Dollar Builds on Recent Gains

  • The news on the virus front is decidedly mixed
  • DXY remains resilient and has retraced about a third of last week’s plunge; US manufacturing data today are expected to show continued weakness
  • Mexico announced yesterday that it will start using the dollar swap lines with the Fed; Chile is expected to cut rates 50 bp to 0.50%
  • Japan’s government proposed a stimulus package worth JPY60 trln ($554 bln); China reported strong official March PMI readings

The dollar is broadly firmer against the majors for the second straight day.  Nokkie and sterling are outperforming, while the Antipodeans are underperforming despite strong PMI readings out of China.  EM currencies are mixed.  RUB and ZAR are outperforming, while the CEE currencies are underperforming.  MSCI Asia Pacific was down 0.3% on the day, with the Nikkei falling 0.9%.  MSCI EM is up 1.6% so far today, with the Shanghai Composite rising 0.1%.  Euro Stoxx 600 is up 0.8% near midday, while US futures are pointing to a higher open.  10-year UST yields are down 4 bp at 0.69%, while the 3-month to 10-year spread is down 5 bp to stand at +67 bp.  Commodity prices are mostly higher, with Brent oil up 2.1%, copper up 1.0%, and gold down 1.4%.

The news on the virus front is decidedly mixed. Italy reported the slowest rate of new confirmed cases in nearly 2 weeks.  The World health Organization said that Italy is seeing some signs of stabilization and could be approaching the peak.  However, the virus is sweeping through Spain now.  There, the daily death rate spiked to a new high of 849, bringing total deaths up to 8,189.  New infections also spiked to a new daily high of 9,222, bringing total confirmed cases up to 94,417.

Implied volatility measures for major equity markets remain very elevated but have started to moderate. In the US, the VIX fell below 60 for the first time in about two weeks and is well off its highest close of 83. In Europe, the V2X is trading at about the same level and has also moderated in line with the VIX.

DXY remains resilient and has retraced about a third of last week’s plunge.  Key retracement objectives from that move come in near 100.05 (38%), 100.65 (50%), and 101.20 (62%).  The euro remains heavy after failing to break above $1.1165, and a break below $1.09 would set up deeper losses ahead.  Sterling has held up a little better after being unable to break above the $1.25 area, while USD/JPY is building on its gains after support near 107 held yesterday.



The March Dallas Fed manufacturing index plunged to -70 vs. -10 expected and +1.2 in February.  That is not a typo.  To repeat, it fell to -70.  This is a diffusion index, where the percentage of respondents seeing deterioration is subtracted from the percentage seeing improvement.  It seems that 70% saw deterioration and 0% saw improvement in March, with 30% unchanged.  This survey seems to be fully reflecting both the virus and the plunge in oil prices, as the earlier Fed regional surveys had held up reasonably well.

More manufacturing sector data will come out this week.  March Chicago PMI will be reported today and is expected to fall to 40.0 from 49.0 in February.  March ISM manufacturing PMI will be reported tomorrow and is expected to fall to 45.0 from 50.1 in February.  Obviously, there are downside risks to both readings.  January S&P CoreLogic home prices and March Conference Board consumer confidence (110.0 expected) will be reported Tuesday.  Canada reports January GDP, with growth expected to remain steady at 1.9% y/y.

Mexico announced yesterday that it will start using the dollar swap lines with the Fed. The central bank will begin offering dollar auctions of up to $5 bln starting tomorrow, with the lines maturing in 84 days. This should help alleviate dollar funding strains and remove some of the worst tail risks, but we doubt it will do much for MXN spot. Indeed, the currency continues to depreciate over the last two sessions, now down over 20% year to date – outperforming only ZAR and BRL amongst the worst of the major EMs.

