Relentless Dollar Surge Continues: Asian Currencies Plunge To 7 Year Lows, Hitting Emerging Markets

While most global equity markets were subdued due to the US Thaksgiving holiday, the FX world was very busy overnight, marked by the relentless dollar surge on expectations of a rate hike not only in December but further in 2017, sending Asian currencies to the weakest level in 7 years: the Bloomberg-JPMorgan Asia Dollar Index reached 103.32, the lowest level since March 2009.

The regional FX plunge will likely deter regional central banks from easing monetary policies as the prospects of higher U.S. rates spurred capital outflows according to Toru Nishihama, an emerging-market economist at Dai-ichi Life Research Institute who added that depreciating currencies are making it very hard for central banks to ease on concerns about inflationary pressure and acceleration of fund outflows.

The dollar also pushed its way past more of last year’s peaks against the euro to hit $ 1.0550 in early European action, with only the March 2015 high of $ 1.0457 standing in the way of a drive toward parity, likewise the yen skidded to an eight-month low and China’s yuan to an 8-1/2 year low, while the highly sensitive Turkish lira and Indian rupee hit new historic troughs, although the USD has since given up some of the gains.

“There doesn’t seem to be anything stopping U.S. yields going higher in the near-term so I think people are going to stay on the dollar trend,” said Michael Metcalfe, head of global macro strategy at State Street Global Markets.

“The only risk to this are that the dislocations in markets outside of the U.S., particularly in emerging markets, get to a point where they start to feed back into concerns (for the Federal Reserve as it looks to raise interest rates),” he said.

While so far US equity markets have ignored the jump in the DXY to a near 14 year highs, dollar gains reverberated through emerging markets. India’s rupee and Vietnam’s dong slid to records, while the Philippine peso dropped to its weakest level in eight years. In Turkey, the lira rebounded from an all-time low after the central bank unexpectedly raised interest rates, although even that move has now been faded. Copper’s surge pulled a gauge of commodities higher for a fourth day, the longest rally in a month. Rosneft PJSC approved a $ 17 billion bond program, the biggest ever by a Russian company as the nation’s largest oil producer refinances debt. Copper was set to close at its highest level in more than a year.

As Bloomberg writes this morning, central banks worldwide are being pushed to take action in the face of the stronger dollar.

In Turkey, policy makers opted to support the nation’s beleaguered currency, while the European Central Bank warned that the risk of an abrupt global market correction on the back of rising political uncertainty has intensified, posing a threat to banks, stability and economic growth. The market odds of a December rate hike in the U.S. are 100 percent and traders are adding to bets that Fed Chair Janet Yellen will lead further action in 2017. U.S. equity benchmarks extended records last session before the Thanksgiving holiday.

“The dollar has been really strong in anticipation of Yellen’s move next month and that strength in the U.S. dollar is ultimately going to mean that emerging-market assets would be seen as disadvantaged,” said Nicholas Teo, a strategist at KGI Fraser Securities in Singapore.

The Stoxx Europe 600 Index added 0.1 percent, while Japan’s Topix index climbed for a 10th straight day, on the back of the ongoing surge in the USDJPY, its longest streak since June 2015. Europe’s top equity market this month, Greece, is giving signs of overheating: A technical indicator hit its most-overbought level since October 2013, meaning that gains might have come too quickly to be maintained.

US equity futures were unchanged at 2201.

European sovereign bonds were broadly higher as ECB Governing Council Member Francois Villeroy de Galhau was quoted by Expansion as saying the central bank was mulling many options for its debt-purchase program. They partially reversed a selloff from Wednesday that was fueled by a report that the ECB is planning to lend out securities in an effort to boost bond-market liquidity and reduce shortages in the repurchase market. France’s 10-year bond yield fell three basis points to 0.76 percent. Portugal led gains in the region, with the nation’s 10-year yield falling nine basis points to 3.59 percent. Indonesia’s 10-year sovereign bonds retreated for a sixth day, sending yields to the highest since March 2.

