Dollar Broadly Weaker Despite Rising US-China Tensions

  • The jubilant market mood is being tested by US-China conflict theme; the dollar remains under pressure
  • President Trump will hold a press conference today to discuss China; Trump is also opening up a Pandora’s Box in his latest offensive against social media companies
  •  May Chicago PMI will be the data highlight today; Fed Chair Powell speaks
  • Canada and Brazil report Q1 GDP data; Colombia is expected to cut rates 50 bp to 2.75%
  • Germany is reportedly preparing a second stimulus package of between €50-100 bln; eurozone May CPI was reported
  • Japan data dump was seen overnight; Bank Indonesia opined that the rupiah is undervalued; China reports official May PMI readings Sunday local time

The jubilant market mood is being tested by US-China conflict theme, as we had warned. Yesterday’s trigger was the announcement that President Trump will hold a press conference today to elaborate on China policies (see below).  Markets have gotten way too complacent about the risks posed by US-China tensions and we think it’s time for a reality check.

The dollar remains under pressure.  DXY is trading at the lowest level since March 17 just above 98.  Just below that is the key 97.837 level, as a break below sets up a test of the March 9 low near 94.65.  The euro is trading at its highest level since March 30 and is on track to test that day’s high near $1.1165.  A break above that level would set up a test of the March 9 high near $1.15.  Sterling has been unable to break above its high earlier this week near $1.2365 and so EUR/GBP has broken above the .90 area to trade at the highest level since March 27.  Lastly, USD/JPY has broken lower after its failure to break above 108.



President Trump will hold a press conference today to discuss China.  Developments have been fast and furious this week, with the US ratcheting up tensions with a variety of measures against China.  It’s hard to believe that Trump would take any sort of conciliatory tone today, so markets should be prepared for more punitive measures today.  Best case scenario would be limited sanctions against China officials, perhaps only consisting of visa bans.  Worst case scenario would be scrapping the Phase One trade deal and a return of Tariff Man.  The New York Fed just released a study that estimates the ongoing trade war has cut $1.7 trln from the market value of listed US firms and will reduce their investment growth rate cy almost 2 percentage points by year-end.  Those numbers would only get worse if trade tensions rise again.

On another front, President Trump is opening up a Pandora’s Box in his latest offensive against social media companies.  He is unlikely to succeed, but we suspect that observers may be underestimating the risks. Trump’s pushback against social media companies, especially Twitter, comes in response to that company’s decision to fact-check his tweets.  More fuel was added to the fire when the company put up a rule violation on a subsequent Trump tweet for “glorifying violence.”  In short, the most consequential path would be to soften the notorious “Section 230” of the 1996 Communications Decency Act, which exempts internet companies from liability for the content posted by its users, differentiating it from traditional media companies.

We are no experts in this field, but we feel it is unlikely that the government will take any actions that pose a serious threat to Section 230.  Why not?  Because the consequences would likely be enormous, possibly transforming the internet as we know it. That said, this seems to be one of the few topics with bi-partisan support (the other being China).  Furthermore, what is ordinarily a tail risk becomes a fat-tail risk in a contested election year such as this one.  The chart below is from Pew Research survey conducted last year.

May Chicago PMI will be the data highlight today.  It is expected to improve to 40.0 from 35.4 in April.  The regional Fed manufacturing surveys for May all improved from April, but we are still a long way from seeing signs of actual growth.  Advance goods trade (-$65.0 bln expected), wholesale and retail inventories, personal income (-6.0% mm expected) and spending (-12.8% m/m expected), and final May Michigan consumer sentiment (74.0 expected) will also be reported today.

Fed Chair Powell speaks today.  After that, the media embargo for the June 10 FOMC meeting kicks in and we will not hear from any Fed official until Powell’s post-decision press conference.  Despite the full court press by the Fed this month, Fed Funds futures are still pricing in a small chance that rates go negative by mid-2021.  With rates near zero, it really doesn’t take much to push expectations into negative territory.  However, we continue to believe the Fed will never go negative.  Rather, it appears that the next step (if needed) would likely be some sort of Yield Curve Control.

Canada reports Q1 GDP data.  The economy is expected to contract -10.0% SAAR vs. +0.3% in Q4, with GDP seen contracting -9.0% m/m in March alone.  Next Bank of Canada meeting is June 3 and is widely expected to stand pat.  WIRP suggests BOC is one of the banks that is unlikely to go negative and we concur.

