Trade-weighted dollar at multi-month top

On Friday morning, the dollar profited from higher interest rates (versus euro) and strong equities (versus yen). The US PPI beat expectations and the retail sales were strong, but apparently not strong enough, as the control group disappointed. The USD rally even slowed temporary after the data. A speech of Fed’s Yellen caused some intraday USD volatility as she suggested inflation could temporary overshoot the target. However, the dollar finally resumed its intraday uptrend and closed the session near the intraday highs against the euro. EUR/USD finished the session at 1.0972 (from 1.1056). USD/JPY closed the session at 104.18 (from 103.71 on Thursday evening).

Overnight, there is no obvious driver from trading on global markets. Asian markets mostly trade with marginal gains. Japan outperforms slightly, probably as USD/JPY holds north of 104. The dollar remains well bid across the board. The trade-weighted dollar (DXY) trades near 98, reaching the highest level since early March. EUR/USD came within reach of the 1.0952 support this morning, but a real test didn’t occur. The pair trades currently again in the 1.0985 area.

Today in Europe only the final EMU HICP inflation for September will be released. It probably won’t move the markets. In the US, the NY manufacturing index is expected to show a marginal improvement from -1.99 in September and -4.2 in August. We side with the consensus for an improvement, but being only marginally above zero it still suggests sluggish activity. The September US production is expected to show a modest 0.2% M/M rebound following a 0.4% M/M decline in August, while manufacturing production should be up 0.1% M/M following a 0.4% M/M drop. Aggregate hours worked in the manufacturing fell 0.4% M/M in September, which suggests a decline of manufacturing output.
An increase in mining output (number of operating rigs climbed) and a rise of utility output (warm September) will be offsetting this. Nevertheless, all in all we see downside risks to the consensus.

Last week, the dollar had a good run. The move was mostly driven by a general market feeling that the Fed will likely raise rates in December. However, there was no obvious one-to-one link with the US data or with interest rate differentials, especially not with spreads at the short end of the curve. Fed speakers will probably reaffirm the likelihood of a December hike before the black-out period ahead of the November FOMC meeting starts. However, this should already be discounted in the dollar. Global factors as the Chinese Q3 GDP or the ECB policy meeting are a wild card for USD trading later this week.
However, we don’t expect Draghi and Co to give already clear hints on the post March-2017 period. We don’t row against the USD positive momentum yet.
That said, the dollar nears significant resistance against the euro (1.0952/13) and the yen (104.35/104.64). The jury is still out, but if those levels won’t be broken soon, the dollar rally might take a breather.

From a technical point of view, we keep a close eye how the test of the 1.0952/13 support turns out. A break below that level would be a USD positive and open the way for the next intermediate support at 1.0822/1.0711. A similar pattern is developing for USD/JPY. A sustained break north of 104.32 would paint a double top formation on the charts with targets in the 108/109 area. However, we stay cautious on sustained USD/JPY gains beyond the 104.32/65 resistance especially as global volatility/uncertainty might intensify.

Does the BoE really care about sterling?

On Friday, the Sterling benign neglect since the Brexit referendum by the BoE and the UK government got a first crack. BoE governor Carney said the bank was not indifferent to the level of the pound, now down almost 20 percent since Britain voted to leave the EU in June. The Fx rate matters for monetary policy. It is an indication of the boundaries to the maximal inflation the BoE may tolerate. Of course, it may be that Carney only wanted the sterling decline to go more gradual and feared that without minimal official support at some point a run on the pound may occur. His support for sterling didn’t look wholehearted and the markets reacted accordingly. The sterling gains against the euro were modest. EUR/GBP closed the session at 0.9004 (from 0.9022). Cable even close the session in negative territory (1.2191 from 1.2254) as USD strength prevailed.

This morning, the Rightmove House Prices were reasonably strong at 0.9% M/M and 4.2 Y/Y. BoE Broadbent said that the recent decline of sterling will help the UK economy to overcome shocks from Brexit. He also admited that inflation could move somewhat above target in the next few years. These comments only confirm that the BoE might give priority to growth, rather than to inflation or sterling, when setting policy in the post-Brexit era. The comments won’t help sterling. The sterling decline slowed last week . However, we don’t expect a real, sustained change for the better. It is much too early to call a bottom for sterling. We continue to avoid sterling long exposure as long as the debate on a hard Brexit persists. Especially the downside in cable looks vulnerable. A retest of the 1.20 barrier might be on the cards.

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