Dollar Firm Ahead of ECB Decision

  • The ECB meets, and it will be the highlight of the week; weak eurozone flash PMI readings for January were reported
  • During the North American session, the US reports weekly jobless claims, December leading index, and January Kansas City Fed au
  • The Senate is scheduled to hold votes today on two competing bills
  • Australia reported December jobs data
  • Norges Bank, Bank of Korea, and Bank Negara Malaysia all kept rates steady, as expected

The dollar is broadly firmer against the majors ahead of the ECB decision.  Swissie and Nokkie are outperforming, while Aussie and Stockie are underperforming.  EM currencies are mostly weaker.  INR and RUB are outperforming, while the CEE currencies are underperforming.  MSCI Asia Pacific was up 0.3%, with the Nikkei falling 0.1%.  MSCI EM is up 0.4% so far today, with the Shanghai Composite rising 0.4%.  Euro Stoxx 600 is up 0.4% near midday, while US equity futures are pointing to a higher open.  10-year UST yields are down 1 bp at 2.73%.  Commodity prices are mostly lower, with Brent oil down 0.4%, copper down 0.3%, and gold down 0.3%.

The ECB meets, and it will be the highlight of the week.  Recall at the November meeting, the ECB kept the risks balanced and the forward guidance unchanged.  However, the account of that meeting showed that the ECB discussed changing the balance of risks.  Draghi’s dovish turn last week was noteworthy and suggests that there is a chance that the ECB shifts it risk assessment this week.

Expect Draghi to once again be quizzed about the impact of negative interest rates on bank profitability.  He was asked in December, and he said then that it was an issue that the ECB is “monitoring carefully.”  In the same vein, Draghi will likely be asked about a new Targeted Longer-Term Refinancing Operation (TLTRO).  All in all, he is likely to mirror this dovish stance from last week.

Ahead of the ECB decision, we got weak eurozone flash PMI readings for January.  Eurozone manufacturing PMI fell to 50.5 and services PMI fell to 50.8.  Both were weaker than expected and led to a drop in the composite PMI to 50.7.  France’s manufacturing PMI rose unexpectedly to 51.2, but this was offset by a sharp drop in its services PMI to 47.5 and this drove its composite reading down to 47.9.  German composite PMI rose to 52.1, as a strong services PMI offset a drop in its manufacturing PMI to 49.9.  Q4 eurozone data was disappointing and refuted any notions that the Q3 slowdown was temporary.  Indeed, the slowdown seems to be getting even worse in Q1.

The euro remains heavy and we do not think the ECB will want to say or do anything to change this.  We still think it is on track to test the January 3 low near $1.1310 and then the November/December lows near $1.1270.  Further out, a test of the November 12 cycle low near $1.1215 seems likely.

Sterling broke higher yesterday but is having trouble sustaining the move today.  It made a marginal new high near $1.3095 but has fallen back after it was unable to break above $1.31.  Charts point to an eventual test of the September 20 high near $1.33, with intermediate targets found at the November 7 high near $1.3175 and the October 12 high near $1.3260.   Elsewhere, USD/JPY continues to have trouble breaking above 110 and awaits fresh drivers.

During the North American session, the US reports weekly jobless claims, December leading index, and January Kansas City Fed index.  Markit reports it US PMI reading too.  Looking at the regional Fed manufacturing index readings so far, Richmond improved from -8 to -2, Empire fell from 11.5 to 3.9 while Philly rose from 9.1 to 17.0.

The Senate is scheduled to hold votes today on two competing bills and marks the first time that it has acted during the entire length of this shutdown.  One includes $5.7 bln in funding for the wall while the other would reopen the government through February 8 with border funding to be decided later.  Things are likely to get worse before they get better.  For instance, Speaker of the House Pelosi exercised her power to deny Trump the use of her chamber to deliver his State of the Union address.  Other reports suggest the White House is seeking a list of programs that would be hurt if the shutdown lasts into March.

While neither Senate bill is likely to solve the impasse, this could be the start of a negotiation process.  The first plan is unlikely to pass in either the Senate (60 votes needed) or the House.  The second plan is expected to pass in the House but not in the Senate.  Even if it is passed in the Senate, there are unlikely to be enough Republican defections to override (67 votes needed) a likely veto by President Trump.

Australia reported December jobs data.  Like in November, a rise in part-time jobs (24.6k) offset a drop in full-time jobs (-3k).  CBA PMI readings for January were also reported.  Here, a sharp drop in the services component offset a rise in manufacturing, leading to a drop in the composite PMI to 51.5 from 52.9 in December.  AUD has taken it on the chin today and is likely to record an outside down day.  A close below yesterday’s low near .7120 is needed.

Norges Bank kept rates steady, as expected.  It started the tightening cycle in September and signaled a very modest pace of rate hikes.  Indeed, the bank flagged a 25 bp hike at the March 21 meeting but warned of “considerable uncertainty” in the outlook.  Another hike is seen in Q3, but a lot can still happen between now and then.   Oil prices will be a major factor for the economy this year.

Bank of Korea kept rates steady at 1.75%, as expected.  Governor Lee downplayed notions that the next move will be a cut, noting that policy remains accommodative after it hiked 25 bp in November.  Recall Korea reported very weak trade data for the first 20 days of January Monday, while CPI rose 1.3% y/y in December, well below the 2% target.  While a cut seems unlikely, neither will the BOK be in any hurry to hike rates again.

Bank Negara Malaysia kept rates steady at 3.25%, as expected.  It showed little urgency to move, noting that “the degree of monetary accommodativeness is consistent with the intended policy stance.”  The central bank does not have an explicit inflation target.  However, low price pressures should allow it to remain on hold through much of this year.  Before the decision, Malaysia reported December CPI, which rose 0.2% y/y vs. 0.3% expected.  

Mexico mid-January CPI is expected to rise 4.69% y/y vs. 5.0% in mid-December.  If so, inflation would move closer to the 2-4% target range.  Next policy meeting is February 7, no change is expected then.  Going forward, the monetary policy outlook will likely be driven by the peso.  For now, recent firmness gives Banxico some breathing room.