Dollar Consolidates as Equity Markets Stabilize

  • The global equity sell-off has paused and the dollar is consolidating its recent gains
  • The European Union (EU) just released its report on all member draft budgets
  • UK Prime Minister May heads to Brussels today to finalize a Brexit deal ahead of Sunday’s summit
  • A USTR report made it clear that US-China tensions remain high
  • Korea reported weaker trade data for the first 20 days of November; South Africa October CPI rose 5.1% y/y vs. 5.2% expected

The dollar is mostly softer against the majors as equity markets stabilize.  Kiwi and Nokkie are outperforming, while the yen and sterling are underperforming.  EM currencies are mixed.  ZAR and PLN are outperforming, while KRW and BRL are underperforming.  MSCI Asia Pacific was down 0.5%, with the Nikkei falling 0.4%.  MSCI EM is flat so far today, with the Shanghai Composite rising 0.2%.  Euro Stoxx 600 is up 0.3% near midday, while US futures are pointing to a higher open.  The US 10-year yield is up 1 bp at 3.08%.  Commodity prices are mostly higher, with Brent oil up 1.8%, copper up 0.7%, and gold up 0.2%.

The global equity sell-off has paused and the dollar is consolidating its recent gains.  Wave after wave of risk-off sentiment had given a bid to the greenback, and we fully expect another wave to hit markets.  In the meantime, the euro feels heavy and is having trouble moving back above $1.14.  The same can be said for sterling and the $1.28 area.  Both currencies are being weighed down by heightened political risk.  The easing of risk-off sentiment today has helped USD/JPY recover back above 113.

During the North American session, the US reports October durable goods orders, existing home sales, and the leading index.  Weekly jobless claims will also be reported and are for the week that BLS conducts its survey for the monthly jobs report.  Fed tightening expectations are creeping higher, with the implied yield on the January 2020 Fed Funds futures contract rising to 2.77% from 2.72% on Monday, but more needs to be seen if the dollar rally is to resume in earnest.

The European Union (EU) just released its report on all member draft budgets.  As we expected, the EC identified Italy as being in “serious non-compliance” with the budget rules.  This marks the start of excessive deficit procedures, which the EU said was warranted.  Elsewhere, the EU warned that Portugal and Slovenia risk breaching its budget rules.

UK Prime Minister May heads to Brussels today to finalize a Brexit deal ahead of Sunday’s summit.  German Chancellor Merkel warned the UK not to dictate the terms of Brexit, nor to make any last-minute changes to what’s already been agreed upon.  May is under pressure to change some of the Brexit terms, but eurozone and EC officials have made it clear that they will not accept any changes.

A USTR report made it clear that US-China tensions remain high.  The detailed 53-page report accused China of continuing its state-led strategy to steal intellectual property and technology from the US.  USTR Lighthizer and trade council chief Peter Navarro are the trade hawks in the administration and continue to lead a confrontational approach to China.  We do not expect any thawing of relations at the Trump-Xi meeting at the end of the month.

Oil has stabilized after making new lows for this move yesterday.  For Brent, the big level to watch ahead is 60.55, the 62% retracement objective of the 2017-2018 rally.  Break below would target the June 2017 low near 44.35.  WTI is leading the move and has already broken its 62% objective near 55.35 from that same rally.  This move in oil is very negative for COP, MXN, CAD, RUB, NOK, and BRL, to state the obvious.  Note that COP and CAD currently have the highest correlations with oil prices, followed by NOK and RUB.

Japan reported October supermarket and nationwide department store sales overnight.  The former contracted -0.7% y/y after rising 1.9% in September, while the latter rose 1.6% y/y after contracting -3.0% in September.  Yesterday, BOJ Governor reiterated that there is little chance of meeting the 2% inflation target in FY2020 and that negative rates are a necessary part of its policy stance.  Bottom line:  no exit from stimulus is likely until 2021 at the earliest.

Korea reported weaker trade data for the first 20 days of November.  Exports slowed to 5.7% y/y while imports slowed to 12.8% y/y.  Policymakers are concerned about rising headwinds to the economy stemming from global trade tensions.  Next BOK meeting is November 30, and no change is expected then.

South Africa October CPI rose 5.1% y/y vs. 5.2% expected and 4.9% in September.  This matches the high for the year and is nearing the top of the 3-6% target range.  SARB meets Thursday and is expected to hike rates 25 bp to 6.75%.  The market is split, however.  Of the 21 analysts polled by Bloomberg, 10 see no change and 11 see a 25 bp hike.  We lean towards a hike.