Heavy US Dollar Tone Continues

The US dollar continues to trade heavily, with the euro and sterling edging to new multi-week highs and the yen consolidating its recent losses. The main consideration appears to be the looming fiscal cliff, weaker data and the prospects for additional QE to be announced next week by the Federal Reserve.

At the same time, tail risks emanating from the euro area have diminished, even if the i's aren't dotted and the t's not crossed on Greece's new program, or if the negotiations over bank supervision in Europe at today's EU finance minister meeting are more protracted.

The Reserve Bank of Australia was the first of five central banks that meet this week. It delivered the 25 bp rate cut that was widely expected. "Sell the rumor, buy the fact" activity was bolstered by the accompanying RBA statement that was read to be less dovish than expected. There was no explicit indication that there will be additional rate cut.

We note that initial reports showed that the early responding local banks passed through 20-25 bp to lending rates. The Australian dollar firmed through the Asian session and the European morning to the upper end of its recent range near $1.0475. It has not traded above $1.05 for more than two months (Sept 21). We recognize that the Australia still has among the highest real and nominal rates among the high income countries and anticipate additional rate cuts next year.

The Bank of Canada meets today. The issue is not a rate cut, but the guidance officials give. Below target inflation, soft economic data, and what appears to be a significant slowdown in the US here in Q4, the BOC statement may soften the still evident hawkish bias. For the better part of two weeks, the US dollar has been trading in a CAD0.9900-CAD1.000 range. The failure of the central bank dial back its hawkishness may see the greenback slipped to the lower end of that range.

A break of the CAD0.9900 area will be important from a technical perspective and should be respected. Looking forward, Canada reports its Nov jobs data at the end of the week, at the same time as the US. The Bloomberg consensus calls for a 10k increase, which would be lackluster, after a 1.8k increase in October.

The Swiss franc has under-performed since yesterday when Credit Suisse announced plans to charge fees on interbank deposits starting next week. Reports today suggest it may be as high as 1%. Although there was some confusion yesterday, other Swiss banks have not followed suit. UBS reportedly will continue to charge fees on interbank accounts with high franc balances.

Even though the Swiss National Bank does not have a negative deposit rate, administrative costs and regulatory pressures to reduce bank balance sheets, has made large franc deposits less desirable. Recall that 1-2 non-Swiss banks have been charging to hold franc deposits. The euro has gained about 0.8% against the franc since CS made its announcement to trade at its best level (above CHF1.21) since mid-September.

Quantitatively this is a large move and puts the euro more than 4 standard deviations above its 20-day moving average against the franc. The last time such a dramatic move took place, Sept 7, the euro pulled back over the next several sessions.

In the face of the poor news stream coming from the US, we note that auto sales remain an important bright spot. Yesterday's figures showed a 15% increase in auto sales in November for a 15.54 mln unit annualized pace, the strongest in five years. Part of this may be some purchases put off from late Oct into November due to the storm. Part of it may be some replacement to cars lost in the storm. The stronger US auto sales may also reflect the multi-year high in consumer confidence, easy credit terms, and the fact that average age of a car on the street is reportedly near eleven years.

The robust US auto sector stands in stark contrast to Europe. France reported its figures yesterday. Auto registrations (sales) fell 19.2% in November to slip below the 2 mln unit pace. Auto registrations have not risen even one month this year. The auto producer association now sees a 13-15% decline this year. Previously it forecast a 12% contraction.

Adding insult to injury, German auto producers, especially the premium brands, saw sales increase despite overall decline. Hyundai also reported a sharp increase in sales. While saying something about the French auto sector, the sales figures also say something (not very pleasant) about the competitiveness of French producers and economy more generally.