Market Drivers October 11, 2016

Dollar Dominates trade
ZEW better
Nikkei 0.98% Dax -0.09%
Oil $51/bbl
Gold $1258/oz.

Europe and Asia:
JPY Eco Watchers 44.8 vs. 45.9
EUR ZEW 6.2 vs. 4.3

North America:
CAD Housing Starts 08:30

Dollar dominated trade today in Asian and early European dealing rising against all the majors as US yields continued to advance with the benchmark 10 year hitting a high of 1.77%.

The commodity dollars were particularly hard hit as carry trade liquidation continues in those pairs. We have been noting for a while that as US yields begin to rise, the high yielders are likely to get hit the worst as yield rate differentials begin to compress.

In overnight comments, Charlie Evans Governor of Chicago Fed and perhaps the most dovish member of the Fed noted that he would be open to a rate hike in December although he insisted that the US was not at full employment and that inflation pressures well below Fed’s 2% target. Although Mr. Evans is not a voting member of the FOMC until 2017 he serves as the barometer of the most dovish wing of the monetary policy committee and his remarks were taken by the market that there is now broad consensus to move Fed towards normalization albeit at a very slow pace.

Elsewhere comments by RBNZ’s Assistant Governor McDermott only added to kiwi’s woes as he noted that inflation remains low but will rise in December. He stated that the central bank remains accommodative. The kiwi dove towards the .7050 level and is now within striking distance of coming towards the .7000 figure. Although Mr. McDermott continued to take a dovish stance, the RBNZ may not need to make any more cuts besides the 25bp cut factored in by the market, as the dollar rally will naturally weigh on the unit going forward. With New Zealand economic fundamentals remaining robust, there is little room for more aggressive stance from RBNZ.

Lastly cable continued to drift lower breaking below the 1.2300 level in late Asian trade as Bexit woes continue to plague the pair. So far there is little indication that the EU is willing to negotiate with UK on trade terms and even Norway refused to engage in any bilateral talks for fear of jeopardizing its stance within EU. Some analysts have forecast that UK could lose up 66 Billion GBP per year under “Hard Brexit” rules and that the hit to GDP could be a depressive 9.5% contraction.

With no data on the docket for North America, trade in FX is likely to be driven by rates and if the 10 year yield can breach the key 1.80% level today the rally in the buck will continue with USD/JPY taking out the 104.00 level as the day proceeds.

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