Dollar Rips Higher, OPEC Reaches Deal
The OPEC meeting may have been the main focus today but the soaring U.S. dollar was the big story. The greenback ripped higher against all of the major currencies with USD/JPY breaking above 114 in the process. The currency pair made a new 8 month high and is now eyeing 115. The rally was driven by back-to-back upside surprises in U.S. data along with a sharp rise in U.S. yields. The positive Beige book also supported the move but the bulk of buying happened before the report was released and before the European close. There’s no question that dollar bulls remain in control and insist on driving the greenback higher into NFPs. There is still the risk of profit taking but the path of least resistance for the greenback remains higher. Although personal spending growth slowed, personal incomes grew significantly more than expected in the month of October. The Chicago PMI index also jumped from 50.6 to 57.6 but the trend for the dollar was set early on by ADP, who reported an increase of 216K jobs in the month of November, up from 147K in October.
The focus now shifts to Friday’s labor market numbers and all signs point to a strong report. Job growth had been relatively mild over the past few months but the Federal Reserve continues to tout the improvements in the labor market. We again that again in today’s Beige book. Their bar could be low or they are satisfied with an improving unemployment rate and job growth below 175K. Either way their optimism has driven the forecasts for November’s release higher with economists calling for non-farm payrolls to rise by 180K. We won’t be publishing on Thursday so we want to take this opportunity to share our outlook for NFPs. This month’s report is more difficult to handicap than others because non-manufacturing ISM won’t be released until next week, but we have every reason to believe that job growth accelerated. Jobless claims have been low, confidence is at a 9 year high according to the Conference Board’s report and ADP reported a significant uptick in private sector payrolls. Corporate earnings are also rising and while the manufacturing ISM report won’t be released until Thursday it doesn’t change our positive outlook. However the dollar’s reaction to non-farm payrolls is not as clear as our forecast for NFP because in order for the dollar to rise, job growth needs to meet or beat expectations, the unemployment rate needs to hold steady and average hourly earnings growth needs to increase by 0.3% or more. The greenback has run up a lot ahead of NFP and that’s a lot to ask for especially after last month’s sharp increase in wage growth. Should the labor market report fall short in any way, we could see significant end of the week profit taking in USD/JPY.
After weeks of difficult negotiations, OPEC ministers finally announced a
deal in Vienna today to cut daily oil production by 1.2 million
barrels, sending oil prices sharply higher. While some analysts
had hoped for a 1.4 million reduction there was a good chance last
night that there would be no deal so everyone was relieved when an
agreement was reached. In yesterday’s note we said oil prices would
soar if a deal is done because of the extent of short positions and
today the price of crude jumped over 10% on an intraday basis. Non-OPEC
nations were also asked to reduce production by 600K barrels a day with
Iran given the special exemption to keep raising production. This
concession reflects how desperate oil producing nations are to end the
supply glut and reverse the downtrend in prices, which is less than 50%
of 2014 lows. The deal is still contingent on the participation on
non-OPEC nations like Russia who has said they can only reduce
production at a moderate pace. Either way, we expect oil to continue
moving higher in the coming days and USDCAD to move lower. Canadian GDP
numbers also rose more than expected on a monthly and quarterly basis.
The only thing supporting USD/CAD is the stronger increase in U.S.
versus Canadian yields.
The Australian and New Zealand dollars were hit from all sides today by weaker data, a rising U.S. dollar and lower oil prices. Gold, iron ore, steel and copper all saw experienced losses. In Australia, building approvals dropped more than -12%, which was significantly worse than the market’s forecast for a 2% rise. In New Zealand business confidence ticked lower. However NZD managed to outperform AUD thanks to RBNZ Governor Wheeler’s comments overnight. The central bank head said he expects inflation to rise back into their target band in December. Australian and Chinese manufacturing PMI numbers are scheduled for release this evening.
The rebound in the greenback drove the euro lower for the first time in 5 trading days. The latest Eurozone economic reports were actually pretty good with German retail sales rising strongly in the month of October. Consumer spending jumped 2.4% which was more than double the market’s forecast. German unemployment also fell by 5K in the month of November keeping the unemployment rate steady at 6%. These numbers are consistent with the recent optimism from Mario Draghi who sees the Eurozone economy expanding at a moderate pace and with the “gradual upward economic trend set to continue.” While euro saw mild losses versus the greenback today, the GE-US 10 year yield spread fell sharply, signaling a near term top for EUR/USD.
For sterling, month end flows translated into wild intraday volatility for the currency. No major U.K. economic reports were released today but last night, we learned that consumer confidence fell sharply in the month of November. The GfK index dropped to -8 from -3 and according to GfK, the deterioration is largely attributed to concerns about Brexit. The economic outlook index dropped to -22 from -17 as the British worry about what is in store for the coming year. The U.K.’s PMI manufacturing report is scheduled for release on Thursday and given the sharp rise in the CBI industrial trends survey, the number should be weaker.