NOK8.38.

Against Madrid's objections, Catalonia held its referendum yesterday, and about 81% of the 2.3 mln voters endorsed independence. Even though the results are not valid in the legal sense, it will be hard for Rajoy to simply ignore it. It may be a catalyst to bring the pro-independent parties together for the next set of regional elections (May 2015). Spanish stocks are higher today. The 0.5% rise is better than most euro area bourses (Dow Jones STOXX 600 is up 0.3% near midday in London), after under-performing last week. The benchmark 10-Year bond yield is down 2 bp, about the same as Italy.

For its part, Italy reported disappointing industrial output figures. The 0.9% decline in September output contrasts with the 0.2% decline the Bloomberg consensus expected, and the August gain was shaved to 0.2% from 0.3%. The year-over-year rate collapses to -2.9% from -0.7%. This warns of downside risks for the Q3 GDP figure to be reported at the end of the week. It now looks likely to match, or even surpass the 0.2% contraction in Q2.

In addition, we recognize a larger push back against the scenario we had suggested for Draghi to become the next Italian president. The current president turns 90 (not 95 as we previously wrote) in the middle of next year and wants to retire beforehand. There had been some thought that Draghi could step down early from his ECB post, ostensibly as part of an arrangement to secure more aggressive easing by the ECB, and become the next Italian president.

However, a local paper reported that Draghi is trying to dissuade supporters from pushing this line. It was always a low probability scenario that was a useful exercise in contemplating under what conditions could the German objections to a more aggressive stance be overcome: have them oversee its implementation.

Meanwhile, the APEC meeting is getting underway and China is expected to showcase its regional leadership. The meeting between Xi and Abe is drawing interest. However, it was confirmation of the Hong Kong-Shanghai equity link (to start in a week) that excited the bulls in Asia, with a 0.8% rise in the Hang Seng and a 2.3% rise in the Shanghai Composite. The PBOC fixed the yuan higher, the most since 2010. The link allows CNY23.5 bln daily cross-border purchases.

The North American session will likely be subdued, with a partial US holiday tomorrow for Veterans Day (stock market open, bonds closed). Today's main release is the Fed's Labor Market Conditions Index, a multi-variable composite that offers a broader read on the US labor market than the monthly non-farm payrolls. Canada reports October housing starts.