Brazil reports Q1 GDP and is expected to contract -1.5% q/q vs. +0.5% in Q4.  Next COPOM meeting is June 17 and another 50 bp cut to 2.5% is expected.  That is likely the last cut in the cycle, though the CDI market is pricing in rising odds of another cut August 5.  Consolidated budget data will also be reported today,  Central government data reported yesterday came in better than expected but with the primary balance at -BRL92.9 bln, still highlights fiscal risks ahead for Brazil.

Colombia central bank is expected to cut rates 50 bp to 2.75%.  The bank has cut 50 bp for two months straight and a third (and counting) is likely. Despite the rebound in oil prices, the economic outlook remains weak as the pandemic spreads through South America.  The peso has been firming, and that should give the bank confidence to continue easing.



Germany is reportedly preparing a second stimulus package of between €50-100 bln. Discussions are still caught between fiscal conservatives in Merkel’s coalition and Finance Minister Scholz’s Social Democrats who are pushing for a looser approach to the budget. Reports suggest measures being considered include a rescue fund of €57 bln to help municipalities offset losses in tax revenue, tax breaks to incentivize corporate investment, and increased subsidies to families from €204-300 per child. Even if it comes at the lower end of the scale, we believe that anything that starts to shift the German fiscally conservative mentality is a positive. And of course, this is on top of the European rescue plan.

One of the consequences of these tectonic shifts (more spending and mutualization of pandemic spending) can be seen in the relative performance of Italian and German yields. The spread between the 10-year yields of the two countries have narrowed, but this has been driven by a simultaneous lowering of Italian yields and a gentle increase in the German side. On the month, German 10-year yields are up about 7 bp while Italian yields are down 30 bp.  Note Germany reported better than expected April retail sales.  Sales fell -5.3% m/m vs. -12.0% expected and a revised -4.0% (was -5.6%) in March.

Eurozone May CPI was reported.  Headline inflation fell to 0.1% y/y from 0.4% in April, as expected.  This is the lowest since June 2016 and falls further below the 2% target.  Obviously, recent data and a gloomier outlook from the ECB pretty much cement further stimulus at next Thursday’s meeting.  Bloomberg poll suggests consensus sees a sizeable increase (EUR500 bln) in the bank’s emergency asset purchase program as well as an extension beyond December, but no move on rates.  WIRP suggests about 55% odds that the ECB will go more negative by year-end, down from nearly 70% at the start of the week.



Japan data dump overnight was mostly weaker than expected.  May Tokyo CPI, April jobs, retail sales, IP, housing starts, and construction orders were all reported.  The upside surprise was Tokyo inflation, where the headline came in at 0.4% y/y vs. 0.1% y/y expected while ex-fresh food came in at 0.2% y/y vs. -0.2% expected.  The jobless rate rose a tick to 2.6%, with the jobs-to-applicant ratio falling to 1.32 from 1.39 in March.  Retail sales fell -9.6% m/m vs. -6.9% expected, while IP fell -9.1% m/m vs. -5.7% expected.  That was the worst reading for IP since the 2011Tsunami and Fukushima nuclear accident.  Lastly, housing starts fell -12.9% vs. -12.1% expected.

No wonder Abe’s Cabinet Office just issued a bearish monthly report and the government announced yet another fiscal package.  The BOJ left rates and QE unchanged at its policy meeting last Friday whilst announcing details of its lending program to support small businesses.  WIRP suggests around 55% odds that the BOJ will go more negative by year-end, down from 65% at the start of the week.  Next scheduled policy meeting is June 16.

Bank Indonesia opined that the rupiah is undervalued.  The rupiah is outperforming today (+0.7%) after these comments. The country’s assets have been seeing increasing inflows, in part helped by relatively higher interest rates and measured policy response to the crisis. The currency is down about 5.5% on the year but appreciating nearly 2% this month.  Meanwhile, the local 10-year yield fell 50 bp to 7.40% this month. The BI’s bond purchase program has helped reignite inflows, with nearly $0.5 bln registered this month.

China reports official May PMI readings Sunday local time.  Manufacturing is expected to rise three ticks to 51.1, while non-manufacturing is expected to rise three ticks to 53.5.  These will be the first snapshots for May of the mainland economy.  Caixin reports its PMI readings for May Monday local time, with manufacturing expected to rise a couple ticks to 49.7.  Tensions with the US are likely to be the biggest driver for the yuan going forward and we believe USD/CNY is on track to test the September 2019 high near 7.1875.