Expert Analysis of Today's Market

• The dollar plummeted against other major currencies on Wednesday after senior Chinese officials hinted that the People’s Bank of China may diversify China’s $1.43 trillion of foreign exchange reserves into stronger currencies. The commodity currencies initially gained the most, but after large stock market losses, risk aversion increased and the yen and European currencies took the lead. Sterling rose to the highest level since May 1981, the Swiss franc is at the highest level in over three decades, the Canadian dollar is at the highest level since at least the 1950s, and the Australian dollar touched the highest level since April 1984.


• Supported by better growth and interest rate differentials, the EUR/USD rose to a new all-time high ahead of the European Central Bank’s interest rate decision tomorrow. The EUR/USD touched the upper band of the bullish trading channel today. We reached our target but do not see any reversal in the pair. The stock market is at a critical level. If the stock-market support at the S&P500 1470 level is broken, the dollar may get some support from the increased risk aversion. However, the main beneficiary would be the yen.

Financial and Economic News and Comments

US & Canada

• US productivity rose more than expected in Q3 while labor costs declined modestly, the Labor Department said. Non-farm business productivity jumped 1.2% q/q, which translates into a 4.9% q/q at an annualized rate in Q3. Productivity rose a more modest 2.3% y/y. Unit labor costs unexpectedly decreased 0.2% q/q at an annualized rate as compensation rose 4.7%. Still, labor costs were up 4.3% y/y, suggesting cost pressure still lingers. Unit labor costs usually peak before recessions (yellow shaded areas) start as shown in the chart below.

• US wholesale inventories rose a larger-than-expected 0.8% m/m and 5.2% y/y to a seasonally adjusted $404.55 billion in September, the Commerce Department said. Wholesale sales rose 1.3% m/m and 9.9% y/y in September to a seasonally adjusted $366.83 billion. The inventory-sales-ratio fell to a new record low of 1.10 months in September from 1.11 months in August.
• Federal Reserve Bank of Richmond President Jeffrey Lacker said he believes the Fed’s rate policy is about where it should be, given the current economic outlook. “I think we have the balance about right, right now” in terms of monetary policy, Lacker said.

Europe

• German industrial production unexpectedly rose a seasonally adjusted 0.3% m/m led by construction and energy and 6.1% y/y in September, the Economy and Technology Ministry said. Construction increased 0.7% m/m and energy output rose 1% m/m.

• The Bank of England and the European Central Bank are expected to keep interest rates unchanged at their monetary decision announcements tomorrow. The BOE is expected to keep rates at 5.75% and the ECB at 4.0%.

Asia-Pacific

• Cheng Siwei, vice chairman of the Standing Committee of the National People’s Congress, was quoted as saying that China should shift more of its $1.43 trillion of currency reserves into “stronger currencies,” such as the euro, to offset “weak” currencies like the dollar. The dollar is “losing its status as the world currency,” Xu Jian, a vice director at the People’s Bank of China, said at the same conference in Beijing.


• The Reserve Bank of Australia raised rates by 25 basis points to an 11-year high of 6.75% and signaled rates may be raised again as said inflation would likely remain high. RBA Governor Glenn Stevens said inflation will exceed his target.


• Australian house prices soared 10.6 % y/y in Q3, the biggest increase in more than three years, the Statistics Bureau said.

FX Strategy Update