At first, investors looked at the meltdown in stocks as a US dollar story but we felt the dollar would remain attractive because rising US rates is good for the greenback. As we anticipated, the dollar resumed its rise and this past week’s rally took the Canadian dollar to its lowest level in more than a month and the Swiss franc to its weakest since mid-August. Other currencies such as the euro and Australian dollar declined but failed to reach any milestones outside of sterling, which fell to a one week low. The strongest currency was the New Zealand dollar, which rose strongly at the start of the week and the weakest was the Canadian dollar. The recovery in the greenback was fueled by the stabilization in equities and hawkish Fed minutes. Looking ahead, stocks will remain in focus along with monetary policy announcements from the Eurozone and Canada.
US Dollar
Data Review
- Hawkish FOMC Minutes Reinforces Outlook for December Hike
- Empire Manufacturing 21.1 vs 20.0 Expected
- Retail Sales Advance 0.1% vs 0.6% Expected
- Retail Sale Ex Auto -0.1% vs 0.4% Expected
- Retail Sales Ex Auto and Gas 0.0% vs 0.3% Expected
- Industrial Production 0.3% vs 0.2% Expected
- Manufacturing Production 0.2% vs 0.2% Expected
- NAHB Housing Market Index 68 vs 67 Expected
- Housing Starts -5.3% vs -5.6% Expected
- Building Permits -0.6% vs 2.0% Expected
- Philadelphia Fed Business Outlook 22.2 vs 20 Expected
- Existing Home Sales -3.4% vs -0.9% Expected
Data Preview
- New Home Sales - Potential for downside surprise given drop in existing home sales and higher interest rates
- Fed Beige Book Release - Beige book likely to report ongoing economic strength
- Advance Goods Trade Balance, Durable goods Orders and Pending Home Sales - Durable goods and pending home sales are hard to predict and best traded reactively
- Q3 GDP - Potential for upside surprise given Trade activity and retail sales weakened in Q3
- University of Michigan Consumer Sentiment Report Revisions - Revisions are difficult to predict but changes will be market moving
Key Levels
- Support 111.00
- Resistance 114.00
Dollar Bounces but US Data Takes a Turn for the Worse
With no major US economic reports scheduled for release until Friday’s third-quarter GDP report, the biggest question on everyone’s minds is whether stocks will resume their slide. The US dollar may be driven by the Fed’s hawkish policy outlook but last week, economic data took a turn for the worse and if this trend continues, not only could the central bank start to rethink their guidance but investors could pare their expectations for tightening next year. Retail sales growth was significantly weaker than expected in the month of September. Economists were looking for spending to rise by 0.6% but instead, it grew by only 0.1% with retail sales ex-autos and gas stagnating. This was the weakest for core consumption since January. Although manufacturing activity in the NY and Philadelphia regions improved, it should surprise no one that rising interest rates is slowing housing market activity. The Fed may see the US economy as strong and feel that it is necessary to hike rates above their long-run level but the pace of tightening may need to slow if the trend of data weakness continues. We don’t expect much help from this week’s GDP report because retail sales and trade, the two most important components of GDP slowed in the third quarter.
GDP won’t be released until Friday so risk appetite, central bank meetings and data from other parts of the world will determine how currencies trade at the start of the week. The most important question right now is whether the sell-off in stocks is a temporary correction or permanent peak because the primary reason why the dollar recovered is because equities stopped falling. Unfortunately, the Dow failed to end the week above Wednesday’s peak, which is a sign of weakness but 25,000 is the main support level. If the Dow closes below this level, we should see a stronger correction down to 23K but if it holds, we could see a broader recovery. Fundamentally rising US interest rates aren’t good for stocks but so far we haven’t seen a dramatic shift in the investment climate but if US data worsens sentiment will change. USD/JPY remains in an uptrend as long as it holds above 111.50.
