Market moves in mysterious ways Following the better-than-expected nonfarm payrolls on Friday, you might have expected the dollar to rise. You might have expected investors to buy dollars against everything. You might also have expected the biggest drop in German factory orders since 2008 to send the euro down. If so, you would’ve been theoretically correct but slightly poorer. In fact, USD fell against all its G10 counterparts and almost all the EM currencies that we track for no obvious reason that I could find. It seems to fit a pattern of the movement on NFP days reversing the following Monday. Maybe it was because of the good response in Brazil to the election, or to the easing of tensions in Hong Kong, which brought back a bid for EM currencies (and hence some selling of USD). Or maybe it was the reversal of Friday’s rise in the US fixed income markets; the implied rate on Fed funds futures were up 3.5 bps in the long end on Friday and down 4 bps on Monday, totally unwinding the NFP impact. Same thing at the long end of the bond market, too (although that was barely impacted by the NFP anyway). I can only think that after 13 straight weeks of buying dollars, people took the good NFP figure as the signal for profit-taking. The US currency may take a breather from here temporarily, but I wouldn’t expect the trend to change.
The Reserve Bank of Australia (RBA) kept rates unchanged, as was universally expected, and softened its tone about the AUD after its meeting Tuesday. Last month it said that the exchange rate “remains above most estimates of its fundamental value.” This month it dropped that line and went back to saying that the rate “remains high by historical standards,” as it had said several times before. In fact, the OECD estimates that AUD is the 3rd most overvalued currency in the G10 (after CHF and NOK), pegging it as 24% overvalued, down from 29% overvalued at the time of the September meeting. Other measures based on CPI and PPI currently estimate it at around 20% overvalued (although the Big Mac index rates it as 15% undervalued, which means that hamburgers are a big bargain there). In any event, the RBA seems less concerned about the level of the currency than it was before. RBA members have previously identified the 0.86 area as representing something they could live with. I would therefore expect less pressure from them on the exchange rate now. This is in contrast to the Reserve Bank of New Zealand, which is still complaining bitterly about their exchange rate. Thus I would expect AUD/NZD to rise from here.
The Bank of Japan kept its policy unchanged, as was also universally expected. Called to testify in the Diet in the middle of the meeting, BoJ Gov. Kuroda said that the BoJ will add stimulus if downside risks materialize. We knew that already as he’s often said so. According to Bloomberg, a majority of the BoJ Policy Board members favor dropping the two-year deadline for meeting the 2% inflation target. It’s hard to say what the impact of this would be on the yen. On the one hand, it would mean that they would keep policy loose indefinitely until they did meet the target. That would be JPY-negative as it would confirm JPY as the funding currency of choice. On the other hand, it would eliminate the need for the BoJ to increase the stimulus as the deadline approached, which would be JPY-positive. Currently, the market is assuming that they will increase their stimulus in January in order to meet the April deadline for 2% inflation. Personally, I think the market has it in mind to sell yen and whatever happens will be interpreted negatively for the currency.
Today’s indicators: During the European day, we get industrial production figures for August from Germany, Norway and the UK. The German figure fell by more than expected, was lower than expected, adding more evidence to the slowdown in what’s supposed to be the engine of growth in Europe. No forecast is available from Norway. In the UK, the figure is expected to remain unchanged from July.
From Canada, building permits for August are expected to fall, a turnaround from July.
In the US, the only indicator we get is the Job Opening and Labor Turnover Survey (JOLTS) report for August and the forecast is for the number of job openings to increase marginally. While this indicator is not particularly market-affecting, it adds on the positive side of the employment report released on Friday.
We have two Fed speakers on Tuesday’s agenda, Minneapolis Fed President Narayana Kocherlakota, a big dove, and New York Fed President William Dudley, a little dove.