Dollar Climbs Further

October 18, 2017

The dollar was buoyed by negative European factors (Catalonia, Brexit and a weak construction output report) and expectations of a widening U.S. interest rate premium. Yellen is generally expected not to be reappointed as Fed Chair, and that suggests a steeper incline in the federal funds target especially if U.S. tax reform is enacted.

The dollar climbed 0.5% overnight against the yen and kiwi. A member of the Bank of Japan Board, Sakurai, said monetary policy will need to stay ultra-easy even as Japanese economic growth strengthens in order to lift inflation expectations.

The dollar also rose 0.4% relative to the Swiss franc and 0.2% vis-a-vis the Australian dollar and euro. ECB President Draghi urged politicians to enact fiscal reforms while central bank policy remains very loose. The Westpac index of Australian leading economic indicators rebounded 0.08% in September following a revised 0.10% dip in the previous month.

Construction output in the euro area fell 0.2% in August and was even 0.1% lower than its level in April. Compared to a year earlier, construction was just 1.6% higher versus a 5.4% year-on-year advance back in February.

In Spain, the deadline of 08:00 GMT on Thursday is now less than 24 hours away for the leaders of the Catalan separatist movement to end that quest. Otherwise, the central government in Madrid will suspend the region’s autonomy.

Britain is in political turmoil, too. The Brexit timetable keeps shortening, and the British population remains as disunited as ever over the decision to leave the European Union. Prospects for an exit deal do not look hopeful. British inflation has risen to 3.0% and seems headed higher, but wages remain subdued despite low unemployment. Labor statistics released today showed an on-year 2.2% increase (2.1% excluding bonuses) in average weekly earnings in the three months to August. Unemployment claims rose 1.7K in September, their first rise since June. The ILO-basis jobless rate was unchanged at 4.3%, the lowest rate since 1975.

The investment appeal of U.S. assets was reflected in the U.S. Treasury’s department’s latest monthly report of capital flows. There was a net long-term inflow of $67.2 billion in August, and the total inflow including short-term capital ballooned to a whopping $125 billion in the latest month.

Fixed income sovereign debt yields are higher, led by a 3-basis point indicated advance in the 10-year Treasury to 2.33%. 10-year German bund and British gilt yields are up by 2 and 4 basis points.

Share prices in the Pacific Rim closed unchanged in Australia, New Zealand and Taiwan. Markets rose 0.3% in China, 0.2% in Hong Kong and 0.1% in Japan but slid 0.3% in Indonesia and 0.1% each in South Korea and India. The market in Singapore was closed for holiday. In Europe, equities so far have strengthened 0.6% in France and Germany, 0.4% in Switzerland, 0.3% in the U.K. but not at all in Madrid.

Comex gold declined another 0.4% to $1,281.50 per ounce. WTI oil, by contrast, rose 0.4% to $52.08 per barrel.

Xi Jinping opened China’s 19th Communist Party Congress in Beijing, with a mission to impose complete party control over all facets of the country and declaring a “new era.” Party discipline will be paramount.

CPI inflation accelerated in South Africa to 5.1% in September, which was a bigger rise than forecast.

The Federal Reserve Beige Book of regional economic conditions will be released this afternoon.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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