Dollar Slumps Post-G20
The US dollar is broadly weaker in the wake of the G20 statement that appeared to encourage flowing in emerging markets and risk assets in general. Leading the move is the Australian dollar and Swedish krona. The larger than expected rise in Q3 PPI (1.3% vs 0.5% consensus) and hawkish comments from RBA Governor Stevens, coupled with anticipation of M&A-related flows (Singapore SGX to buy Australia’s ASX for A$8.4 bln) helped lift the Australian dollar to near parity (~$0.9973). Expectations that Sweden’s Riksbank will follow through with it recent hawkish signals and raise rate later this week has underpinned the krona. The euro is trying to establish a foothold above $1.40. Although it traded around there for the better part of the past three weeks, only in one session (Oct 14) has it managed to finish the NY session above there. The dollar’s broad weakness conceals sterling’s weakness, which is evident on the crosses. Meanwhile the G20 pledge to avoid competitive devaluations has seen the yen strengthen and the JPY80 psychological level draws near.
Asian stocks began the week strongly as merger activity in the form of the news that the Singapore exchange made a takeover bid for ASX in Sydney boosted sentiment. The MSCI Asia Pacific rose 1.6%, while the leading gainers in the region were the Chinese benchmarks: Shanghai up 2.5% and Shenzhen up 2.9%. There were gains in Hong Kong, Taiwan, Korea and Australia while Japan’s Nikkei slipped back 0.2%. In Europe stocks gained after the G20 pledged to avoid weakening currencies. The Stoxx Europe 600 Index advanced 0.2% in by mid afternoon in London led by a gain in basic materials and consumer goods, both of which were up more than 1%.
Japanese bonds were mixed, with the 10-year and 5-year note yields up 1bp to 0.89% and 0.285%. The 30-year JGB yield fell 1 bp to 1.915%. German bunds opened steady, yielding 2.48% with the Irish 10-year up 3 bps followed by Greece with a 2 bps rise. Spain yields decreased 3 bps to 1.96%. Meanwhile, Treasuries edged higher overnight ahead of housing market reports this week. The 30-year bond yield slipped 4 bps to 3.893%, while the 10-year was down 2 bps to 2.536%.
The G20 meeting kicked the can down the road. Countries pledged to avoid competitive devaluations, but it is not clear what this really means in a period in which nearly all the emerging market currencies are appreciating. Surely the pledge does not pose an obstacle to the Federal Reserve’s QEII plans, even though the German Economic Minister was unusually pointed—that the excessive money supply growth implied by quantitative easing was an indirect manipulation of the foreign exchange market. The US attempt to turn the current account imbalance story, which has long been used to criticize it, into a new point of leverage on China was diluted with no agreement on quantitative targets. US Treasury Secretary Geithner reportedly made an unscheduled trip to China and opined China would continue to allow the yuan to appreciate. It is not clear that this will be off sufficient magnitude to deter Senator Schumer from taking up the bill aimed at the CNY after next week’s election. Speculation from a large US investment house that the Federal Reserve’s bond purchases could be as much as $2 trillion, though $4 trillion is what may truly be needed, is not doing the dollar any favors. Reports that the St. Louis Fed President Bullard (voting member) suggested that $250 bln purchases between meetings was being discussed, is more in line with our thinking.
Australian rate hike expectations were given a boost by some strong producer price numbers, spurring some strong buying of the Australian dollar. Producer prices climbed 1.3% in the third quarter from the previous three months, up from 0.3% quarterly growth in Q2. That was more than twice the 0.5% pace of growth expected by economists. From a year ago prices rose 2.2%, up from 1% in Q2 and better than the forecast 1.4% gain. Wednesday sees the release of the Q3 consumer price figures, with expectations for a quarterly increase of 0.8% in the three months to September, up from 0.6% in Q2. That would leave annual pace of inflation at 2.9%, just within the Reserve Bank’s 2-3% inflation target. RBA Governor Glenn Stevens today said the 2%-3% range has an ‘adequate degree of flexibility to handle short-range shocks’ and help anchor inflation expectations. Stevens also commented on the G-20 statement, urging some realism about the importance of exchange rate policy to ‘the unbalanced nature of growth in the global economy.’ Though more cohesion would help, ‘it is no panacea.’
Japan’s exports rose 14.4% in September from a year earlier, slowing for a seventh straight month (although, the y/y exports were nearly twice as high as expected). With the long and variable lags in the data the drop in exports may not be directly associated with yen strength and is more likely attributed to the weakening of developed economies, though Asia remains a source of strength for exporters. In fact, exports to Asia (which account for more than half of Japan’s total) rose 14.3% from a year earlier. Meanwhile, shipments to China increased 10.3%. The trade surplus totaled ¥797 bln, up 54% from a year earlier and nearly 3.5% of GDP. This report adds to signs that the Japan’s export-led growth is waning as the y/y has slowed remarkably in the past few months. Nevertheless, the yen strength, which in nominal trade-weighted terms has increased by nearly 7% since June, may start to impact growth as well. But overall, besides currencies, the key to export-led growth is a strong global economy.
Euro-zone manufacturing orders jumped 5.3% m/m in August, nearly twice the market consensus of 5.3% after a 2.4% drop in July. The numbers were led by a demand for capital goods, such as machinery. The three months trend rate still declined for a second consecutive month, but at 5.7% remains very robust and the annual rate accelerated to 24.4% y/y from 11.7% y/y in July. On the whole, this is a very strong number that adds to better than expected survey findings and supports the view that the slowdown in Q3 GDP was less pronounced than initially feared. This, in fact, boosts the outlook for industrial production and PMI for October and affirms that the euro-zone recovery is much better than most had anticipated. Nonetheless, the euro’s 8% appreciation vis-à-vis the dollar (and 6% increase in trade-weighted terms) over the past three months threatens to curb exports just at the time when austerity measures in Spain, Ireland and others begins to kick in.
Upcoming Economic Releases
At 8:30 EST / 12:30 GMT the US reports the Chicago Fed activity index which is expected to fall to -0.3 from -0.5 followed by existing home sales and the Dallas Fed activity index. Home sales are expected to increased, while the Dallas Fed index is expected to drop. Bernanke speaks at 8:30 EST / 12:30 GMT followed by Bullard and Dudley later on in the afternoon.