* * *

Bulletin Headline Summary from RanSquawk

  • Subdued trade across major asset classes thus far amid the Thanksgiving holiday with European equities trading relatively flat
  • Thanksgiving day has not stopped FX players pushing the USD higher against the JPY, EUR and CHF, with USD/JPY printing new cycle highs just above 113.50
  • Looking ahead, highlights include German IFO. Note that US markets are closed for the Thanksgiving Holiday

Market Snapshot

  • S&P 500 futures unchanged 0% at 2201
  • Euro Stoxx 50 down -0.1%
  • FTSE 100 down -0.3%
  • CAC 40 down -0.2%
  • DAX down 0%
  • IBEX 35 down -0.1%
  • FTSE MIB up 0%
  • German 10yr yield down -3bps to 0.24%
  • Greek 10yr yield up 0bps to 6.92%
  • Portugal 10yr yield down -6bps to 3.62%
  • Italian 10yr yield down -4bps to 2.08%,
  • Credit: iTraxx Main down 0.4 bps to 81.58
  • iTraxx Crossover down 2.1 bps to 343.7
  • Nikkei 225 +0.9%
  • Hang Seng -0.3%
  • Kospi -0.8%
  • Shanghai Composite +0%
  • ASX +0%
  • Sensex -0.6%,

Top News

  • Spanish economy grew in line with expectations in 3Q
  • India’s rupee sinks to a record low, Philippine peso falls to 50 per dollar for first time since 2008
  • Copper, nickel rises, crude oil little changed
  • U.S. individual investor bulls at highest since Jan. 2015: AAII

Looking at regional markets, Asian stocks traded mixed following a similar lead from Wall St where S&P 500 and DJIA posted a 3rd consecutive record close, while Nasdaq 100 finished negative. Nikkei 225 (+0.9%) outperformed as the index played catch up to yesterday’s gains on return from holiday and was met with further JPY weakness, while ASX 200 (Unch.) was weighed on by commodities after gold slumped below USD 1200/oz amid a firm USD and after the index met resistance around 5,500. Hang Seng (-0.2%) and Shanghai Comp (flat) were indecisive and traded mixed amid a lack of key drivers. 10yr JGBs were flat with demand dampened as focus was on riskier assets in Japan, while the curve steepened amid underperformance in the super-long end in which 30yr yields rose to its highest in 8 months. PBoC academic Wang Yong said CNY depreciation will lead to a decline in FX positions and money supply, which could result to higher money market rates. The PBoC injected CNY 60bIn 7-day reverse repos, CNY 45b1n in 14-day reverse repos and CNY 10bIn in 28-day reverse repos. PBoC set mid-point at 6.9085, the weakest fixing since June 2008.

Top Asian News

  • China Wants Quick Close on Regional Trade Pact After TPP Dashed
  • Asia’s Accelerating Currency Rout Set to Sideline Central Banks
  • Philippine Market in a Funk as Peso Slides to 2008 Crisis Level
  • Thailand Evokes Temasek as Junta Tries to Revive State-Run Firms
  • Singapore Downgrades 2016 Growth Forecast as Exports Remain Weak
  • Ctrip Extends Global Reach With $ 1.7 Billion Skyscanner Deal

In Europe, like in Asia, trade has been subdued across major asset classes thus far amid the Thanksgiving holiday with European equities trading relatively flat. This morning has seen Russia’s Energy Novak announcing Russia’s support for an output freeze as opposed to a cut, which is largely a reiteration and as such WTI and Brent crude saw a muted reaction. Elsewhere, property names remain pressured after countrywide (typical barometer for housing) stated that profit will hit the lower end of their guidance. Finally, material names have been leant a helping hand by a recent uptick in gold from yesterday’s slump and copper prices extending on gains with demand seen from the open of Shanghai metals trade as participants in the region jumped in on the recent advances, alongside iron ore gains which rallied by around 6% to a near-3 year high. Across fixed income markets, Bunds are higher this morning with the curve slightly steeper after a revision lower in the German GDP release, while volumes have been light due to the aforementioned Thanksgiving holiday. OPEC have yet to make a final proposal to Non-OPEC on joint production cut, adding that a discussion is to take place on 28th November, according to sources.

Top European News

  • Rio Lowers 2016 Capital Spending to Less Than $ 3.5b from ~$ 4b
  • BNP Paribas Plans EU2b-EU3b Investments 2017-20, Les Echos Says
  • Generali CEO Says Merger With Axa Not on Agenda : Les Echos
  • Vinci Confirms Outlook for FY Revenue, Results
  • Thyssenkrupp to Keep Dividend Stable as Profit Matches

