Dollar Mostly Firmer Ahead of Eventful North American Session

The US dollar is firmer against most of the major and emerging market currencies.  The Australian dollar is the biggest loser on the day, off about 1.3% on the back of slightly disappointing Q3 GDP (0.6% rather than 0.7%).  This exaggerated response to data, which is not unexpected from the central bank's point of view speaks to the poor underlying sentiment.  The currency hit a new 13-week low and is absorbing the demand near $0.9000. 

After briefly (and shallowly) slipping below JPY102 yesterday, the dollar rebounded to JPY102.85.  Japanese equities took it on the chin though, with the Nikkei shedding 2.2%, its largest lost in nearly four months.  The Nikkei actually opened sharply lower and left a gap in its wake.  We'll write more about this later, but the gap between yesterday's low (15661) and today's high (15579) is important.  

We have been concerned that there would be a wave of profit-taking ahead of the capital gains tax hike on Jan 1.  Today's retreat was more a function of the losses on Wall Street yesterday and news that the Government Pension Investment Fund, which has been talking about shifting away from JGBs toward equities more a good part of this year, has indicated it is still in no hurry.  It suggested it could reduce its JGB exposure passively by waiting for maturities.  Japan Post was even more circumspect, saying that it had a "social responsibility" not to roil the bond market and also was not selling its JGB holdings.   

Speculation earlier this week that the BOJ can expand its operations in the near-term was dampened by board member Sato.  He downplayed the likelihood of a preemptive move, by which is meant prior to the retail sales tax increase on April 1.  

Separately, Chinese stocks bucked the regional trend.  The Shanghai Composite advanced 1.3% to an 11-week high.  The ostensible trigger was comments from the central bank that promise plans to implemented the much-awaited financial reforms in Shanghai's free-trade zone within the next three months.  Many of the companies involved with the free-trade zone traded highs.    Press reports have emphasized plans to liberalize a number of industries and allow easier convertibility of the yuan (to facilitate trade not capital flows)

The strangeness of the current investment climate is illustrated, though by the UK today where a 60 reading on the service PMI was understood as disappointing.  The consensus was for 62 after October's 62.5.  It is the fifth consecutive reading at 60 or above.  Sterling's inability to push through $1.6440 yesterday left short-term momentum players a bit vulnerable.   It was sold below $1.6330 before finding a bid.  Resistance is now seen near $1.6380.   

The euro area reported its service PMI rose to 51.2 from 50.9 in the flash, but still down from the 51.6 in Oct.  The German service PMI rose to 55.7 from the 54.5 flash and 52.9 in Oct.  France disappointed with a 48.0 reading, down from 48.8 of the flash and 50.9 previously.  Italy also disappointed with a 47.2 reading down form 50.5.  This is a 5-month low (though the manufacturing PMI was a 2.5 year high).  New business was particularly week at 47.0 from 50.7.  On the other hand, Spain surprised to the upside with a 51.5 reading.  The market anticipated a sub-50 report.  

When combined with the manufacturing data, the composite PMI for Nov stands at 51.7.  This compares with the 51.5 of the flash and 51.9 in Oct.  New orders rose to 51.8 from 51.4, which appears promising.  Nevertheless, weakness in France and Italy portends greater stress in 2014. 

The ECB meets tomorrow and the excess liquidity has fallen toward 155 bln euros.  Besides dovish comments and keeping all options on the table, it is not expected to take new action.  We note that the term structure appears to reflect the pricing in of  about 15 bp of the next refi rate cut.  Separately, we note that EONIA which was up to almost 30 bp at the end of last week, before month end, is now below 12 bp and is likely to ease further in the days ahead, before year-end pressure begins.  

We had previously mistakenly noted that the Bank of Canada and Canadian trade statistics were to be released yesterday.  It is today.  No change in the overnight rate is expected.  The Bank of Canada has already eschewed the forward guidance or what used to be called, tightening bias, of Carney and now is neutral.   The Oct trade deficit is likely to be near the year's average so far which is just below C$800 mln. The US dollar is trading at new multi-year highs against the Canadian dollar prior to the beginning of the North American session.    The CAD1.0680 has been approached.  The short-term market looks a bit stretched, warning of the risks of a pullback. 

The ADP private sector jobs estimate and the service ISM may be the highlights before the Fed's Beige Book.  The Oct trade balance, which is helpful for Q4 GDP forecasting and new homes sales (for Sept and Oct) will also be reported.