Dollar Extends Gains as Week Winds Down

  • Markets are relatively calm as an eventful week winds down and fresh drivers are awaited
  • Reports suggest the US and China remain far apart in trade talks
  • The two US parties are still working to avoid another government shutdown
  • Canada reports January jobs data
  • UK Prime Minister May now travels to Ireland to salvage a Brexit deal
  • RBA delivered a dovish Statement of Monetary Policy
  • Thai politics were upended by the surprise announcement that Princess Ubolratana is running for Prime Minister
  • Central Bank of Russia kept rates steady at 7.75%, as expected

The dollar is mostly firmer against the majors as the week winds down.  Sterling and Swissie are outperforming, while Aussie and Nokkie are underperforming.  EM currencies are mostly weaker.  PHP and TRY are outperforming, while THB and RUB are underperforming.  MSCI Asia Pacific was down 1.1%, with the Nikkei falling 2%.  MSCI EM is down 0.6% so far today, with China markets closed all week for the Lunar New Year holiday.  Euro Stoxx 600 is flat near midday, while US equity futures are pointing to a lower open.  10-year UST yields are down 1 bp at 2.65%.  Commodity prices are mixed, with Brent oil up 0.4%, copper down 0.1%, and gold up 0.1%.

Markets are relatively calm as an eventful week winds down and fresh drivers are awaited.  Global equity markets remain under modest pressure as concerns about global growth and trade wars intensified.  The dollar rally continues, with DXY up for the seventh straight day after last week’s dovish FOMC.

Reports suggest the US and China remain far apart in trade talks.  White House advisor Kudlow warned that a “sizable distance” remained between the two nations.  Furthermore, President Trump confirmed reports suggest the and President Xi will not meet before the March 1 deadline and suggests a deal remains elusive.  This means that US tariffs on a wider array of Chinese goods will kick in, while existing tariff rates will jump to 25%.

Recall that this was delayed for 90 days under the trade truce back in December.  Could we see another delay to the US tariffs?  Possibly.  The whole world seems to be in can-kicking mode (the Fed, Brexit, ECB, etc.) so what’s another can down the road?  USTR Lighthizer and Treasury Secretary Mnuchin travel to Beijing next week for another round of talks.

US rates remain too low, in our view.  The implied yield on the January 2020 Fed Funds futures contract is 2.35%, which means the market is still putting odds (albeit low) of a rate cut this year.  The 10-year yield has edged lower to 2.65%, while the 2-year is falling further to 2.48%.  US inflation data out next week is unlikely to turn the tide just yet.

The Fed’s Daly speaks today.  She is not a voting member of the FOMC this year.  However, we expect her to toe the party line, that of “patience” and “flexibility.”

The two US parties are still working to avoid another government shutdown.  Funding is good through February 15.  House Speaker Pelosi had originally said today is the deadline to reach a deal so that both houses can vote on it next week.  Now it appears that a deal Monday would allow enough time to pass.  Ranking Republican Senator Shelby said he believes Trump will sign the deal presented to him.

Trump reportedly laid out his demands for a deal that includes border wall funding.  However, press reports suggest that lawmakers of his own party will not let the government shut down again.  Nor will they reportedly support a declaration of a state of emergency.  We will know more Monday, but markets seem to be pricing in a benign outcome and we concur.

Elsewhere during the North American session, Canada reports January jobs data.  Consensus sees 5k jobs added.  Details of last month’s 7.8k gain were not good, as -19.3k full-time jobs were offset by a 27.1k gain in part-time jobs.  Bank of Canada next meets March 6 and a 25 bp hike to 3.0% is widely expected.  USD/CAD is breaking higher and is on track to test the January 24 high near 1.3375.  Looking further out, a break of 1.3435 is needed to set up a test of the December 31 high near 1.3665.

UK Prime Minister May now travels to Ireland to salvage a Brexit deal.  She will meet with Irish Prime Minister Varadkar to discuss (what else?) the Irish backstop.  EC President Juncker told May this week that the deal will not be reopened, and so we see little chance of any breakthrough in Dublin today.  As such, sterling should remain heavy.

After plunging in the wake of the dovish BOE hold yesterday, sterling then recovered on a more upbeat outlook from Governor Carney.  BOE cut its GDP and investment forecasts, citing the “fog of Brexit.”  However, Carney stuck to the bank’s prevailing view that limited and gradual rate hikes will still be needed.  Sterling traded in a very large range yesterday but just missed an outside up day with a close below the previous day’s high near $1.2980.

RBA delivered a dovish Statement of Monetary Policy.  In its quarterly update of forecasts, the bank cut its growth and inflation forecasts significantly.  Rather than solely blaming global factors, the RBA pointed to “developments in the housing market and the implications that lower prices might have for construction activity and households’ spending decisions.”  The RBA did note that downside risks to global growth has increased.  Given the RBA’s dovish tilt this week, markets will have to push out rate hike expectations even further.

Thai politics were upended by the surprise announcement that Princess Ubolratana is running for Prime Minister.  The royal family is seen as apolitical and a senior royal has never run for office before.  She is the sister of King and to make matters worse, she is a candidate for the Thai Raksa Chart Party that is linked to former Prime Minister Thaksin.  This upheaval will make it more difficult for junta leader Prayuth, who hopes to win the March 24 election.  The baht weakened on the political uncertainty and this weakness should continue until after the vote.

Central Bank of Russia kept rates steady at 7.75%, as expected.  January CPI was reported earlier this week at 5.0% y/y vs. 4.3% in December.  This is the highest since January 2017 and moves further above the 4% target.  We do not think the tightening cycle is over yet, as the bank noted that risks remain skewed towards inflation.