US Reopens to Find Risk-off Sentiment Boosting the Dollar

  • Risk-off sentiment is creeping back into markets and boosting the dollar
  • US reports December existing home sales; Canada reports November wholesale trade and manufacturing sales
  • The IMF released its quarterly update to its World Economic Outlook yesterday
  • UK reported strong labor market data for November; Bank of Japan meets tonight
  • President Xi issued a stark warning to China’s top leaders, underscoring the growing economic and political risks
  • Data out yesterday underscore why we remain negative on EM

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Drivers for the Week Ahead

  • The ECB meets Thursday and will likely be the highlight of the week
  • The partial US shutdown shows no sign of ending
  • US rates are normalizing and likely helping the greenback
  • UK Prime Minister May will unveil her replacement Brexit plan to Parliament today
  • Bank of Japan meets Wednesday; Norges Bank meets Thursday
  • Australia reports December jobs data Thursday
  • EM FX is still under pressure as the dollar remains resilient

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EM Preview for the Week Ahead

EM FX ended the week on a soft note, as the dollar remains resilient. While a softer US interest rate outlook benefits EM, we think this is offset by the deteriorating global growth outlook. The IMF will release its updated World Economic Outlook Monday, which is likely to highlight the growing downside risks.

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What Has Changed in EM

  • Press reports that suggest that the US may lift its tariffs on China
  • Turkish President Erdogan was granted emergency powers by parliament
  • South African Reserve Bank delivered a dovish hold
  • Violence has returned to Colombia

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Dollar Mixed, Equities Higher on Trade Optimism

  • Risk on sentiment has returned due to press reports that suggest that the US may lift its tariffs on China
  • During the North American session, the US reports December IP and Canada reports December CPI
  • There has been no new Brexit news to speak of, and yet sterling is powering to two-month highs; UK reported weak December retail sales
  • Japan reported December national CPI
  • Colombia reports November retail sales and IP

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Dollar Still Firm After UK No Confidence Vote

  • As expected, UK Prime Minister May survived the no confidence vote yesterday 325-306
  • Press reports suggest that the EU will consider an extension of the Article 50 deadline well into H2
  • Federal prosecutors in Seattle will pursue a criminal case against China’s Huawei
  • The economic costs of the shutdown are mounting
  • During the North American session, the US reports January Philly Fed index and weekly jobless claims
  • Bank Indonesia kept rates steady at 6.0%, as expected; SARB is widely expected to keep rates steady at 6.75%

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South African Reserve Bank on Hold Ahead of Spring Elections

The South African Reserve Bank meets tomorrow and is widely expected to keep rates steady at 6.75%. The recent release of the ANC’s election manifesto suggests a modification of the central bank’s mandate, which we think would be a mistake. Longer-term, we see more downgrades and loss of investment grade from Moody’s.

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Dollar Still Firm, Markets Still Calm Ahead of UK No Confidence Vote

  • Markets are relatively calm after UK Parliament overwhelmingly rejected Prime Minister May’s Brexit plan by a vote of 432-202
  • Opposition Labour has called for a vote of no confidence in the government today
  • There are no signs of compromise from either side with regards to the US shutdown
  • December US retail sales and business inventories reports were due out but have now been postponed
  • The Fed will still release its Beige Book today
  • Central Bank of Turkey kept rates steady, as expected; South Africa reported November retail sales

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