The US dollar is mostly higher to start the week, with two exceptions. The first is the yen. The unexpected contraction in Q3 GDP triggered a stock market slide (Nikkei off 3%, giving back around 40% of this year’s gains) and spurred a dramatic short-covering squeeze in the yen after the greenback first pushed briefly through the JPY117.00 level. The dollar found good bids near JPY115.50 from where it based and returned to the JPY116.30 area in the European morning. The New Zealand dollar is the other exception, helped by a strong retail sales report (1.5% in Q3 vs. consensus of 0.8%).
Dovish comments over the weekend by the BOE’s Carney and Haldine, who played up the disinflation risks, took a toll on sterling. It fell a cent from the Asian high near $1.5735 to return toward the 2014 low set before the weekend. Economists are pushing out when the BOE will be able to raise rates, and investors are responding accordingly by extending the recent rally in the short-sterling futures contracts. Since last week’s dovish Quarterly Inflation Report, the implied yield of the December 2015 short-sterling futures contract has fallen 18 bp. The 10-year gilt yield has fallen 16 bp.
For its part the euro traded as high as $1.2580 in Asia, on follow through buying after the construction pre-weekend price action. However, sellers re-emerged; encouraged by comments from ECB’s Mersch suggesting, at least theoretically, a wide range of assets the ECB could buy, including gold shares and ETFs. However, Mersch seemed to downplay market speculation that new initiatives would be launched as early as next month, noting that the covered bond and ABS purchases are just beginning.
