Major Currencies, but Yen, at New Highs before the Weekend

The US dollar is on its back foot. It was already sporting a softer bias and the FOMC minutes were read with a dovish twist.  A Wall Street Journal poll found 64% of economists expect a hike in December, and while the minutes might not substantively change that, the confidence is weak.  

While most Fed officials see the conditions for lift off having been met or soon to be, the concern is that the downside risks increased as well.    On surprise contained in the minutes was the repeated references to the dollar.  According to Bloomberg, the dollar was mentioned at least two dozen times in the September minutes twice as much as it was cited in the minutes from the July meeting. 

There was never a very strong chance of an October hike.  In fact, only one of 64 economists participating in the Wall Street Journal survey envisioned an October hike.   In order to boost confidence in a December move, many economists want to see stronger jobs data, easing of the dollar's momentum (which seems to be happening), and greater stability in China and emerging markets.  It may take some time for these conditions to materialize.  

That said, the Fed continues to view the impact of the dollar's strength and the decline in oil prices to have a temporary impact on inflation.  The dollar is posting new lows for the week against the major currencies, but the yen, and many emerging market currencies as well.  Brent, which finished last week near $48, tested $54 today while the November light crude futures is above $50 a barrel of the first time since late July.  This is nearly 10% above last week's close.  

The less than hawkish signal from the Fed, coupled with the rally in oil and commodities more broadly, rekindled the upside momentum in the dollar-bloc currencies, which had flagged near mid-week.  The Canadian dollar has gained about 1.6% this week against the US dollar, nearly a third is being recorded today.  Higher oil prices, a smaller Canadian interest rate discount to the US, and the generally weaker tone for the greenback is taking its toll. 

Canada reports September jobs data today.  The consensus expects a 10k increase in jobs, leaving the unemployment rate at 7.0%.  We suspect there are downside risks. Given the weak growth of the Canadian economy, the 54.4k full-time positions created in August is unsustainable.  In addition, like the US, the participation rate in Canada is low. The consensus forecast is for it to slip back to 65.8% from 65.9%, keeping it bouncing along the trough, but also warning of upside risks to the unemployment rate.   Afterward, the Bank of Canada will release its senior loan officer survey.   Separately, Bank of Canada Governor Poloz is speaking over the weekend.  

The US dollar is at its lowest level against the Canadian dollar since late-July.  It is approaching the 100-day average (~CAD1.2890), which it has not traded below since late-June.  It also corresponds to a retracement objective of the rally since the May lows (~CAD1.2870). A break of this are could spur a move toward CAD1.2700. 

There were a few economic reports in Europe to note.  First, the UK reported weaker than expected construction output (-4.3% in August compared with consensus forecasts of a 1.0% rise). The UK also reported a larger than expected overall trade deficit.  The August shortfall was GBP3.268 bln. This was nearly a third larger than the consensus expected, and the July series was revised to a GBP4.436 bln deficit from GBP3.371 bln.   The BOE minutes suggest there is no urgency to hike rates, Governor Carney continues to insist it is getting closer.  Sterling is higher for the fourth consecutive session.  It has approached the 50% retracement objective of the drop in the second half of last month near $1.5385.  A break above here would target $1.5450.  

Second, while many countries reported weak industrial output data for August,  France surprised on the upside.  Industrial output was expected to have risen by 0.6%. Instead, France reported a 1.6% increase.  Manufacturing output rose a surprisingly strong 2.2% (consensus was 1.0%), which is the largest rise in more than two years. Overwhelming the consensus forecasts by such a magnitude offsets the small downward revisions in the July series.  

Third, Italy is more of the broader pattern.  Industrial output fell 0.5% in August.  The consensus was for a 0.3% decline, following a 1.1% rise in July.   The area's aggregate figures will be released next week, and a 0.5% fall is expected, which would offset the 0.6% gain in July.  Meanwhile, the euro is moving above the $1.1325 area, and the next target is near $1.1400.  

Fourth, Norway firm inflation figures.  September CPI rose 0.6% for a 2.1% year-over-year rate. This was a little below expectations, but still the envy of many countries.  The underlying rate, which adjusts for tax changes and excludes energy rose 0.8% for a 3.1% year-over-year pace.   The main concern of Norges Bank is not inflation but growth.  Still, the quickening of underlying inflation may steady the central bank's hand.   

Major Currencies, but Yen, at New Highs before the Weekend Major Currencies, but Yen, at New Highs before the Weekend Reviewed by Marc Chandler on October 09, 2015 Rating: 5
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