The main currencies of Europe, the GBP and EUR, were the worst performers on the week. The GBP was still reeling from the previous week's flash crash which saw it lose 6% in a matter of minutes. The main catalyst for last week's loss was Prime Minister May's concession to allow Parliament to vote on Brexit and Governor Mark Carney's comments. Carney said he would tolerate an overshoot of the Bank of England's inflation target, suggesting that supporting economic growth remains the priority after the Brexit vote. The euro has given up all of the previous week's gains which were built on QE tapering and this week it's the opposite - there was talk about extending and/or tweaking QE. Confused – you're not alone; at this point it is difficult to discern the ECB's position. Meanwhile, the CAD and AUD were the only two currencies to outpace the USD last week in the face of weaker imports from China and the continued increase in US treasury yields and inflation expectations.
China's September trade data flashed another weak signal for the global economy. China reported a USD 41.99 billion trade surplus for September, compared to a USD 59.60 billion surplus a year earlier and missing market estimates of a USD 53.0 billion surplus. It was the smallest trade surplus since March as exports fell much more than imports. Exports fell 10% from a year earlier to USD 184.51 billion, following a 2.8% drop in the preceding month - if the global economy were humming along, China's export engine would be too. Interestingly, these numbers cut against the view that stronger competitiveness from a weaker currency will cause exports to grow – which means that the true problem with the global economy is not the lack of demand but rather excess capacity or too much supply. Nevertheless, the commodity currencies were resilient to the weak data – the only reason why AUD and NZD are not trading lower is because of carry trade demand, while the CAD was supported by firmer oil prices around the $50 level.
The rally in the USD since the September FOMC meeting has been supported by an increase in US treasury yields and inflation expectations. In that meeting, three policy makers (George, Mester, Rosengren) dissented, which was the first time that three policy makers registered a nay since December 2014; and this seems to have convinced the market that the Fed is almost ready to raise interest rates. Inflation expectations also appear to be a factor as the 10-year breakeven and the five-year, five-year forward have risen steadily since mid-September.
The technical condition of the US ten-year yield warns that additional gains may be hard to achieve as the momentum indicators are getting stretched. This dovetails nicely with the fact that the US dollar index is also bumping up against the upper Bollinger Band that is found near 98 level. Not to mention that the momentum indicators are also getting stretched.
Looking ahead, the USD could consolidate as it takes a back seat to more important non-U.S. event risks on the calendar. This includes the ECB monetary policy announcement, Bank of Canada Rate Decision, Reserve Bank of Australia Minutes, Australian and U.K. employment reports, U.K. and Canadian retail sales, and China's Q3 GDP.