Week in FX: Americas October 16-21

Investors had expected a relatively uneventful trading session into the Euro Summit this weekend. This was not to be, the dollar had a ‘wobbly’, printed WWII record lows against the yen that was triggered by the execution of exotic auction barriers and the running of a plethora of dollar stop-losses across the major currency pairs. A mix of speculation that European leaders are moving closer to an agreement to contain its sovereign debt crisis has tentative “risk” being applied and the big dollar ending the week on the back foot. When does the ending of the euphoric headache begin? Maybe it’s after the second summit?

Below are some highlights of the week:

• FED: Chicago Fed President Evans (most dovish of the committee) stated this week that the US economy is in a “liquidity trap and faces massive shortfalls in output and employment”. He suggests that the Fed communicate an explicit target – “either the jobless rate falls below +7% or inflation outlook rises above +3%” – and keep target rates low and/or embark on more QE until the objectives are clearly met.
• USD: IP advanced +0.2%, bang on market expectations, despite the net revisions being marginally negative at -0.1%. August was revised down from +0.2% to unchanged, while July was revised higher by +0.2% to +1.1%. The negative print came from June retreating -0.1%. Analysts use this to explain why capacity utilization fell short of consensus at +77.5% by -0.1%.
• USD: Empire State Manufacturing Index contracted this month (-8.5) at a faster pace than forecasted (-3.9), reflecting a lack of confidence in the recovery, even as measures of orders and sales improved.
• USD: The surge in PPI (+0.8%) almost entirely reflected higher energy compared to August. Strip out the most volatile components and the core increased by just +0.2%, m/m, with the annual rate steady at +2.5%. This would suggest relatively contained inflationary pressures. This would suggest relatively contained inflationary pressures. The release should have no influence on the Fed’s monetary policy. Capital markets and the Fed are honing in on growth indicators.
• USD: The TICS report was strong at +$57.9b, led by +$69.7b foreign buying of Treasuries. It seems that investors stepped up to the plate once the debt ceiling standoff was resolved. It was interesting to see that China was a net seller of treasuries in August.
• USD: US housing data crushed market expectations for September, jumping +15%, to its highest level in 17-months as a surge in apartment and condo construction boosted the ailing housing sector. The seasonally adjusted annual rate of +658k beat a forecasted +590k print.
• USD: CPI came in ‘piggybacking’ expectations at +0.3% for September. Even better was the core-print (ex-food and energy) up only +0.1%. In translation, year-over-year, the core now stands at +2%, within the Fed’s comfort zone. Policy makers can now go back to looking at growth indicators, hoping for inspiration.
• CAD: Canadian index of leading indicators fell -0.1% in September, the first decline in a year, led by declines in manufacturing.
• BRL: The Copom (MPC) cut the Selic (O/N lending rate) by -50bp to +11.50%, in line with market consensus. Policy makers blamed the deterioration in global demand conditions as the main culprit.
• CAD: Core (+0.5% and the highest level in three years) and headline inflation (+0.2%) unexpectedly accelerated in September. While inflation has been above the BoC+2% target for 10-months, Governor Carney has said he has “considerable flexibility” in how fast inflation returns to the bank’s desired rate.

European Week in FX

ASIA Week in FX