Euro
Data Review
- EZ Trade Balance 16.6b vs 14.7b Expected
- GE ZEW Survey Current Situation 70.1 vs 74.4 Expected
- GE ZEW Survey Expectations -24.7 vs -12 Expected
- EZ ZEW Survey (Economic Sentiment) -19.4 vs -7.2 Prior
- EZ CPI 0.5% vs 0.5% Expected
- GE Wholesale Price Index 0.4% vs 0.3% Prior
- EZ Current Account 24b vs 19,0b Prior
Data Preview
- ECB Rate Decision - No change expected but ECB could express hawkish outlook on inflation
- GE PPI - Potential for downside surprise given stronger wholesale prices
- GE and EZ PMI’s - Potential for downside surprise given weaker ZEW. Also, softer industrial production offset by stronger factory orders
- IFO Report - Will have to see how PMIs fare but. ZEW lower, industrial production down and factory orders up
Key Levels
- Support 1.1400
- Resistance 1.1700
EURUSD Could Hit 1.13 on Italy (Oct 22) and ECB
This is an important week for the euro. Not only will the latest PMI and German IFO reports be released but the European Central Bank also has a monetary policy announcement. EUR/USD is trading below 1.15 ahead of the rate decision and many investors are wondering if the central bank will send the euro to new lows. Taking a look at the table below we know that inflation which is one of the most important economic indicators for the central bank is on the rise and ECB officials are worried that prices will accelerate at a faster pace. However, this same table shows retail sales falling and business activity slowing. Investor confidence weakened significantly with the ZEW survey falling to its lowest level since 2016. The expectations component of the report also hit its weakest level in 6 years. So while inflation is on the rise, Italy, Brexit fallout and slower growth mean ECB President Draghi could downplay this increase by taking efforts to reinforce their accommodative stance at this week’s meeting. On Monday, the European Commission is expected to lodge their official concerns about Italy’s budget. If they decide that Italy’s draft budget is noncompliant, Italy will be given two weeks to respond after which they could reject the submission. If the EC deems the budget noncompliant, we expect a knee-jerk decline in EUR/USD but in the unlikely chance that they give Italy a pass and say they are not violating their budgetary policy obligations, the EUR/USD will soar. Unfortunately, we think the risk is to the downside with the currency pair potentially falling to its August low near 1.13 if the EC officially deems Italy non-compliant and the ECB confirms that rates aren’t rising until late 2019.
British Pound
Data Review
- Rightmove House Prices 1.0% vs 0.7% Prior
- Claimant Count Rate 2.6% vs 2.6% Prior
- Jobless Claims Rate 18.5k vs 14.2k Prior
- Avg. Weekly Earnings 2.7% vs 2.6% Expected
- Weekly Earnings Ex. Bonus 3.1% vs 2.9% Expected
- ILO Unemployment Rate 4.0% vs 4.0% Expected
- Employment Change -5k vs 11k Expected
- CPI 0.1% vs 0.3% Expected
- RPI 0.0% vs 0.1% Expected
- PPI 1.3% vs 0.8% Expected
- PPI Output 0.4% vs 0.2% Expected
- PPI Output Core 0.1% vs 0.2% Expected
- Retail Sales Ex Auto Fuel -0.8% vs -0.4% Expected
- Retail Sales Inc. Auto Fuel -0.8% vs -0.4% Expected
- Public Sector Net Borrowing Ex. Banking Group 4.123b vs 4.5b Expected
- Public Sector Net Borrowing 3.259b vs 4.6b Expected
Data Preview
- No Data
Key Levels
- Support 1.2900
- Resistance 1.3200
UK Could Delay Exit, EU Ready to Extend Transition Period
Sterling hit a 1-week low versus the US dollar this past week. Data was mixed with consumer price growth slowing significantly and retail sales falling by the largest amount since March. The claimant count increased but average weekly earnings grew at its fastest pace since February. Retail Sales missed badly coming in at -0.8% versus -0.4% as the World Cup died down. According to ONS, the monthly drop in food sales was the biggest since October 2015. The data showed positive revisions to August making Q3 retail sales +1.2% QoQ and +3.4% YoY. This was the strongest annual calendar quarter growth since Q4 2016, but the number still raises questions as to whether demand may have peaked. The deterioration in data especially on inflation gives the central bank breathing room to keep monetary policy easy as the UK figures out its next Brexit moves. Cable continued to hug the 1.3100 mark as the wrangling in Brussels persisted. PM May suggested that the transition period to Brexit could be extended by a few months in order to negotiate a deal, but so far parties appear far apart on key issues of Irish border and customs union. Unless we get positive noises from Brussels, the impasse on Brexit and softer eco means that GBP/USD will underperform. There are no major UK economic reports on the calendar this week but BoE Governor Carney and Chief Economist Haldane will be speaking – we do not expect anything new from either policymaker. Carney feels that limited and gradual hikes are needed to keep inflation in check and the market doesn’t expect the BoE to tighten before the UK leaves in the EU in March.
