USD: A bit more pain
The dollar showed tentative signs of recovery yesterday, but appears to be lacking any strong support at the moment. While we don’t buy the one-way traffic, and the USD-bearish narrative in the longer run, there may be extra downside room for the greenback this week.
With the US calendar being rather light, the two main drivers of global sentiment are China and Fed speakers. With respect to the first, there are two aspects to consider: data and diplomatic talks. As discussed here, Chinese industrial production and fixed asset growth numbers for October were in line with consensus, but the retail sales drop (-0.5% year-on-year) came as a surprise. Still, retail sales are highly sensitive to Covid restrictions, and the recent progress towards more flexible rules suggests room for recovery. Asian equities are rallying this morning, and this appears to be due to general optimism after a long meeting between US President Joe Biden and Chinese President Xi Jinping at the G20 meeting yesterday, which was followed by mildly encouraging remarks about diplomatic cooperation.
We still suspect it is too early to point at China as the key driver for a broader recovery in risk sentiment (and dollar descent), considering the still sizeable economic challenges affecting China going beyond its Covid policy (e.g. real estate fragility, slowing global demand).
On the Fed front, we heard from both sides of the hawk-dove spectrum yesterday. The hawk Christopher Waller dismissed the deceleration in core inflation as just “one data point” and that more data was needed to conclude tightening should slow. The dove Lael Brainard also signalled there is more work to do, but explicitly said the Fed will likely shift to slower rate increases soon. It appears that the FX market was primarily affected by Waller’s remark, with the ultra-Fed-sensitive yen dropping around 1% yesterday. For now, we read recent Fedspeak as further indication that a bearish dollar call on the back of Fed dovish pivot bets still appears premature.
Today, we’ll hear from the Fed’s Patrick Harker, while the data calendar includes October Empire Manufacturing and PPI figures. Some extra near-term USD weakness is possible, but we suspect we are reaching the bottom of the recent downtrend.
Francesco Pesole
