Dollar Is On The Defensive, Though Yields Rise

The US dollar is trading heavily against most of the major currencies, but the general tone appears consolidative in nature. Despite a disappointing UK manufacturing PMI (53.4, a four-month low), sterling is near a three-week high above $1.2600. 

The consolidative tone for the dollar that began last week continues. It has been unable to make much headway this week, except against the yen, despite stronger data and higher yields. Sterling is leading the move with nearly a cent gain against the greenback. The euro is firm with around a 0.3% gain that puts it close to $1.0625. In the emerging market space, Russia and South Africa are ahead of the pack, while eastern and central European currencies benefit from the steady to firmer euro.  As expected Brazil cut the Selic rate yesterday and the real is expected to open steady to firmer.  

Asian equities advanced, led by the 1.1% rally in the Nikkei. European shares are heavier and the Dow Jones Stoxx 600 is off 0.5%. Energy is the only sector that is higher.  MSCI Emerging Market equity index is up 0.2%, fourth gain in five sessions.  Bond yields are higher, with European 10-year yields up 2-4 bp, while the 10-year US yield is above 2.40%. 

Oil prices are firm after yesterday’s OPEC agreement. Many seem prepared to respect the price action and not resist the higher oil prices, but many are skeptical of the implementation, which does not begin for another month. Saudi Arabia is perceived to have blinked.It agreed to cut its output by almost 500k barrels a day, while its rival Iran was allowed to boost output slightly (90k barrels a day).That would bring Saudi output to 10.1 mln barrels a day, which incidentally is its average output from the end of last year through April of this year.Iraq failed to resist pressure for output cuts despite claiming it should be exempt due to its battle against ISIS.  

If OPEC agreed to almost a 1.2 mln barrel a day cut, most driven by about a 4.5% cut in member’s output, non-OPEC is supposed to deliver a 600k barrel cut. Next week there will be meetings with OPEC and non-OPEC countries. Conflicting reports suggest Russia could phase in 200k-300k barrel cut over the course of the first several months of next year. Getting many other non-OPEC countries to participate actively may be difficult. Mexico, for example, quickly indicated it would not cut output.