Dollar Lower Following Fed Speach, BoE Inflation Report Watched

Dollar was mildly soft in quiet trading overnight after comments from Fed officials. Atlanta Fed President Lockhart, a voter next year, did not rule out that a tapering could begin in as soon as December. However, he preferred to see inflation rising back towards 2% first. According to him, inflation is "stable but too low" and a move higher would "give me some confidence we are not dealing with some downside scenario that might develop". He also noted that the tapering decision should "focus mostly on employment and inflation, both of which are pretty far from the mandate-consistent levels we are seeking". Besides, he stated that he is comfortable with a 6.5% unemployment rate as the threshold for the first rate hike while there would likely be discussion on lowering the threshold to 6%. Meanwhile, Minneapolis Fed President Kockerlakota, a voter in 2014, suggested that the threshold for the first rate hike should be 5.5%. He is more dovish than Lockhart and suggested that the Fed should continue QE at the present pace and open the possibility of accelerating the pace if economic recovery disappoints.

UK events will remain a major focus today. Sterling has been under some pressure yesterday after much tamer than expected CPI reading. Attention will be on job data and BoE inflation report today. Claimant count is expected to drop -30k in October while unemployment rate is expected to be unchanged at 7.7%. CPI slowed to 2.2% yoy in October, the lowest level since September 2012. Traders pared back some expectation of policy stimulus removal yesterday after the data as it's getting less likely that BoE would use the opt-out clause in its forward guidance. In today's inflation report, growth forecast is expected to be revised up while inflation forecast would be revised down. The most important projection would be unemployment rate. BoE pledged to maintain stimulus at least until unemployment falls back to 7% threshold and it projected in the August inflation report that this level won't be reached until the end of 2016.

In Japan, BoJ board member Miyao warned of the "possibility that global and U.S. economic recoveries may be delayed depending on how U.S. fiscal problems play out." He noted the downside risks to the economy. And, emerging and resource-exporting economies, except for China, are facing downside risks on structural problems. Data released from Japan saw machine orders dropped -2.1% mom in September. Domestic CGPI rose 2.5% yoy in October.

In China, the 4-day meeting of the 18th Central Committee (Third Plenum) ended with the communiqué approving the "decision on major issues concerning comprehensively deepening reforms". While more details should be released in coming weeks, the politburo affirmed that China "remains in the primary stage of socialism and will long remain so while pursuing comprehensive, deeper reform". The country would "stick to the strategic judgment that development is still the key to solving all problems in China". Also mentioned in the communiqué, the Chinese government reiterated its key focus on "economic reform" with the core issue being "a proper relationship between the government and the market". It also set the goal of achieving "decisive results" in "key sectors" and putting in place "a well-developed, scientific, procedure-based and effective framework" by 2020. The final objective of the reforms is "to improve and develop socialism with Chinese characteristics, and push forward modernization of governance".

It is positive news that the Chinese government also stressed the importance of fiscal reforms which should address the major financial and economic risks around property price bubbles, local government debts, etc. From the experiences of the US and the Eurozone, we realize that an all-round fiscal reform is needed if China wants its liberalization of the financial markets to progress with a solid basis and the financial system to have more firepower to withstand financial turmoil. Regarding the fiscal reforms, the communiqué stated that China needs to "improve its budget management and taxation systems in a bid to make responsibilities of government agencies match properly with what they spend". Also, it is "essential that China improves related legislation, ascertains government bodies' responsibilities, reforms the taxation system and ensures budgeting is transparent".

Meanwhile, 2 new entities, a leading group on deepening reform and a State Security Committee, will be set up. The former would be responsible for "designing reform on an overall basis, arranging and coordinating reform, pushing forward reform as a whole, and supervising the implementation of reform plans" while the latter is for "improving systems and strategies to ensure national security", safeguarding the interests of the people and effectively preventing and ending social disputes and improving public security.