Surprising Dollar Action

OVERNIGHT

Global equity markets were mixed to generally lower overnight with the biggest loser, the CAC-40 which posted a decline of 1.24%. In a development that might find its way to the US, the cost of borrowing for the ECB reached the highest level since the euro zone financial crisis of 2012 as burgeoning debt has resulted in demands for higher payment for buying risky EU debt. Overnight economic news included a slight drop in Australian monthly consumer price index readings for October, a weaker than expected French consumer confidence reading for November, a much weaker than expected Swiss ZEW expectations survey for November and a much weaker than expected German GfK consumer confidence survey for December. Today’s US economic report slate is packed, with initial claims (expect to be up 4000), durable goods (expected to be up 0.5% a recovery from the decline last month), preliminary third quarter GDP (expected to be unchanged), Chicago purchasing managers which are expected to improve notably, unchanged quarterly core personal expenditures, unchanged personal income for October and slightly weaker personal spending. There will also be a seven year note auction at mid-session today.

CURRENCY FUTURES

Once again, the action in the dollar is surprising and confusing as rising concern over European debt and fear mongering over a global tariff war should have lifted the Dollar index. However, for the time being, the trade expects the US to suffer the most from a launch of significant US tariffs. It should be noted that the amount of tariffs on US goods flowing to the European Union is nearly $2 trillion per year with the euro zone also forcing a massive amount of arcane and costly regulation on US products and services. If today’s US economic data (those measuring activity) are better-than-expected, that could stall the dollar correction. However, the December dollar index looks poised to retest the psychological consolidation low support around 106.00. On the other hand, the Euro is likely to struggle to extend its pattern of higher highs with initial resistance at 1.0565 and again at its psychological price level of 1.06. The biggest winner of the current environment is obviously the Japanese yen which is poised for a retest of the November high up at 66.42. However, it should be noted that the Bank of Japan has seen record losses on its quantitative easing bond holdings as yields climb away from negative/zero.

INTEREST RATE MARKET FUTURES

With a bevy of US economic reports scheduled for release this morning, the tendency for thin holiday trade might be temporarily replaced with a compacted measure of active trading activity. While inflation readings today are expected to be unchanged, activity readings (particularly durable goods and Chicago purchasing managers) are likely to be positive while initial claims, pending home sales and personal spending are likely to register minimal slowing. Part of the early gains in US treasuries this morning could be the result of international flight to quality inflows following a jump in ECB borrowing rates to the highest level since the European financial crisis back in 2012. Another positive lift for US treasuries is the continuing headline coverage painting Trump tariffs threats as mutually destructive, inflationary and likely to produce economic headwinds. With the higher high and highest trade since November 6^th, December bonds and notes are likely to see upside follow-through today. The seven year treasury note auction at midsession is likely to see mixed to slightly positive demand despite the recent slide in yields. If there is a headwind for treasuries today, it is recent doubt from various Fed members on upcoming rate cut prospects with some Fed members expressing concern for widespread uncertainty in the markets.

STOCK INDEX FUTURES

While US equity market measures have fallen back from fresh 12 day highs, prices generally remain near all-time high ground. Therefore, the uptrend should extend despite the haranguing over the US tariff threat. While past history is not indicative of future performance, the Thanksgiving Day holiday has been bullish for prices in the past. However, internal fundamentals for stocks are bearish with Dell forecasting a drop in fourth-quarter revenue, and concerns for US automakers in the face of tariffs. However, a positive development is the progression toward a cease-fire between Israel and Hezbollah.

Interested in more futures markets?  Explore our Market Dashboards here.