The dollar continued its descent overnight as traders bet on a weaker jobs report and a slower pace of rate hikes from the Federal Reserve. The trade-weighted greenback is down almost 1.5 percent this week, floating near a four-month low as American yields come under pressure and interest rate differentials shrink in favour of other major currencies. The benchmark ten-year US treasury yield is holding near 1.51 percent, down sharply after Jerome Powell’s less-hawkish-than-expected speech on Wednesday.
Yesterday’s data showed American consumer spending hitting new heights, even as inflation pressures cooled. Supported by robust income gains and a falling savings rate, consumer outlays increased a seasonally-adjusted 0.8 percent and an inflation-adjusted 0.5 percent in October from the prior month – the biggest monthly gain since June. The Fed’s preferred inflation measure – the core personal expenditures price index – climbed 5 percent year-over-year, down from 5.2 percent in September.
The Chinese yuan has risen almost 2 percent since the weekend, posting its biggest weekly gain since 2005 as investors grow more convinced in an imminent relaxation in the country’s “zero-covid” policies. With protests boiling over in major cities, authorities have said that certain people will now be allowed to quarantine at home, and they plan to reduce the number of mass testing procedures that have repeatedly brought economic activity to a standstill. Additional measures are expected in the coming days.
Japan’s yen is also notching up solid gains on the prospect of a policy reversal. New Bank of Japan board member Naoki Tamura told Bloomberg that the central bank could launch a review of its policy framework before the end of current Governor Haruhiko Kuroda’s term in April. Similar assessments have foreshadowed changes in policy previously, and many investors are convinced officials will opt to raise the yield curve control target that currently caps ten-year bond yields at 0.25 percent.
The pound and euro are going from strength to strength, breaking technical barriers as they move higher – but traders remain wary of the potential for a weather-related rise in gas prices. A mild winter and extraordinary efforts to rebuild storage levels have helped put pressure on energy benchmarks across the region in the last two months, helping reduce the likelihood of a growth-crushing inflation shock.
Markets think US non-farm payrolls climbed 200,000 last month, down from 261,000 in October, and a number that would represent the smallest gain in almost two years. A stronger-than-expected print could help the dollar rebound somewhat, but we think market momentum clearly favours more weakness in the days and weeks ahead.
Today’s Fed speakers include Richmond’s Thomas Barkin and Chicago’s Charles Evans. Officials will then enter a quiet period ahead of the December 13-14 meeting, leaving markets to their own imaginings.
Karl Schamotta, Chief Market Strategist