Dollar Edges Higher as Data Elsewhere Disappoint

  • US and China continue to work on a Phase One trade deal; Congress and the White House were unable to finalize a deal on USMCA
  • Canada reports retail sales; Mexico and Brazil inflation readings should support further easing
  • The Labour Party unveiled its manifesto yesterday, confirming its radical platform; UK and eurozone PMIs were weaker than expected
  • Japan reported weak data; Australia PMI readings disappointed

The dollar is mostly firmer against the majors as the week draws to a close.  Kiwi and yen are outperforming, while sterling and Nokkie are underperforming.  EM currencies are mostly weaker.  ZAR and PHP are outperforming, while KRW and CNY are underperforming.  MSCI Asia Pacific was up 0.2% on the day, with the Nikkei rising 0.3%.  MSCI EM is up 0.2% so far today, with the Shanghai Composite falling 0.6%.  Euro Stoxx 600 is up 0.3% near midday, while US futures are pointing to a flat open.  10-year UST yields are down 2 bp at 1.75%, while the 3-month to 10-year spread has fallen 2 bp to +19 bp.  Commodity prices are mixed, with Brent oil down 0.3%, copper up 0.7%, and gold up 0.5%.

The dollar continues to edge higher.  DXY is up for the fourth straight day, though gains have been very modest.  Both the euro and sterling are edging lower, helped by weak PMI readings.  On the other hand, USD/JPY is being weighted down by growing doubts about ongoing trade negotiations.   Today’s data so far support our case for a firmer dollar based on relative growth rates and interest rate differentials.  We believe both will remain dollar-positive in the coming weeks.

The US and China continue to work on a Phase One trade deal.  China Commerce Ministry said negotiators will continue communicating closely, while Vice Premier Liu He extended an invitation to USTR Lighthizer and Treasury Secretary Mnuchin to come meet in Beijing.  US officials reportedly indicated that they would be willing to come but only if China will make clear commitments on IP protection, forced technology transfers, and agricultural purchases.  Elsewhere, reports suggest that the US may delay the December 15 round of tariffs if a deal hasn’t been reached by then.  Of course, we need to see confirmation from the US side.  In recent weeks, Chinese sources have been more optimistic than US sources.

 

AMERICAS

Congress and the White House were unable to finalize a deal on USMCA.  Ways and Means Chairman Richard Neal said he would continue discussions with USTR Lighthizer next week, even though Congress will be in recess.  House Speaker Pelosi said there has been progress but noted that even if the Trump administration agrees to the changes sought by Congressional Democrats, the House may not have time to write and vote on legislation before year-end.  Changes in the text would also have to be approved by both Mexico and Canada.   The delay is negative for MXN and CAD, to state the obvious.

Regional Fed manufacturing surveys for November continue.  Kansas City Fed will be reported today (-2 expected).  Yesterday, Philly Fed came in at 10.4 vs. 6.0 expected while last week, the Empire survey came in at 2.9 vs. 6.0 expected.  Markit preliminary PMIs for November will also be reported today, with manufacturing expected to rise a tick to 51.4 and services expected to rise a few ticks to 51.0.  Final Michigan confidence for November will also be reported.  There are no Fed speakers today.

Canada September retail sales will be reported.  Headline sales are expected to fall -0.3% m/m and ex-autos by -0.1% m/m.  BOC recently delivered a dovish hold and data have been coming in on the weak side.  Both factors have weighed on the Loonie this month, taking it from 1.3040 to 1.330 before the move ran out of steam yesterday on less dovish than expected Poloz comments.  We look for renewed weakness if the data come in weak.

Brazil mid-November IPCA inflation is expected at 2.69% y/y vs. 2.72% in mid-October.  If so, inflation would remain below the 2.75-5.75% target range.  Next COPOM meeting is December 11 and a 50 bp cut to 4.5% is expected.  CDI market is pricing in one last 25 bp cut in February that would take the policy rate down to 4.25%, but we think much will depend on how the real is trading.  While the next 50 bp cut is baked in the cake, further BRL weakness is likely to prevent further easing.

