Dollar Broadly Firmer Ahead of Holiday Weekend

  • The dollar is getting some more traction ahead of the holiday weekend
  • The US data highlight is March retail sales; Atlanta Fed’s GDPNow model is now tracking 2.4% SAAR for Q1
  • US and China officials are trying to reach a trade deal by early May
  • Eurozone flash PMI readings for April were reported; strong UK March retail sales were reported
  • BOK kept rates steady at 1.75%, as expected; TRY is underperforming on reports that foreign reserves are much lower than reported

The dollar is broadly firmer against the majors ahead of the holiday weekend. Yen and Swissie are outperforming, while Kiwi and Stockie are underperforming. EM currencies are broadly weaker. IDR and TWD are outperforming, while TRY and ZAR are underperforming. MSCI Asia Pacific was down 0.6%, with the Nikkei falling 0.8%. MSCI EM is down 0.6% so far today, with the Shanghai Composite falling 0.4%. Euro Stoxx 600 is up 0.2% near midday, while US futures are pointing to a lower open. 10-year UST yields are down 3 bp at 2.56%, while the 3-month to 10-year spread has flattened 3 bp to 14 bp. Commodity prices are mixed, with Brent oil flat, copper down 1.6%, and gold up 0.1%.

The dollar is getting some more traction ahead of the holiday weekend. The euro is trading at its weakest level since April 10 and a break below $1.1235 would set up a test of the April 2 low near $1.1185. Sterling has gotten no comfort from firm retail sales data (see below), as cable is testing the April 5 low near $1.2985. A clean break below $1.30 would set up a test of the February 14 low near $1.2775.

The US data highlight is March retail sales. Headline sales are expected to rise 1.0% m/m, ex-auto by 0.7%, and the so-called control by 0.4%. Recall that February sales data was very weak, and so consensus sees a nice little payback. A strong reading would help the dollar outlook, to state the obvious.

The Atlanta Fed’s GDPNow model is now tracking 2.4% SAAR for Q1, up from 2.3% previously. Elsewhere, the New York Fed’s Nowcast model is tracking 1.4% SAAR for Q1 and 2.0% for Q2. Both models have seen their forecasts rise in recent weeks. To us, it is becoming clear that the soft patch in early Q1 was indeed temporary.

There several other minor US data points today. Weekly jobless claims (205k expected) will be of interest since it will be for the BLS survey week. April Philly Fed (11.0 expected) will also be reported, as will March leading index (0.4% m/m expected) and February business inventories (0.3% m/m expected). Markit releases its flash US April PMI, with manufacturing seen rising to 52.8 and services seen falling to 55.0.

Fed’s Bostic (non-voter) speaks today. After that, the Fed’s media embargo ahead of the FOMC meeting goes into effect and so there will be more Fed speakers until after the meeting.

Press reports suggest that US and China officials are trying to reach a trade deal by early May. More high-level meetings are being planned, with USTR Lighthizer and Treasury Secretary Mnuchin traveling to Beijing the week of April 29. The week after that, Vice Premier Liu would come to Washington to wrap up negotiations and announce a deal that would allow a Trump-Xi summit in May.

Canada reports February retail sales, which are expected to rise 0.4% m/m (0.2% ex-autos). Recent data have been coming in soft. BOC next meets April 24, no change is expected then. CAD continues to have trouble breaking below 1.33 and it is now testing the 1.34 top of recent ranges.

Eurozone flash PMI readings for April were reported. The composite reading fell to 51.3 vs. 51.8 expected and 51.6 in March. Manufacturing PMI rose to 47.8 but was offset by a larger than expected drop in the services PMI to 52.5. Looking at the country breakdown, Germany’s composite rose to 52.1 vs. 51.7 expected due to a higher manufacturing PMI of 44.5 and a higher services PMI of 55.6. France’s composite rose to 50.0 vs. 49.7 expected, with a lower than expected manufacturing PMI of 49.6 offset by a higher services PMI of 50.5.

What are the takeaways from the PMI data? The second monthly drop in a row for headline PMI supports the view that the eurozone economy continues to slow in Q2. As press leaks suggest, some ECB policymakers remain skeptical of an H2 rebound. Germany’s manufacturing sector remains in a slump and justifies the recent cut in the government’s GDP growth forecast to 0.5% this year. On the other hand, with a composite reading back at 50, France seems to be on the cusp of recovery.

Strong UK March retail sales were reported earlier. Both headline and ex-auto fuel were expected to fall -0.3% m/m. Instead, they rose by 1.1% and 1.2%, respectively. Warmer weather apparently boosted spending. Yet we still caution that the longer the Brexit uncertainty continues, the more damage is done to the UK economy. BOE has no choice but to stand pat until after the new Brexit deadline of October 31. BOE next meets May 2, no change is expected then.

Australia reported strong March jobs data. Employment rose 25.7k vs. 15k expected. Better yet, the breakdown showed 48.3k full-time jobs were added and only partially offset by a -22.6k drop in part-time jobs. The unemployment rate ticked up to 5.0%, as the participation rate rose a tick to 65.7%. The RBA is struggling to reconcile a strong jobs market with a sinking housing market but it’s clear that rate cuts are on the horizon. RBA next meets May 7, no change is expected.

Bank of Korea kept rates steady at 1.75%, as expected. CPI rose only 0.4% y/y in March, well below the 2% target. The bank shaved its growth forecast for this year a tick from its January projection to 2.5% and cut its inflation forecast to 1.1% from 1.4%. With growth headwinds still strong, we believe rates will be kept on hold for the rest of this year.

The Turkish lira is underperforming on reports that central bank reserves are much lower than reported. Late yesterday, the FT wrote that the central bank engaged in some currency swaps with commercial banks to inflate its foreign reserves. Rather than the $28 bln being reported for usable reserves, the report suggested that the true number was below $16 bln.

Frankly, both numbers are simply awful. However, the real takeaway is that the institutional framework appears to be breaking down further in Turkey. USD/TRY made new highs for this move near 5.8515 today and is nearing the January high near 5.8790. Charts point to a test of the October high near 6.2280.