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#Post#: 242--------------------------------------------------
Dollar Rolls On
By: Marc Chandler Date: December 3, 2014, 10:35 pm
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The US dollar is extending its advance as the divergence theme
moves into overdrive. The dollar has drawn close to JPY119.50.
The euro has fallen to new lows near $1.2320, having been turned
back from $1.25 on Monday. The Australian dollar has been pushed
briefly below $0.8390.
The main exception is sterling, which is holding its own after a
stronger than expected service PMI. Although it slipped below
yesterday's low, Monday's low near $1.5585 remains intact, and
sterling is trading around 3/4 a cent above there near midday in
London.
The divergence theme has been underscored by the comments by
Fischer and Dudley reaffirming the signal by Fed leadership that
mid-2015 rate hike is still "reasonable". The disinflationary
impulse from the drop in energy prices is temporary. Instead,
they emphasized the growth implications.
There has been a backing up of US interest rates too. The 2-year
yield is near 55 bp, which is the upper end of the range seen in
recent weeks, and represents a 10 bp increase since Monday's
lows. There is increased speculation that the "considerable
period" phrase in the Fed's statement is likely to be diluted or
dropped as early as this month. Meanwhile, the 10-year yield is
near 2.30%, which is a 15 bp increase since Monday's lows.
In Europe, the service PMI was slightly disappointing at 51.1
from 51.3 of the flash and 52.3 in October. Germany was
unchanged from the flash (52.1) but France's downward revision
wipes out the improvement that the flash suggested. France's
service PMI slipped to 47.9 from 48.8 of the flash and 48.3 in
October.
The pleasant surprise came from Italy. The November service PMI
rose to 51.8 from 50.8. The consensus was for 50.2. It was Spain
that disappointed. The service PMI fell to 52.7 from 55.9. The
market had expected a smaller decline to 55.2.
In addition, the euro area October retail sales in October rose
0.4%, slightly less than expected, and managed to retrace only a
small part of the 1.2% decline in September (was initially
-1.3%). This week's data provides a poor backdrop for tomorrow's
ECB meeting. Everyone agrees that the ECB staff is going to cut
its forecasts again and the Draghi will be dovish. This goes
practically without saying. The key issue is whether the ECB
expands the assets it is purchasing (to include supra-nationals,
like EU, EIB, EFSF, ESM bonds like we think are "low hanging
fruit), or does it announce its intentions to buy sovereign
bonds, as some expected.
The market took the Australian dollar lower in response to the
poor Q3 GDP figures. The economy expanded by 0.3% on the
quarter, less than half the pace the consensus expected. The RBA
statement earlier this week had spurred a reassessment of a rate
cut the market was pricing in for next year. However, today's
weak growth figures have seen such pressure renew. However,
ahead of tomorrow retail sales and trade balance reports, the
interest rate adjustment is modest. The 2-year yield is off 5 bp
today to 2.38%. It had reached 2.45% earlier in the session. The
low before the RBA meeting was near 2.36%. This level should be
taken out as a cut is further discounted.
China reported service PMIs. The official one ticked up to 53.9
from 53.8. The HSBC measure also ticked up, from 52.9 to 53.0.
It does not impact expectations that the PBOC is likely to cut
the reserve requirements in the next week or so. The dollar has
quietly firmed against the yuan and reached almost CNY6.1550
today, its highest since late September. Because of the yuan
shadows the dollar, despite the flexibility the PBOC claims to
have introduced, the yuan has appreciated on a trade-weighted
basis. It will continue to do so, even if it edges lower against
the dollar.
The North American session will be busy. The Bank of Canada
meets. It is expected to leave rates on hold. We look for the
Bank of Canada's statement to emphasize that it is looking
through the pick up in price pressures as transitory. There are
three US reports to note: ADP, ISM services and the Beige Book.
Note too that UK's Osborne will make the Autumn Statement
(budget). Separately, it has already been announced that the
Funding for Lending Scheme, which aims at increasing credit to
small and medium-sized businesses has been extended for another
year.
__________________
Marc Chandler
Marc to Market
www.marctomarket.com
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