Dollar Climb Stalls as US Shutdown Averted

  • The dollar rally may be taking a pause
  • US Congressional leaders appear to have avoided a second partial government shutdown
  • The parade of Fed speakers continues
  • UK Prime Minister May is scheduled to make a statement to Parliament today
  • The Bank of Japan reduced the amount of bonds it is buying for the first time in two months
  • RBNZ decision is due out this evening after North American markets have closed
  • Taiwan January CPI rose 0.20% y/y; South Africa reported Q4 unemployment and December manufacturing production

The dollar is narrowly mixed against the majors as risk sentiment improves after another US shutdown was likely avoided.  Aussie and Stockie are outperforming, while yen and Swissie are underperforming.  EM currencies are mostly firmer.  HUF and INR are outperforming, while IDR and MYR are underperforming.  MSCI Asia Pacific was up 0.9%, with the Nikkei rising 2.6% as it reopened from holiday.  MSCI EM is up 0.4% so far today, with the Shanghai Composite rising 0.7%.  Euro Stoxx 600 is up 0.6% near midday, while US equity futures are pointing to a higher open.  10-year UST yields are up 2 bp at 2.68%.  Commodity prices are mixed, with Brent oil up 1.9%, copper down 0.7%, and gold up 0.4%.

The dollar rally may be taking a pause.  It’s early still but DXY is so far flat on the day after making a new cycle high earlier today.  Yet charts point to further gains for the greenback.  Yesterday’s break above the 96.686 level sets up a test of the December 14 high near 97.711.  Some intermediate resistance is seen near the figure.  Euro is on track to test the November 12 low near $1.1215, while USD/JPY appears to have found a foothold above the 110 area as it continues to climb.

US Congressional leaders appear to have avoided a second partial government shutdown.  Press reports suggest a tentative deal was struck yesterday evening that will lead to passage of all seven spending bills that would keep the government open.  Democrats reportedly dropped their demand to cap the number of illegal detainees.  Yet the $1.375 bln allocated for border fencing falls far short of the $5.7 bln demanded by President Trump and so there is some risk that he vetoes the bills.  Republics leaders sounded optimistic that he would sign the bills into law.

The parade of Fed speakers continues.  After Bowman (voter) spoke Monday, Powell (voter), Mester (non-voter), and George (voter) all speak today.  This will be followed by Mester, Bostic (non-voter), and Harker (non-voter) Wednesday, Harker Thursday, and Bostic Friday.  All are expected to stick with the current script, that of “patience” and “flexibility.”

UK Prime Minister May is scheduled to make a statement to Parliament today.  She is expected to ask for more time to renegotiate her Brexit deal with the EU.  Recent Brexit optimism is giving way to hard realities and so we expect sterling to continue weakening.  Cable has given up half of its January gains.  However, a break below the $1.2735 area is needed to set up a test of the January 3 low near $1.2440.

The Bank of Japan reduced the amount of bonds it is buying for the first time in two months.  There is no policy significance, however.  Japanese yields have fallen in line with the rest of the world this year and so the bank does not need to buy as much to keep yields in their target range.  The BOJ just affirmed its policy stance at its January 23 meeting.  Next policy meeting is March 15.

RBNZ decision is due out this evening after North American markets have closed.  It is expected to keep rates steady at 1.75% and should maintain its dovish message.  Antipodean data have been coming in soft recently, leading the RBA to deliver what became an increasingly dovish hold as last week progressed.  RBNZ is likely to take a similarly dovish approach this week and this is likely to push out tightening expectations further into 2020.

We suspect the bank is quite happy with current NZD weakness.  A break below the .6715 area would set up a test of the January 3 low near .6575.  Kiwi is leading the Antipodean move, as AUD has yet to test the 50% retracement objective of its January rally near .7020.  For AUD, a break below .6955 is needed to set up a test of the January 3 low near .6740.

Taiwan January CPI rose 0.20% y/y vs. 0.33% expected and -0.05% in December.  January trade will be reported Friday, with exports expected to contract -3.2% y/y and imports by -4.5% y/y.  The central bank does not have an explicit inflation target, but downside growth risks and low price pressures should allow the central bank to remain on hold for much of this year.  Next quarterly policy meeting is March 21, and no change is expected then.

South Africa reported Q4 unemployment and December manufacturing production.  Unemployment fell unexpectedly to 27.1%, but production rose only 0.1% y/y vs. 1.4% consensus.  Sluggish growth and low price pressures should allow SARB to keep rates steady for much of this year, but much will depend on global factors.  Next policy meeting is March 28, and no change is expected then.  USD/ZAR is coming up on the 200-day moving average near 13.89, but a break above the 14 area is needed to signal an even bigger upside move.