Chile central bank is expected to cut rates 50 bp to 0.50%.  However, markets are somewhat split.  A couple of analysts expect steady rates while one sees a 75 bp cut.  The bank just delivered an emergency 75 bp cut two weeks ago and boosted its FX swaps program.  Last week, it eased some rules in order to help boost liquidity and support credit flow to homes and businesses.  There is a case for not moving again so soon, and yet the economic outlook has worsened sharply and so we lean towards a 50 bp cut.  Earlier in the day, Chile reports February retail sales and IP.



Germany reported better than expected March unemployment data.  Total unemployment rose only 1k vs. 25k expected and the unemployment rate was steady at 5.0% vs. 5.1% expected.  February retail sales will be reported tomorrow and is expected to rise 0.1% m/m vs. a revised 1.0% (was 0.9% in January).  This is just the calm before the storm, as officials acknowledge that the economy is facing a deep downturn this year.  Eurozone March CPI rose 0.7% y/y vs. 0.8% expected and is down sharply from 1.2% in February.

WTI futures are recovering a bit, almost erasing yesterday’s decline. The front-month futures are up $1.2 to $21.30 per barrel, with Brent lagging a bit at $23.45 per barrel. The move came after reports that US President Trump will have a discussion with his Russian counterpart about a way to stabilize energy prices. We remain skeptical about a deal, as we can’t see how it would benefit Russia and Saudi Arabia at the moment.

Turkey’s trade gap came in at -$3.0 bln in February, narrowing from -$4.5 bln the previous month but much wider on a y/y basis. Lower oil prices will greatly benefit Turkey’s balance, and we are already seeing this on lower (-9.8% y/y) import growth, but it will be partially offset by a fallout in tourism. Export growth decelerated to 2.3% y/y from 6.0% in January.  Despite numerous measures taken to support the lira, USD/TRY is moving higher and testing the cycle high near 6.6090 from last week.  The next target after that is the late August 2018 high near 6.8425, but ultimately the pair is headed for a test of the all-time high near 7.2360 from earlier that month.



Japan’s government proposed a stimulus package worth JPY60 trln ($554 bln).  This comes just weeks after it passed the FY2020 budget.  Details are scant but it appears that JPY20 trln would be made up of public-private initiatives and more than JPY10 trln would be earmarked for direct payments and subsidies to households.  There is some debate about the true size of the package but if passed, this would be the biggest ever and the door would be left open for further measures as needed.

Japan reported mostly better than expected February labor market data, retail sales, and IP.  Unemployment rate was steady at 2.4%, as expected, while retail sales rose 0.6% m/m vs. -1.5% expected and an upwardly revised 1.5% m/m (0.6% previously) in January.  Lastly, IP rose 0.4% m/m vs. flat expected.  Yet make no mistake, the Japanese economy is likely to have an even worse Q1 than Q4 as the impact of the virus hits.

China’s PMIs bounced back in March, confirming the recovery in economic activity as the lockdowns are gradually softened. Manufacturing jumped to 52.0 vs. 44.8 expected and 35.7 in February, while non-manufacturing rose to 52.3 vs. 42.0 expected and 29.6 in February.  Manufacturing new orders have also come in at a relatively healthy level at 52, suggesting the recovery could continue despite the challenging outlook. Monetary and fiscal policy support will certainly help. Caixin reports China March manufacturing PMI tomorrow, which is expected to rise to 45.0 from 40.3 in February.  Caixin then reports services and composite PMIs Friday, with the former expected to rise to 39.5 from 26.5 in February.

Hong Kong February retail sales collapsed -46.7% y/y in volume terms.  Sales were expected to contract “only” -37.5% y/y vs. -23.0% in January.  The territory was already in a weakened state due to the ongoing protests and now the coronavirus is just adding to the headwinds.  After a record surge in infections over the weekend, the government announced immediate restrictions on social gatherings and closed cinemas, gyms, and arcades.  As such, the data are likely to get a lot worse in Q2.  We look at Hong Kong as a cautionary tale on how badly things may get in Europe and the US as the virus spreads, and it’s looking pretty grim.