AUD, NZD, CAD
Data Review
Australia
- RBA Minutes Still Show a Holding Pattern for Rates
- CH PPI 3.6% vs 3.5% Expected
- AU Employment Change 5.6k vs15.0k Expected
- AU Unemployment Rate 5.0% vs 5.3% Expected
- Full-Time Employment Change 20.3k vs 35.2k Prior
- Part Time Employment Change -14.7k vs 9.5k Prior
- CH GDP 6.5% vs 6.6% Expected
- CH Retail Sales 9.2% vs 9.0% Expected
- CH Industrial Production 5.8% vs 6.0% Expected
New Zealand
- PSI 53.9 vs 53.2 Prior
- CPI (QoQ) 0.9% vs 0.7% Expected
- GDT Prices Drop 0.3%
Canada
- Existing Home Sales -0.4% vs 0.0% Expected
- Manufacturing Sales -0.4% vs -0.6% Expected
- Retail Sales -0.1% vs 0.3% Expected
- Retail Sales Ex-Autos -0.4% vs 0.1% Expected
- CPI -0.4% vs 0.1% Expected
Data Preview
Australia
- No Data
New Zealand
- Trade Balance - Potential for downside surprise given weaker manufacturing PMI index
Canada
- BoC Rate Decision - Potential for dovish guidance after 25bp rate hike
Key Levels
- Support AUD .7000 NZD .6500 CAD 1.3000
- Resistance AUD .7200 NZD .6650 CAD 1.3200
25bp Hike Expected from Bank of Canada
For the third time this year, the Bank of Canada is expected to raise interest rates but instead of rising, the Canadian dollar is performing terribly ahead of the monetary policy announcement. The market is pricing in a 92% chance of a quarter-point rate hike but investors are worried that the central bank’s guidance will be dovish. Friday’s economic reports were significantly weaker than expected with retail sales and inflation falling. Retail sales fell -0.1% while CPI dropped -0.4%, the largest decline this year. The BoC is expected to press forward however with tightening because the unexpected decline in prices was largely driven by a reversal of price hikes in the travel industry. With that in mind, one of the biggest problems for Canada is oil. The price of crude is down 10% from its peak this month but the price of Western Canada Select is down more than 30%. Unlike crude, which is still hovering near 3-year highs, WCS is trading near 2-year lows. This massive differential is caused by shutdowns in US refinery, the lack of pipeline capacity and growing production from oil sands. These factors almost assure that the BoC will opt for a dovish hike with a small chance of no change in rates on Wednesday.
Thanks to stronger service sector activity and consumer price growth, the New Zealand dollar was last week’s best-performing currency. CPI grew at its fastest pace since the first quarter of 2017 and year over year price growth accelerated to 1.9% from 1.5%. So while dairy prices continue to fall, the Reserve Bank’s concerns and in turn their dovishness will be eased by the increase in CPI. The service sector is doing better than the manufacturing sector but economists are looking for the trade balance to improve after hitting a record low in August. Technically, as long as NZD/USD is trading below 66 cents it remains in a downtrend but if it exceeds that level, a stronger recovery could be in the cards. Considering that there are not many New Zealand economic reports on the calendar this week, the outlook for NZD could hinge on the market’s appetite for risk and US dollars.
AUD/USD Still in a Downtrend Below 72 Cents
Both the Australian and New Zealand dollars benefitted from the US government’s decision to pass on branding China as a currency manipulator. Like NZD, the downtrend in the Australian dollar remains intact until AUD/USD rises above 72 cents. Data from Australia was mixed. Only 5600 jobs were created in September (against expectations for 15K jobs) and the participation rate declined but full-time job growth was strong. Full-time jobs rose by 21K while the unemployment rate dipped to 5.0%. Over the past year, trend employment increased by over 290,000 persons or 2.4 percent, which was above the average year-on-year growth over the past 20 years (2.0 percent). The labor data suggests that growth Down Under remains surprisingly resilient despite risk off and trade war woes. However Australian businesses are getting worried because business confidence fell to its lowest level in two years. These concerns are justified with the Chinese economy growing at its slowest pace since 2009 according to the latest GDP report. There are no major Australian economic reports scheduled for release this week but the RBA’s Deputy and Assistant Governors will be speaking. They are likely to echo the RBA minutes, which said there’s no strong case for near-term policy adjustment. While the weaker Australian dollar is helping the currency, they are worried about consumption uncertainty.