The Dollar: More Of The Same

The US dollar gained on most of the major foreign currencies last week, but the overall tone, leaving aside the yen, was largely consolidative in nature. The greenback was soft in the first half of the week but recovered in the second half.  

The Australian and Canadian dollars were the only major currencies that managed to hold onto some of their gains (0.55% and 0.40% respectively).  The yen was the weakest of the majors, losing 1.2%, as the panic from the week before died down.  Equity markets were mostly higher, with the Nikkei’s 5.2% rise, leading the major markets.  US 10-year Treasury yields rose 8 bp. Core bonds generally traded heavier, but European peripheral bonds were firmer, in line with the calmer conditions.   

We were never persuaded that last week’s turmoil would prevent the Fed from completing its tapering operation, and see that in the market, cooler heads are prevailing.  Talk of “tapering the tapering” has diminished, and no one is taking too seriously the prospects of QE4.  Nevertheless, we note that both the December 2015 Fed funds and Eurodollar futures contracts were unchanged on the week at 46 bp and  77 bp respectively.  

Perhaps offsetting the diminished interest rate support for the dollar has been speculation that more action from the European Central Bank and the Bank of Japan could be imminent. Reports suggested that the ECB may consider adding corporate bonds to its asset purchase program.  There were also report suggesting that the BOJ sees risk that inflation may fall, and this could prompt an extension of the already aggressive Qualitative and Quantitative Easing.  We are skeptical that either will materialize in the coming weeks. The BOJ meets next week and the ECB the following week.    

Technically, the euro looks poised to continue to consolidate.  Most of last week’s price action took place within the $1.2625-$1.2886 range set on October 15.  In recent session, the euro flirted with the lower end and slipped to about $1.2615. The euro spending the second half of the week below the 20-day moving average, which comes in near $1.2690. This is the nearby cap. Of note, the nearly four-cent bounce in the euro has not been accompanied by a sharp change in euro positioning  The confidence of the euro bears is palpable and quite widespread.