Dollar Corrects Lower

The US dollar is trading heavily today.  The losses are not particularly steep against either the majors or the emerging market currencies.  A common narrative is attributing the dollar's pullback to "dovish minutes," but this is not a fair assessment, we think.  Instead, it seems that a typical buy the rumor sell the fact offers a more robust explanation.  The FOMC minutes did not contain any surprises, and it does not appear anyone's views really changed.  The December Fed funds futures finished yesterday unchanged for the ninth consecutive session. 

Indeed, the fear that the labor market may have lost some momentum has been allayed by the October jobs report.  Of course, given the various forces at work, the Fed did not commit to a hike in December, but the burden has shifted.  Barring an unanticipated shock, the hike in December remains the most likely scenario. 

The dollar's pullback looks primarily a technical not a fundamental development.  The euro, for example, made a new low below $1.0620 after the FOMC minutes, but large euro bids near $1.06 stalled the momentum.  Late shorts were forced to cover, and the euro bounced to almost $1.0720 in the Asian morning.  European participants turned more cautious ahead of the ECB meeting record.  The ECB's version of minutes rarely goes beyond what Draghi reveals in his post-meeting press conference.  The ECB statement turned more dovish, and the record is likely to reflect that. 

Two economic reports stand out today.  First, Japan reported its first trade surplus in seven months.  The JPY111.5 bln surplus is mostly the effect of seasonal factors.  Adjusted for such factors, Japan recorded a JPY202.3 bln trade deficit.   Japanese imports fell more than expected (-13.4% vs consensus -8.6%).  Exports fell (2.1%) for the first time since August 2014.  Of note, exports to China have fallen for three consecutive months. 

The dollar had risen to its best level against the yen since August 20 (~JPY123.75) yesterday but is also falling on profit-taking today.  It has found support in the JPY123.10-JPY123.20 area.  Technical indicators warn the correction may not be over.  The risk extends toward JPY122.60-JPY122.80. 

As widely anticipated the BOJ left policy as it is at today's meeting.  BOJ chief Kuroda shows no indication that he is about to change his assessment.  We argued against claims that two quarters of contraction in the Japanese economy signal a recession or the end of the economic expansion.  And this is precisely what the BOJ said:  the economy continues to recover moderately.  Growth is expected to return in the current quarter.     Many, who do expect the BOJ to ease again, see it early next year after the supplemental budget is passed.  

The second data point today was UK retail sales.  It was slightly disappointing.  The headline slipped 0.6%.  The market expected a 0.5% decline.  The strong Rugby World Cup induced 1.9% jump in September sales were marked down to 1.7%.  Clothing/footwear and household goods saw the biggest declines (1.8% and 0.8% respectively). 

Sterling reached almost $1.53 before the report, a two-week high.  It slipped to about $1.5240 on the news, but quickly recovered, and looks poised to challenge the $1.53 level again in North America.  Sterling's 0.2% gain in late-morning London activity makes it the weakest of the major currencies today against the dollar.  

The Australian dollar is the strongest of the major currencies, gaining a little more than 0.8% against the greenback.  Like the euro, it was initially sold on the FOMC minutes to new session lows (~$0.7070) but quickly rebounded.  The inability to beak it forced a bout of short-covering, which accelerated when the downtrend from the October highs was violated.  It has hardly backed off of its session highs set in European morning near $0.7080.  Although the $0.7200 area offers resistance, we suspect there is scope toward $0.7250.  Barring a strong reversal, the Aussie will close above its 20-day moving average for the first time since October 26, and the 5-day average looks poised to cross above the 20-day average, if not tomorrow then early next week.  

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