The US dollar is firm against the dollar-bloc currencies, and sterling, but is heavier against the euro and yen. The 13th consecutive year-over-year decline in China’s imports helped keep the pressure on the commodity producers. Despite New Zealand reporting strong Q3 manufacturing sales (3.5% vs. -0.2% in Q2), the pendulum of market expectations have continued to swing for a rate cut later this week.
The exaggerated response to last week’s ECB meeting continues to unwind. Draghi’s dovish comments and the strength of US employment data have helped keep the divergence meme front and center.
China joined the SDR, with a weight that puts it in third place behind the dollar and euro. The ECB did ease policy. It delivered a 10 bp cut in the deposit rate (now -30 bp), extended its asset purchase program for six months (to March 2017), broadened the range of assets that can be bought to include regional bonds, and declared intentions to reinvest maturing proceeds.
After the ECB’s disappointment yesterday market nerves were shattered, but the largely as expected US jobs data may help the focus return to the underlying fundamental fact. The ECB just eased policy. Not as much as the market expected, and that speaks to market positioning, but it did ease. And the 211k increase in November jobs, with the October series being revised up 27k to 298k, Fed officials looking for more improvement in the labor market got it.
The anticipation is nearly over. The softer than expected preliminary EMU inflation figures encourages expectations for the more aggressive range of actions by the ECB tomorrow. Draghi has claimed that movement toward the inflation target was too slow. Today’s data showed a 0.1% increase year-over-year in the headline rate. The market had anticipated a 0.2% increase. Although the ECB targets headline inflation, it clearly also tracks core inflation. Core price increases slowed to 0.9% from 1.1%.
The US dollar is trading with a heavier bias today amid some last minute position squaring ahead of the key events of the week, which are stacked in the second half. The ECB meeting and US jobs data are the two most important events in a jam packed week for most participants.
The week ahead is among the most important of the year. Rarely is there such a confluence of events in a short period that will have far-reaching implications for investors known ahead of time and discussed so extensively. One implications of this is the market discount of expectations.
The potential for sharp price gyrations and the dictates of money management should not distract from the big picture and the durable trends. In this context, there are two important considerations long-term investors ought to keep in mind.
Anticipating a yawning divergence of monetary policy between the world’s largest central banks, market participants continued to drive the dollar higher over the past week. In fact, the greenback appreciated against all the major and emerging market currencies except the Malaysian ringgit and South Korean won.
The US dollar remains firm, even if it has eased from its seven-month high against the euro and five-year high against the Swiss franc recorded yesterday. The US October personal consumption expenditure was disappointing, and prompted some downward revision to Q4 GDP forecasts.
Europe currently has approximately 900 billion euros ($956 billion USD) in bad loans, (aka non-performing loans or NPLs). The director of the Monetary and Capital Markets Department at the International Monetary Fund (IMF), Jose Vinals, announced that figure.
