Dollar Firm Ahead of Clarida and Powell

  • The dollar is gaining more traction as US rates markets are giving back some of the recent dovish drop
  • Fed Vice Chairman Clarida speaks today while Chairman Powell speaks Wednesday
  • UK Prime Minister May is in Northern Ireland as part of her campaign to get her Brexit deal passed
  • There are signs of some capitulation by Italy’s populist government
  • President Trump signaled that he will likely increase tariffs on $200 bln of Chinese goods from 10% to 25% come January 1
  • Brazil reports October current account and FDI; Mexico reports October trade

The dollar is mostly firmer against the majors but remains in narrow ranges.  The Antipodeans are outperforming, while sterling and Swissie are underperforming.  EM currencies are mixed.  BRL and RUB are outperforming, while PHP and HUF are underperforming.  MSCI Asia Pacific was up 0.5%, with the Nikkei rising 0.6%.  MSCI EM is up 0.1% so far today, with the Shanghai Composite flat.  Euro Stoxx 600 is down 0.4% near midday, while US futures are pointing to a lower open.  The US 10-year yield is flat at 3.06%.  Commodity prices are mixed, with Brent oil up 0.5%, copper down 1.1%, and gold up 0.1%.

The dollar is gaining more traction as US rates markets are giving back some of the recent dovish drop.  The 10-year yield is trading near 3.07% and the 2-year near 2.83%, both up from last week’s lows.  Also, the implied yield on the January 2020 Fed Funds futures contract has risen to 2.75%, the highest since November 16.  Still, a lot of dovish sentiment still needs to be unwound, in our view.

Fed Vice Chairman Clarida speaks today while Chairman Powell speaks Wednesday.  These two will be the most closely watched in light of their dovish comments earlier this month that significantly reset market Fed expectations.  Indeed, Clarida sounded the most dovish this month, feeding into the drop in US rates.

Note that Michelle Bowman has become a new Fed Governor.  5 of the 7 members of the Board of Governors are now in place, with two more Governors (Marvin Goodfriend and Nellie Liang) still awaiting confirmation.  Despite Trump’s complaints about Fed policy, all of his choices have been orthodox centrists.  Bowman will be able to vote at the December 19 FOMC meeting, where a 25 bp hike is still widely expected.

During the North American session, the US reports September house price data and November Conference Board consumer confidence.  Except perhaps for the November ISM report on December 3, there is no top-tier US data until the November jobs report December 7.  It’s early still but consensus sees 212k jobs added vs. 250k in October and average hourly earnings steady at 3.1% y/y.

UK Prime Minister May is in Northern Ireland as part of her campaign to get her Brexit deal passed.  Yet her allies in the Democratic Unionist Party (DUP) have united behind leader Arlene Foster in opposing the deal.  Despite the UK-EU agreement over the weekend, markets acknowledge the still-significant odds of a no-deal Brexit if it fails in the UK parliamentary vote tentatively scheduled for December 12.   Sterling remains heavy and is likely to test the August low near $1.2660 in the coming days.

There are signs of some capitulation by Italy’s populist government.  Press is reporting that the deficit target could be reduced to 2.2-2.3% of GDP vs. 2.4% currently.  Of course, these are mere rounding errors but the signal of compromise, if true, will be welcomed by the markets.  Yet with growth rolling over in Italy and the eurozone, there remain upside risks to the actual deficit numbers.

The euro remains heavy and is making new lows for the week.  A clean break below $1.1315 would set up a test of the November 12 low near $1.1215.

President Trump signaled that he will likely increase tariffs on $200 bln of Chinese goods from 10% to 25% come January 1, as threatened previously.  He also indicated that he would slap tariffs on all remaining imports from China worth $267 bln if upcoming talks with President Xi do not yield any trade deal.  While we think an eventual face-saving deal for both nations will be struck next year, the time is not yet ripe as more pain seems likely and necessary to get such a deal.

Brazil reports October current account and FDI.  The real seems to be trading less on the data and more on the political risk.  Press reports suggest President-elect Bolsonaro is facing tensions with congressional leaders, which may threaten passage of reforms.  The USD/BRL gap from October 5-8 has now been filled.  That means we are back to where we were before the first-round vote.  The pair is coming up on the 62% retracement objective of the September-October drop near 3.9710, and a break would set up a test of the September 13 high near 4.2085.

Mexico reports October trade.  Here too, the peso is trading less on the data and more on the political risk.  MXN underperformed Monday as tensions with the US mount over migrants at the border.  USD/MXN made a new cycle high today near 20.6345 before falling back a bit.  The pair is on track to test the June high near 20.96 as political risk is likely to remain high as AMLO takes office this weekend.