In Currencies, the greenback advanced 0.4 percent to 113 yen at 6:25 a.m. New York time, having reached an almost eight-month high. It slipped 0.2 percent to $ 1.0577 per euro, after surging 0.7 percent the previous day. Turkey’s lira strengthened 0.3 percent and stocks rallied after the central bank unexpectedly raised interest rates for the first time since January 2014. Policy makers increased the overnight lending rate by 25 basis points to 8.50 percent and the repurchase rate by 50 basis points to 8 percent. Economists had predicted no change in either rate. The rupee tumbled as global funds dumped Indian assets. The central bank will take appropriate action to deal with the currency’s decline, a government official said earlier Thursday, asking not to be identified, citing rules. State-run lenders sold dollars, probably on behalf of the central bank, three Mumbai-based traders said, asking not to be named. A gauge of implied price swings in the euro versus dollar over the next two weeks jumped to its highest level since the aftermath of the U.K.’s Brexit vote, as traders await the ECB’s Dec. 8 policy meeting. The euro has slid 4.2 percent against the dollar since the U.S. election amid speculation that the ECB will extend its stimulus, maintaining a policy divergence with the Fed. The MSCI Emerging Markets Currency Index dropped for a second day, heading for the lowest level since June 27, days after the U.K. voted to leave the European Union

In commodities, the Bloomberg Commodity Index was up 0.3 percent, extending gains to a fourth day, the longest run since Oct. 19. Copper for deliver in three months rose 1.9 percent to $ 5,848.50 a metric ton on the London Metal Exchange in London, heading for the highest close since June 2015, while zinc and lead also posted gains. The LMEX Index of six base metals on Wednesday closed at the highest level in 18 months. West Texas Intermediate crude was little changed at $ 48.04 a barrel after retreating 0.2 percent last session. Iraq’s prime minister said the country will cut production as part of a broader OPEC supply deal, while Russia is seen agreeing to a freeze rather than a reduction. Gold for immediate delivery dropped as much as 0.7 percent to $ 1,180.38 an ounce, the lowest level since February, on expectations of higher rates and a stronger dollar.

* * *

US Event Calendar:

  • Closed for Thanksgiving holiday

* * *

DB’s Jim Reid concludes the overnight wrap

A happy Thanksgiving to all our US readers although if you’ve got enough time to read this then you obviously haven’t got a big enough Turkey to cook. Pre-Thanksgiving trading was a microcosm of the volatility we expect to be a more regular feature of markets in 2017. Indeed the real excitement was in the rates market where yields darted higher on both sides of the pond. It started in Europe though where mid-way through the morning session a Reuters story suggesting that the ECB was looking at ways to lend more bonds in order to address the collateral squeeze in markets. The article suggested that possible changes could include reducing charges for firms which ‘fail to return on time the bonds that they borrowed’ as well as ‘accepting new types of collateral and extending the duration of loans’. The suggestion is that this will be discussed at the ECB meeting next month on the 8thDecember so it’s one to keep an eye on.

The move was supported by a strong set of European flash PMI’s and then some bumper durable goods orders data in the US and a set of FOMC minutes which did little to move the needle. 10y Bund yields were at one stage up as much as +10bps from their lows at a shade above 0.300%. A retreat into the close however saw Bunds finish up a more modest +4.4bps at the closing bell at 0.260%. Yields in the periphery were also up between 5bps and 10bps by the end of play with 10y BTP’s trading in a 15bp range while 10y Treasury yields closed 3.8bps higher and just below Friday’s high in yield at 2.351%. Still, the high-to-low range for Treasuries was just over 12bps during the course of the session with the peak in yield of 2.415% intraday actually the highest on an intraday basis since July 2015.

Meanwhile here in the UK the Gilt market also had to contend with Chancellor Hammond’s first Autumn and post-Brexit Statement. As our economists noted, their expectation was that the Chancellor would ease the UK fiscal stance modestly and that he would keep some ‘fiscal stance’ in reserve if needed for later and this is what we got with a 0.9% of GDP of fiscal relaxation and 1.2% of GDP of fiscal space in reserve. As our colleagues highlighted in their note last night, the announced relaxation is back-loaded to year three (2019/20), which coincides with the assumed timing of the UK’s exit from the EU and the lead up to the next general election, assuming this parliament goes full term. The fiscal relaxation in 2017/18 is just 0.1% of GDP. The Chancellor had said he would create more flexible fiscal rules. The changes were modest though. The deficit target is now defined on a cyclically-adjusted basis and leaves him some modest room for manoeuvre if needed later. However, there was no “golden rule” to protect public investment spending. That said, public investment is the only part of spending expected to grow in cyclically-adjusted terms over the next five years. There were hints of the “new industrial strategy”, but it remains a slow-moving work-in-progress. In terms of what this means for the BoE, our economists’ interpretation is that the Autumn Statement has not pushed hard against the 2017 real income shock coming from sterling’s boost to inflation. Their baseline view is BoE policy will be on hold but there is a higher probability of the next move being a loosening of monetary policy rather than a tightening. Gilts were the big underperformer in DM markets yesterday with the 10y yield closing +8.7bps higher at 1.446% with an intraday range of a little over 13bps.

