Dollar index slips after ECB minutes sound a hawkish tone

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OVERNIGHT MARKET SUMMARY

The U.S. dollar index regained its footing late yesterday after falling following a Bloomberg story claiming that Chinese officials were considering slowing or halting their purchases of U.S. government bonds. The report had sent the dollar tumbling across the board as Beijing’s massive purchases of U.S government bonds represent a sizable source of funding of America’s gapping current account deficit. The greenback recouped much of yesterday’s losses after China’s currency authority denied the Bloomberg story.

The dollar’s trade-weighted average fell sharply again this morning following the release of the European Central Bank’s minutes from last year’s final Governing Council meeting in December. The minutes sounded a more hawkish tone than investors had originally interpreted in the immediate aftermath of December’s policy meeting. The account of the December Governing Council meeting said central bankers could revisit their forward guidance on asset purchases in early 2018 based on the improving performance of the 19-member bloc’s economy. The potential for the ECB to adjust its communications, possibly as early as its January 25th policy meeting, sent the euro soaring to session highs.

U.S. wholesale prices surprisingly fell by 0.1(m/m) in December, confounding expectations for a 0.2%(m/m) increase. Ex-food and energy, the story was just as benign, with the core PPI falling 0.1%(m/m) versus forecasts for a rise of 0.2%(m/m) as well. The figures added to the greenback’s heavier tone this morning as they suggest little upward pressure on wholesale prices. Investors await tomorrow’s more closely watched consumer price index for further clues on the state of inflation and on the outlook for the Fed.

The Canadian dollar failed to move higher against its generally heavier U.S. counterpart this morning following comments from two Canadian officials late yesterday that said they were increasingly convinced President Trump would pull the U.S. out of the North American Free Trade Agreement. The headline sent the loonie tumbling to its lowest level this year and dampened expectations for the BOC to raise Canadian lending rates when it meets next month.

The Aussie retested a recent three-month peak against the greenback after retail sales were reported to have risen by the most in four years in November.

USD: The U.S. dollar briefly regained its footing from the previous day’s selloff after China’s currency authority denied a Bloomberg report that officials who were evaluating the nation’s massive foreign holdings had recommended slowing or halting its purchases of U.S. Treasury bonds. Because China is the largest purchaser and holder of U.S. government debt, any shifts in is buying habits or asset allocation can have a massive impact on the Treasury market and on the dollar. The greenback’s improved tone however, proved very short-lived, with more hawkish ECB minutes and much cooler than expected U.S. inflation data sending its to session lows this morning. While the surprise drop in PPI was damaging for the already vulnerable dollar, tomorrow’s CPI data will likely be more consequential. A similarly cooler than expected CPI print tomorrow would all but certainly add to the dollar’s heavier tone.

EUR: The euro soared to session highs across the board after the release of the minutes from the ECB’s final Governing Council meeting of 2017. The ECB had disappointed euro bulls at the time with its very open-ended timeline for its asset purchases and by reminding investors that stimulus could still be increased if economic conditions warranted. The minutes however, showed that councilmembers planned to revisit the bank’s forward guidance on policy in early 2018, suggesting that the ECB could remove language keeping the door to further easing open and could more firmly suggest that its asset purchases will end in September. Lending rates in the euro zone are still not expected to rise before 2019 but the removal of the bank’s easing bias, possibly as early as its January 25th Governing Council meeting, could keep the euro well supported.

JPY: The yen, which soared to its highest level since late November the previous session on news that China could slow or halt its Treasury purchases, pared some of its gains after Beijing denied the story. Still, the dollar remains near the lower end of recent ranges against the yen and was done no favors by this morning’s surprise drop in wholesale inflation.

AUD: The Aussie jumped to its highest level in three-months against the generally heavier greenback after Australian retail sales soared by 1.2%(m/m) in November, eclipsing forecasts for a rise of 0.4%(m/m). It was the biggest monthly jump in Australian retail sales in four years. The news helped improve the outlook for Aussie consumer demand and increased, albeit marginally, the possibility of an RBA lending rate increase before 2019.

CAD: The Canadian dollar fell to its lowest level since late December after two officials close to ongoing NAFTA negotiations with the U.S. and Mexico, said that they were increasingly convinced that President Trump would pull out of the free trade deal. The officials believed the U.S. would announce it is leaving the deal around the beginning of the sixth phase of the talks, which are set to begin in late January. Because roughly 75% of Canadian exports wind up in the U.S., any increased risk of NAFTA talks falling apart will continue to have a significant impact on the value of the CAD.

DOLLAR OVERNIGHT PERFORMANCE VERSUS
EUR
-0.86%
CAD
-0.10%
MXN
+0.63%
CNY
-0.18%
CHF
-0.44%
DKK
-0.83%
AUD
-0.51%
EUR/CAD
+0.73%
GBP
-0.25%
SEK
-0.74%
NZD
-0.54%
EUR/GBP
+0.58%
JPY
+0.05%
NOK
-0.66%
ZAR
+0.06%
EUR/JPY
+0.86%
MARKETS AND COMMODITIES PERFORMANCE
DOW JONES
25461.80
+0.37%
CRB INDEX
195.34
+0.25%
FTSE 100
3040.65
-0.25%
US 10 YEAR
2.569
+0.01%
GOLD
1322.32
+5.51%
CRUDE OIL
64.40
+0.83%

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