Dollar Claws Back Losses Ahead of Weekend and G20

  • The dollar continues to claw back some of this week’s losses ahead of the weekend
  • Yesterday, FOMC minutes did not really reveal much new but markets of course focused on the dovish aspects
  • The G20 meeting gets under way today in Buenos Aires; the most important meeting will be that of Trump and Xi.
  • Eurozone reported preliminary November CPI; Italy signaled some willingness to tighten its budget
  • China reported weak official November PMI
  • Japan reported a fair amount of data; The BOJ tweaked its bond-buying program slightly
  • Bank of Korea hiked rates 25 bp to 1.75%, as expected; Poland November CPI rose 1.2% y/y; India reports Q3 GDP

The dollar is mostly firmer against the majors as the week draws to a close.  Yen and Kiwi are outperforming, while sterling and Nokkie are underperforming.  EM currencies are mostly softer.  IDR and INR are outperforming, while RUB and ZAR are underperforming.  MSCI Asia Pacific was down 0.2%, with the Nikkei rising 0.4%.  MSCI EM is down 0.3% so far today, with the Shanghai Composite rising 0.8%.  Euro Stoxx 600 is down 0.6% near midday, while US futures are pointing to a lower open.  The US 10-year yield is down 2 bp at 3.01%.  Commodity prices are mostly lower, with Brent oil down 1%, copper down 0.3%, and gold down 0.2%.

The dollar continues to claw back some of this week’s losses ahead of the weekend.  For the week as a whole, the greenback is up against sterling, yen, and Loonie and flat against Swissie and Stockie.  The only major currencies up on the week are the Antipodeans, Nokkie, and euro despite the sell-off sparked by Powell.  We believe the dollar rally is not over yet but recognize that some choppy days lay ahead as markets wrestle with likely Fed policy.

Yesterday, FOMC minutes did not really reveal much new but markets of course focused on the dovish aspects.  The Fed reportedly discussed modifying the language on “further gradual” rate hikes and discussed the need for a “flexible” approach to policy.  Fed officials also saw above-trend growth slowing over the medium-term.

Markets were looking for something dovish and the Fed gave them just enough.  All of the tweaks discussed fit in with the “Fed is likely to pause” storyline.  However, as we wrote yesterday (“Some More Thoughts on the Fed’s Neutral Rate”), we think that the markets are vastly underestimating the Fed’s capacity to tighten next year.

During the North American session, November Chicago PMI will be reported.  The Fed’s Williams speaks today.  Next week will see a full slate of Fed speakers but then the press embargo for the December 19 meeting goes into effect the week after.

The G20 meeting gets under way today in Buenos Aires.  After coming into existence 10 years ago during the Great Financial Crisis, this rather unwieldly group is in danger of irrelevance.  Of more relevance will be the bilateral meetings that are likely to take place (or not take place).  Saudi Arabia and Russia are expected to talk about coordinated action to support oil prices.  On the other hand, reports of a US-Russia meeting were later denied, with Trump saying it would not take place due to Russia’s recent hostilities against Ukraine.

The most important meeting on the G20 sidelines will be that of Trump and Xi.  The two are to have dinner together Saturday.  Trump has hinted this week of some sort of breakthrough, and this has been in conjunction with fairly positive comments from Chinese officials.  We remain skeptical that anything of substance will emerge from this meeting.  Looking ahead, there have been reports that top Chinese officials may come to Washington DC in mid-December.

Eurozone reported preliminary November CPI.  Inflation eased to 2.0% y/y from 2.2% in October, as expected.  However, core inflation fell to 1.0% y/y vs. 1.1% expected.  German retail sales fell -0.3% m/m vs. an expected gain of 0.4%.  Soft eurozone data has called into question the ECB’s ability to lift rates next year.  The euro remains heavy and has been unable to break above $1.14 this week despite the downward pressure on the dollar.

Italy signaled some willingness to tighten its budget.  Press reports suggest a deficit equal to -2.2% of GDP will be discussed, which Prime Minister Conte said should be low enough to avoid an excessive deficit procedure.  However, European Commissioner Dombrovskis said that 2.2% is not low enough.  The 10-year spread to German has fallen to 290 bp from the 327 bp peak last week but the saga is by no means over.

China reported official November PMI.  Manufacturing PMI fell to 50.0 when it was expected to remain steady at 50.2, while non-manufacturing fell to 53.4 vs. 53.8 expected.  We see downside risks to China building, and so we expect further stimulus measures in the coming weeks.  As noted earlier, we downplay the odds of any breakthrough in relations this weekend as a result of the planned Trump-Xi meeting on the sidelines of the G20.

Japan reported a fair amount of data.  October labor market data worsened, with the unemployment rate rising to 2.4% and the jobs-to-applicants ratio falling to 1.62.  IP was stronger than expected, rising 2.9% m/m in October.  November Tokyo CPI came in at a much lower than expected 0.8% y/y, nearly half the October rate of 1.5% y/y and the lowest since June.

The BOJ tweaked its bond-buying program slightly.  It reduced the number of days where it will buy bonds with maturities longer than 10 years from five to four.  However, the bank has taken pains to stress that such tweaks do not amount to any sort of tapering.  Governor Kuroda made it clear last week that the BOJ is unlikely to remove stimulus until FY2021 at the earliest.

Bank of Korea hiked rates 25 bp to 1.75%, as expected.  This was the first hike since November 2017 and so the pace of tightening is clearly meant to be very modest.  Headwinds are building, which explains the two dissenting votes in favor of steady rates. November trade data will be reported Saturday local time, with exports expected to rise 6.6% y/y and imports by 12.1% y/y.

Poland November CPI rose 1.2% y/y vs. 1.6% and 1.8% in October.  Inflation is the lowest since December 2016 and well below the 1.5-3.5% target range.  Next policy meeting is December 5, no change is expected then.  Indeed, the bank may feel more confident about extending its official forward guidance for steady rates beyond end-2019.

India reports Q3 GDP, which is expected to grow 7.5% y/y vs. 8.2% in Q2.  The economy remains robust, but some easing of price pressures should allow the RBI to remain on hold near-term.  Next policy meeting is December 5, no change is expected then.