Dollar Gains at Month-End as Traders Await BOE, Next Fed Chair

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  • Greenback sets longest monthly winning streak this year
  • Loonie drop after data offsets pound gain before BOE meeting

The dollar gained at month-end despite portfolio rebalancing that was expected to result in greenback selling, as markets awaited the start of central bank meetings and the nomination of the next Fed chair.

The Bloomberg Dollar Spot Index advanced less than 0.1 percent as the greenback gained versus most of its G-10 peers, with the pound strongly outperforming. Sterling has risen this week before a Bank of England meeting, where investors widely expect the first rate increase in a decade. The biggest losers of the day were the Canadian and New Zealand dollars and the yen; some rebalancing models had anticipated dollar-yen demand.

  • The dollar pared gains and traded little changed just ahead of the London fixing at midday New York time; the greenback then rebounded as USD/JPY rose the most in a week to a session high. The Bloomberg dollar index was on track for a monthly gain of 1.7%, its best performance since November, and gained for a second consecutive month for the first time this year
  • The Fed began its two-day meeting in Washington; rates are widely seen staying unchanged and investors appear more focused on the nomination of the next Fed chair, which is expected on Thursday
    • There is unlikely to be much of a reaction by Treasuries if the appointment goes to current chair Yellen or Fed Governor Jerome Powell, who is seen as a continuation candidate, Pimco’s Richard Clarida said in an interview with Bloomberg Television 
  • GBP/USD rose to a high for the day at 1.3289 and continued to trade nearby as investors prepared for a BOE policy meeting Thursday, with markets pricing in more than 80% odds for a rate hike. Traders are waiting to see whether the BOE will adopt a “one and done” approach or whether Governor Carney will signal a possible need for future hikes, a step that could send sterling higher. Uncertainty surrounding Brexit negotiations favors a single hike, one trader in London said
  • Traders also continue to monitor the outlook for U.S. tax reform, with House bill writers expected to release a proposal Wednesday; President Trump said corporate tax cuts will “hopefully not” be phased in
  • USD/JPY set a fresh daily high at 113.73 amid fixing demand and remained near the level later in the session. The pair rebounded from an overnight drop to 112.96 that flushed out more USD longs, traders in Asia said. The BOJ kept rates and policies on hold while lowering its inflation forecasts, underscoring its divergence from G-10 peers
  • EUR/USD was trading around 1.1654 after earlier rising as high as 1.1661. EUR gains proved attractive to some proprietary accounts keen to add USD longs ahead of a new month, a London trader said. EUR wasn’t moved much by data that showed the euro area economy expanded 0.6% q/q in 3Q, above estimates for a gain of 0.5%. Inflation continued to lag, with CPI rising 1.4% y/y vs est. 1.5%, underscoring the ECB’s decision last week to extend QE into 2018 
  • The Canadian dollar led declines in G-10 after Canada August GDP contracted by 0.1 percent vs expectations for a gain of that magnitude, suggesting a more extreme-than-expected slowing of the economy from a torrid 2Q pace. The loonie fell more than 3% against the greenback during October
    • The data “justifies the BOC’s current wait-and-see approach after two quick hikes,” CIBC economist Nick Exarhos wrote in a client note 
  • USD saw little impact from data that showed the U.S. 3Q employment cost index rose 0.7%, in line with estimates and faster than the prior 0.5%. Other October U.S. data showed a stronger-than-expected gain in consumer confidence and a rise in the MNI-Chicago report vs expectations for a drop
  • Some information comes from foreign exchange traders familiar with the transactions who asked not to be named as they are not authorized to speak publicly
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