Mexico mid-November CPI is expected to rise 3.07% y/y vs. 3.01% in mid-October.  If so, inflation would remain near the 3% target and well within the 2-4% target range.  Next policy meeting is December 19 and another 25 bp cut to 7.25% is expected.  Two dissents were seen in November in favor of a 50 bp cut.  If data worsen significantly, we cannot rule out a bigger move next month.

 

EUROPE/MIDDLE EAST/AFRICA

The Labour Party unveiled its manifesto yesterday, confirming its radical platform for the UK economy and to hold a second referendum on Brexit. It promises to give the country “The Final Say on Brexit” by renegotiating the deal within three months and put it to a legally binding referendum within six months. It also included significant fiscal spending, a higher minimum wage, and widespread nationalization plans. Polls continue to give the Conservative Party a lead of over 10 percentage points.  If Labour were to get greater traction with voters, sterling would clearly be spooked by its planned agenda.

On the UK data front, PMI readings for November disappointed across the board.  This is the first month that all three will be released at the same time rather than staggered over several days.  Manufacturing fell to 48.3 (48.9 expected) and services fell to 48.6 (50.1 expected), which dragged the composite back below 50 to 48.5, a new low.  Brexit uncertainty continues to take a toll on the economy.  Today’s weak data has helped push sterling to its lowest level since November 14 but losses should be limited by election optimism.

Flash eurozone PMI readings were mixed.  Services fell to 51.5 while manufacturing rose to 46.6, dragging the composite PMI down to 50.3 vs. 50.9 expected and close to the September low of 50.1.  Looking at the country breakdown, Germany and France similarly saw positive surprises on the manufacturing side and negative ones on the services side.  Germany’s November manufacturing PMI came in at 43.8 (42.8 expected), supporting the view that the worst may be over for the country’s industry.  France’s manufacturing PMI was 51.6 (50.9 expected) with a healthy boost from foreign demand, and the fourth consecutive print over 50.  Yet none of these readings bring cause to break out the champagne, as the overall economic outlook remains weak.  

President Lagarde spoke earlier and Bundesbank President Weidmann speaks later today.   In her first major speech, Lagarde called for a new policy mix and asked for greater fiscal stimulus.  Her predecessor Draghi was also vocal in calling for governments to do more to boost the economy.  She added that she will announce an DCB policy review soon, acknowledging that deep differences have evolved over the bank’s unconventional policies.  Lagarde’s first policy meeting is December 12 but no policy change is expected.  The euro has traded largely in a $1.10-1.12 range since mid-October.  Despite this most recent bounce, it feels heavy and we look for continued weakness in the coming days.  Today’s data has done the euro no favors and we look for an eventual break below $1.10.

 

ASIA

Japan reported national CPI data for October.  Despite the consumption tax hike, headline inflation was steady at 0.2% y/y while ex-fresh food rose only a tick to 0.4% y/y.  Preliminary November PMI readings were also reported, with the composite rising to 49.9 from 49.1 in October.  October department store sales were also reported, with nationwide sales -17.5% y/y and Tokyo -19% y/y.  USD/JPY has been pinned to a 108-109.50 range since mid-October.  It is currently near the center of that range but we favor an upside breakout.  Working against this will be periodic bouts of yen strength when negative trade headlines hit the tape.

Australia November PMI readings came in weak.  Manufacturing slipped a tick to 49.9, while a bigger drop in services to 49.5 dragged the composite PMI to 49.5 from 50.0 in October.  This is the first sub-50 reading since August and will likely keep alive notions of further RBA easing.  WIRP suggests 21% odds of a cut December 3, rising sharply to 63% February 4.  AUD remains heavy on the soft data and growing doubts about a Phase One trade deal and a break below the .6770 area would set up a test of the October 2 low near .6670.