Antipodeans Sink, while USD Treads Water

The US dollar remains within recent ranges against the euro, yen and sterling.  The antipodean currencies have been pushed lower, and that is where the movement is today.  The main impetus is from a downgrade in the Reserve Bank of New Zealand's inflation expectations, and momentum players selling the Aussie on the break of $0.8600.  Players were encouraged by the help of a sharp 3% drop in iron ore prices and more jawboning by officials.   The Australian dollar has recorded new four-year lows today.  For its part, the New Zealand dollar has slipped through $0.7800.  The multi-year low set earlier this month was near $0.7660.  A retest seems likely next month.  

The news stream is light, but between the EC review of the 2015 budget, Juncker's "stimulus" plan (300 bln euros over three year, using a combination of leverage and repackaging previously earmarked bunds) and the vote on his censure, coupled with the OPEC meeting on Thursday (when US markets are closed), there are plenty of events on the near-term time horizon to inject more volatility.  In addition, there is the Swiss gold referendum on November 30, and the France's center-right UMP party's leadership contest in which Sarkozy is expected to edge out Juppe.  Whether this means that Sarkozy will be the UMP candidate for President is a different story and does not appear to be a foregone conclusion. 

Four pieces of data emanated from Europe.  First, Germany's Q3 GDP was unrevised, showing 0.1% growth in the quarter after a 0.2% contraction in Q2.  Second, France's business surveys showed sequential improvement and a little more than the market expected.  The French economy, recall, grew 0.3% in Q3, which was considerably stronger than the surveys, especially the PMIs, which are well below 50, suggested.  Third, |Italian retail sales fell 0.1% in September.  It is the fifth consecutive monthly decline.  Outside of January, where retail sales were flat, there was only one other month this year that Italian retail sales did not fall (April  +0.3%).  Fourth, the BBA reported UK mortgage loans increased less than expected (37.0k vs 38.5k Bloomberg consensus and a revised 39.1k in September). 

The prospect of additional easing measures by the ECB as early as next week, despite BBK's Weidmann highlighting the legal difficulty with sovereign bond purchases, has seen European bond markets extended their rally. New record low yields of 10-year benchmarks is being seen throughout much of the euro area today, Spain, Italy, Portugal, but also France and Germany.  Greece, which is having trouble reaching an agreement on what could be its last aid tranche, has prevented Greek bonds from joining the party. 

European stocks have extended their rally, with the Dow Jones Stoxx 600 up about 0.5%, led by utilities and financials.  The materials and energy sectors are weaker today.    The Dow Jones Stoxx 600 is at two-month high.  It is up 14.8% since the mid-October meltdown, edging out the S&P 500 which is up 13.8% over the same period, coming into today's session.  

The OECD has called on the ECB to provide more monetary stimulus, which is hardly surprising, alongside its update forecasts, which project the euro area to grow 0.8% this year and 1.1% next.  Separately, banks had borrowed 102.5 bln euros in last week's main repo operation (7-day), and today borrowed this again, plus another 11.7 bln euros.  Some of this likely reflects month-end needs, but the borrowing is likely to remain high for the remainder of the year.    A new 3-month liquidity operation will be arranged tomorrow.  There is about 7.2 bln euros that are maturing.

The North American highlight today is the revision to Q1 GDP.  The risk seems to be on the downside of the consensus expectations for a 3.3% reading, down from 3.5% initially.  The risks come from trade, where September exports fell, which was not known when the first estimate was made; consumer spending was also softer at the end of Q3, and construction spending was weaker.  Government spending and inventories are wildcards.  Defense spending jumped 16% at an annualized rate in the initial estimate, which help bump government spending (pre-election?) and inventories are notoriously hard to forecast.   

In this second look at Q3 GDP, there will be the initial estimate of corporate profits.  Remember than not all companies are publicly traded, which makes profits also somewhat difficult to forecast.   Profits of the S&P 500 rose about 12%. 

Lastly, Canada reports September retail sales ahead of the GDP figures at the end of the week.  The consensus calls for a 0.5% increase after the 0.3% decline in August.  The fact that the Canada reported firmer than expected consumer inflation last week has failed to lend the Canadian dollar much support, though it continues to fare better than the other dollar-bloc currencies.  The US dollar is testing the 20-day moving average just below CAD1.1300 after having briefly traded below CAD1.1200 at the end of last week.  Additional resistance is seen near CAD1.1350. 

Antipodeans Sink, while USD Treads Water Antipodeans Sink, while USD Treads Water Reviewed by Marc Chandler on November 25, 2014 Rating: 5
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