- USD may further extend gains against almost every currency pair as the sell-off in bonds and EMs gears up
- The better-than-expected US data released yesterday further strengthened the case for a December Fed hike
- EM currencies continue to suffer from a massive outflow as investors turn to US assets
- Apart from the MXN which suffered a severe sell-off on Trump’s election, the BRL is the worst performer in the EM complex
The US dollar extended gains against almost every currency pair during the Asian session as the sell-off in bonds and emerging markets geared up. After climbing 0.70% on Tuesday, the dollar index added another 0.10% in Tokyo and reached 101.90, the highest level since March 2003. The better-than-expected US data released yesterday further strengthened the case for an interest rate hike in the US. Emerging market currencies continue to suffer from a massive outflow as investors turn to US assets. The Dow Industrial Average closed at an all-time high yesterday - for the third day in a row at 19.083.
Apart from the Mexican peso, which suffered a severe sell-off amid Trump’s election, the Brazilian real was the worst performer in the EM complex as it retreated as much as 10.90% against the greenback with USD/BRL jumping to 3.50 before easing at around 3.38 as markets calmed down. The main reason behind the recent emerging market debasement is that over the past months, these markets have seen massive inflows against the backdrop of a hunt for higher returns. USD/BRL has however been unable to break its 200dma to upside and is currently stuck below it at 3.43.
The Japanese yen came under renewed pressure on Thursday as investors continued to favour the greenback amid solid US data. USD/JPY climbed to 113.42 in the early European session, up more than 2% on the week as durable goods orders rose 4.8%m/m in October, beating the median forecast of 1.7%, while the previous reading was upwardly revised to 0.4% from -0.3%. The measure excluding transportation was up 1% m/m versus 0.2% expected and upward revision of 0.2%. Separately, initial jobless claims came in line with consensus, printing at 251k versus 250k expected.
In the equity market, Asian regional markets were mixed this morning with the Nikkei rising 0.94% as traders returned from vacation. In Mainland China, the Shanghai Composite was flat, while the Shenzhen Composite was down 0.38%. Offshore, the Hang Seng was off 0.26% and the Taiex fell 0.28%.
In Europe, equity futures were blinking green across the screen - the DAX was up 0.14%, the Footsie 0.24% and the Euro Stoxx 50 up 0.20% - suggesting a higher open.
Yann Quelenn, market analyst: Germany: "Plenty of German economic data was released early this morning, notably Q3 final GDP, which printed exactly in line with preliminary data. No revisions were made and the economy strengthened 1.5% y/y but only expanded by 0.2% q/q.
Private consumption also rose during the third quarter to 0.3% q/q. Nevertheless, we think that the economic data is not sufficient to push the euro higher for the time being, indeed the ECB remains largely dovish.
German yields are in an upward trend and 10-year bund yields are stalling below 0.25%. At the same time, German yields have dropped to record-lows. Indeed, there are strong speculations that the ECB will tweak its asset-purchase program in order not to run out of bonds. Markets are therefore not focused on data but on central banks. We are in an era where economic data plays second fiddle to central bank policy. In our view it is very likely that the ECB will allow itself to buy bonds with yields below the depo-floor (-0.4%), which would explain why we are seeing significant buying speculation on the German 2-year bund.” ---