Dollar Retreats As Rate Hike Pace Questioned

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Includes: FXA, FXB, FXC, FXE, FXF, FXY, UDN, UUP
by: Dean Popplewell

By Dean Popplewell

The U.S. dollar starts the final month of the year under pressure across the board as dealers and investors prudently price in market expectations of a gradual tightening cycle by the Fed. Currently, it’s considered a foregone conclusion that the Yellen and company will begin their rate normalization policy on December 16. Now it’s about the rate of the pace of future hikes that the market is required to get a handle on. So far this week, the intraday price moves have been somewhat fleeting and limited. That’s to be expected as most of the capital markets event risk occurs at the end of this week (ECB rate announcement Thursday and NFP Friday). Nevertheless, rate announcements and a number of key economic releases overnight are providing some regional clarity.

RBA policy statement still neutral with door open to more easing: The Reserve Bank of Australia (RBA) kept rates unchanged for their seventh consecutive meeting overnight (+2%). Aussie policy makers reiterated their sentiments from last month’s policy statement. Governor Stevens continues to see the prospects for an improvement in economic conditions having firmed, while inflation remains consistent with their objectives over the next 18-months, while the AUD (A$0.7283) continues to adjust to the commodity price decline. The biggest change in the language was the admission of a large decline in capital spending (MUTF:CAPEX) in the mining sector and also that of moderation in property price gains in Melbourne and Sydney. Other Aussie data indicates that net trade appears to have saved the economy from contracting in Q3, and one of the reasons why the RBA held firm. The combination of a +4.6% q/q rise in real exports and a +2.4% q/q fall in real imports suggests that “net” trade will add close to +1.5 pps to Aussie GDP growth in Q3 (to be reported later this evening, +0.7% vs. +0.2%). 


Chinese manufacturing still struggling but services looks healthier: Official PMI’s would suggest that conditions in the manufacturing sector remains a challenge for the world’s second largest economy, but that construction and service sector activity is finding some traction. The official manufacturing PMI fell from 49.8 in October to a three-year low of 49.6 in November. Digging deeper, with both the output and the new-order components falling would suggest further softening of external demand. However, the rest of the economy appears to be holding up reasonably well – the official non-manufacturing PMI rallied to a four-month high (53.6) on the back of the resilience of the service sector. The mixed headline results – disappointing manufacturing offset by a stronger services and non-manufacturing print – do not paint a clear picture for growth. The market will require further hard data to have a better understanding on how China’s economy is really holding up.

Fall in eurozone unemployment will not dissuade the ECB: October’s fall in eurozone unemployment (10.8% to 10.7%) suggests that the steady labor market recovery continues. However for Draghi, euro joblessness remains too high to stimulate wage growth (Germany-4.5%, Spain-21.6%, Portugal-12.4% and Italy-11.6%). Eurozone business surveys suggest that the slow labor market recovery is unlikely to gain pace for some time. Thus, euro jobs coupled with the low level of inflation expectations will continue to limit pay pressures and help to keep wage growth subdued. The market is aggressively pricing in a strong response by the ECB on Thursday. If they are not proactive enough, investors should be expecting a strong EUR whiplash price reaction.

U.K. manufacturing sector comes back down to earth: The November Markit/CIPS manufacturing survey suggests that the U.K. manufacturing sector continues to face significant challenges – 55.2 to 52.7. Today’s print brings the U.K. manufacturing sector more into line with other activity indicators and also reveals that that the upticks in the October print was just a temporary blip. U.K. growth theme is expected to remain the same, led by the services sector. U.K. manufacturing requires the twin help of global growth traction and a weaker pound (£1.5083).

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