Elsewhere, the closing levels across risk assets were a bit more subdued although again not without a similar level of intraday chopping around. Equities were initially a touch weaker in Europe with the Stoxx 600 closing -0.07% albeit in a high to low range which spanned nearly 0.90%. Over in the US, despite REITS and utilities sectors being weighed down by the moves in rates the S&P 500 (+0.08%) did still manage to pare early losses to extend its record closing high for a third consecutive day. The move also came despite a strong day for the US Dollar with the Dollar index (+0.65%) closing at the highest level in more than a decade. On the other hand Gold (-1.98%) closed below the $ 1,200/oz level for the first time since February.

Over in Asia this morning it’s been a fairly directionless session for equity markets. In Japan the Nikkei has reopened with a +1.09% gain despite the flash manufacturing PMI for November deteriorating a touch to 51.1 from 51.4 the month prior. The Shanghai Comp (+0.09%) is also higher however the Hang Seng (-0.35%), Kospi (-0.74%) and ASX (-0.09%) have all dipped lower. Elsewhere EM currencies continue to remain under pressure following the continued strengthening for the Greenback. The Philippine Peso has hit 50 to the Dollar for the first time since 2008 while the Malaysian Ringgit is now at its weakest level since the Asian financial crisis in 1998.

Back to that data yesterday. The most significant prints were the flash November PMI’s in Europe. It was revealed that the composite reading for the Euro area rose to 54.1 this month from 53.3 in October after expectations were for no change. The services sector drove the improvement with the PMI rising to 54.1 from 52.8 (vs. 52.9 expected) and the highest since December last year. The manufacturing print was up a more modest 0.2pts to 53.7 (vs. 53.3 expected). Regionally, a slight disappointment in Germany was compensated by a marginal pick-up in France leaving the average for both flat on the month. That suggests that the positive momentum for the Euro area came from the non-core for which we will get the data for at the start of December. Significantly however, the data has led our European economists to adjust their ECB call next month. They have switched their call from a 9-12 month QE extension to a 6 month extension announcement at the December meeting.

Elsewhere, there was little in the way of surprise from yesterday’s FOMC minutes. The text confirmed that ‘most participants expressed a view that it could well become appropriate to raise the target range for the federal funds rate relatively soon, so long as incoming data provided some further evidence of continued progress toward the Committee’s objectives’. The minutes also showed that members considered that labour market conditions had improved ‘appreciably’ and that some participants had argued that ‘to preserve credibility’ an increase ‘should occur at the next meeting’.

Back on the data front, it was the October durable and capital goods orders that really stood out in the US yesterday. Headline durable goods orders printed at +4.8% mom for October following a boost from aircraft orders, well exceeding the +1.7% expected, while September data was also revised up. The ex-transportation reading (+1.0% mom vs. +0.2% expected) also beat while core capex orders rose +0.4% mom and a smidgen ahead of consensus (+0.3% expected). Meanwhile, the flash manufacturing PMI rose 0.5pts this month to 53.9 which is the best reading since October last year. Initial jobless claims rose 18k to 251k last week, the FHFA house price index rose +0.6% mom in September as expected but new home sales weakened more than expected in October (-1.9% mom vs. -0.5% expected). Lastly the final University of Michigan consumer sentiment reading for November was revised up to 93.8 from 91.6 – the best reading since May with both current conditions and expectations components getting revised up.

Before we wrap up, one potentially important event which has crept up upon is Austria’s presidential vote re-run on the 4th of December. As a reminder this is a re-run of the vote held back in May which was then overturned on voting irregularities. The Greens-backed Independent candidate Van der Bellen won that by tiny majority of 50.3% to 49.7% over the far-right Freedom party candidate Norbet Hofer. According to the FT, Hofer holds a narrow lead in opinion polls but voting is expected to be close. Notably, in an interview with the BBC and highlighted in an article this morning, Hofer confirmed that he would push for an EU membership referendum should the EU become more centralised after Brexit, particularly in a case where ‘the national parliaments are disempowered and where the union is governed like a state’. One to keep an eye on.

Looking at the day ahead, given the Thanksgiving Day holiday in the US today where both bond and equity markets will be closed, the data docket is unsurprisingly fairly light this afternoon. The focus will be on the releases this morning in Europe with the spotlight on Germany where we’ll get the details of the Q3 GDP report as well as the November IFO business climate survey. France will also be out with November confidence indicators and jobseekers data. Away from the data we’ll hear from the ECB’s Praet this afternoon in Vienna while the ECB will also publish its Financial Stability Review this morning.

About The Author

Reply

-->