Dollar Bounces on Turnaround Tuesday

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  • Late yesterday in the US, the shutdown ended and tariffs were announced
  • The BOJ maintained its forecasts and policy stance
  • NAFTA negotiations resume today in Montreal
  • Brazil mid-January IPCA inflation is expected to rise 3.05% y/y

The dollar is mostly firmer against the majors on Turnaround Tuesday.  Kiwi and yen are outperforming, while sterling and Aussie are underperforming.  EM currencies are mostly softer.  TWD and IDR are outperforming, while PHP and ZAR are underperforming.  MSCI Asia Pacific was up 1%, with the Nikkei rising 1.3%.  MSCI EM is up 1% on the day, with the Shanghai Composite rising 1.3%.  Euro Stoxx 600 is up 0.3% near midday, while S&P futures are pointing to a higher open.  The 10-year US yield is down 2 bp at 2.63%.  Commodity prices are mixed, with WTI oil up 0.5%, copper down 1.7%, and gold up 0.2%.

Late yesterday, there were two developments in the US to note.  First, the spending authorization issue was kicked down the road until February 8.  This allows the US government to re-open.  Remember that half the time the government has shut down since 1977, the closure lasted 3 days.  This one is on par, and the economic impact is inconsequential.  Enough Democrats voted to reopen after the Republicans agreed to address the status of the so-called “dreamers.”  Yet this remains a very contentious issue, and one that may not be solved by the February 8 deadline.

Second, President Trump announced trade measures.  The US put tariffs on solar panels (30% to begin and falls to 15% after 4 years) and washing machines (quota and tariff, 20% tariff on the first 1.2 mln washing machines and 50% on any more washing machines).  Companies in these sectors in Asia weakened but Asian shares largely followed the US to new record highs.  South Korea quickly announced a WTO challenge.  Note that after underperforming on the pre-weekend MSCI warning, Korean shares bounced back smartly today, with the KOSDAQ leading the region with a 2.4% gain.  Also of note, the H-shares in Hong Kong, the HK Enterprise Index rose nearly 2% to extend its streak to 18 sessions.

The BOJ maintained its forecasts and policy stance.  There was a small tweak to the inflation assessment, noting that prices were skewed to the downside, and said there was no change in inflation expectations.  Last time it said expectations were weakening.  The BOJ also reiterated that there was no policy implication to the recent tweak to its bond operations.  The dollar bounce was capped in front of yesterday’s high near JPY111.20, and the yen has since recouped its losses.  There is around a $400 mln option that expires today struck at JPY111.50.  Tomorrow, there are $2+ yards struck at JPY110.00-JPY110.05 that roll off.

It is a light European calendar.  Germany’s ZEW came in better than expected.  The current assessment is a new record high (95.2), while the expectations component rose to 20.4, the highest since May last year.  For its part, the euro remains confined to the pre-weekend range roughly $1.2215 and $1.2295.  There is a 660 mln euro option struck at $1.22 that expires today.

In the UK, it is the monthly budget position and CBI trends survey.  The UK budget figures showed the smallest deficit for the month of December in 17 years.  VAT receipts rose to a record and UK received a large credit from the EU.  The data did not do much for sterling, which is trading near $1.3945 after briefly poking above $1.40 in early Asia, the highest since the UK referendum.  Rather than being seen as a breakout, it appears to have been greeted with profit-taking.

The week’s highlights lie ahead.  Tomorrow the UK reports employment (earnings growth is expected to be unchanged at 2.5% including bonuses and 2.3% without).  The first look at Q4 GDP will be reported ahead of the weekend (0.4% q/q for a 1.4% y/y pace, down from 1.7%).  Thursday is the ECB meeting.  Since it met last, December inflation was reported softer than expected and the euro has appreciated.  On the other hand, oil prices have also risen.  Draghi is likely to reiterate the ECB’s stance that despite the impressive and broadening expansion, prices are not yet on a sustainable and durable path to the target.  Continued monetary support is necessary.

Canada reports no data, and the slate is empty in the US except for the Richmond Fed survey.  Note that Trump’s second nominee to the Federal Reserve Governors, Goodfriend, has confirmation hearings in the Senate today.

Aussie is the weakest of the majors, off by around 0.6% and pushing back below $0.8000.  The 4% drop in iron ore may be providing the incentive for some profit-taking.  With today’s pullback, the Aussie is still up 2% year-to-date.

NAFTA negotiations resume today in Montreal.  It is the 6th round of what is intended to be 7 rounds.  Although the first five rounds did not appear to resolve the thorny issues, that seems to be typical of these kinds of negotiations.  The low hanging fruit is picked first, leaving the toughest issues for last.  Although a news wire survey found 41 of 45 economists expect a successful conclusion, the risks seems skewed to the downside.

Mexico’s presidential campaign kicks off in March (July election) and it is difficult to expect any progress near-term.  Whether the talks can be concluded in time is a challenge.  If the US were to leave, as Trump has threatened, it would seem to be only after the 7th round of negotiations.

Singapore December CPI rose 0.4% y/y vs. at 0.5% expected.  The MAS does not have an explicit inflation target, but we note that this is the lowest rate of the past year.  Singapore then reports December IP Friday, which is expected to rise 0.2% y/y vs. 5.3% in November.  The data have been a bit mixed lately.  It will likely be a close call for the MAS when it next meets in April, but we believe it will keep its current accommodative stance.

Brazil mid-January IPCA inflation is expected to rise 3.05% y/y vs. 2.94% in mid-December.  If so, it would still be below the 4.5% target.  Price pressures are rising, albeit slowly.  COPOM signaled another possible 25 bp cut to 6.75% at the next policy meeting February 7.