Dollar Softens, Consolidation Phase Continues

The US dollar is trading choppily but with a distinct softer bias. The economic news has been limited, and the apparent downing of a Russian plane by Turkey caused a flurry of activity, with Turkish assets coming under initial pressure which has abated somewhat.  

The euro briefly dipped below $1.06 yesterday for new seven-month lows, but there was no follow through selling. As is often the case with such chart points, a snap back after the violation, the euro reached $1.0670 in early Europe. 

Although the speculative market, judging from the positioning in the futures markets and the clear down trend since mind-October, is stretched bearish sentiment prevails. Euro bounces are shallow and greeted with fresh sales. Resistance is seen in the $1.0680-$1.0700 area. In the larger picture, we suspect aggressive market positioning will facilitate selling the rumor buying the fact type of activity around the significant events next month. 

German Q3 GDP was confirmed at 0.3%. The details showed a 0.7% increase in domestic demand after a 0.2% decline in Q2. Private consumption rose 0.5%, while government spending increased 1.3%. Capital and construction investment each declined by 0.3%, weaker than expected. Export growth slowed to 0.2% from  a revised 1.8% increase in Q2 (initially was 2.2%). German imports rose 1.1% on the quarter, twice the revised pace in Q2 (initially 0.8% and revised to 0.5%).

There had been some concern that the Germany economy was hitting a soft patch, the flash PMI data earlier this week helped ease such concerns, and today’s IFO survey offers additional assurances. Both the current assessment and expectations rose by more than expected, lifting the overall climate measure to its best level in more than a year.  

Japan’s preliminary manufacturing PMI  rose to 52.8 from 52.4. It is the highest level since March 2014, just before the sales tax increase. This is consistent with our argument against claims that Japan is in either a “technical” or “official” recession because of two consecutive quarters of negative growth. The characterization is supposed to imply the end of the business cycle. Our dispute is not a quibble over the word choice but of what it is to signify. Japan’s business cycle has not ended. With trend growth a lowly 0.5%, the normal vagaries of a modern economy could see it contract without signifying very much.