Dollar Firm as Asian Central Banks Yell “Surprise!”

  • The dollar is getting some traction as central banks in Asia delivered dovish surprises all around
  • The dollar is strengthening despite depressed US yields; US curve remains significantly inverted
  • The yuan was fixed weaker overnight
  • RBNZ surprised markets with a 50 bp rate cut to 1.0%; market expects RBA to cut again soon
  • RBI surprised markets with a 35 bp cut to 5.4%; BOT surprised markets with a 25 bp cut to 1.5%

The dollar is broadly firmer against the majors as several Asian central banks delivered dovish surprises.  Yen and Nokkie are outperforming, while the Antipodeans are underperforming.  EM currencies are mostly weaker.  TRY and ZAR are outperforming, while PHP and CNY are underperforming.  MSCI Asia Pacific was flat, with the Nikkei falling 0.3%.  MSCI EM is up 0.1% so far today, with the Shanghai Composite falling 0.3%.  Euro Stoxx 600 is up 1% near midday, while US futures are pointing to a higher open.  10-year UST yields are down 4 bp at 1.67%, while the 3-month to 10-year spread has inverted 3 bp to stand at -36 bp.  Commodity prices are mixed, with Brent oil down 0.6%, copper up 0.2%, and gold up 1%.

The dollar is getting some traction as central banks in Asia delivered dovish surprises all around.  DXY is up for the second straight day after three days of losses triggered by President Trump’s renewed tariff threats.  It has retraced over a third of that drop but a break above the 98.273 area is needed to set up a test of the cycle high near 98.932 from August 1.  Equity markets have stabilized but are in search of direction and so await fresh drivers.

The dollar is strengthening despite depressed US yields.  This supports our belief that as bad as things might get in the US, the rest of the world will be even worse off.  The implied yield for the January 2020 Fed Funds futures contract is trading near 1.47%, just above the low of 1.45% from Monday.  This still prices in nearly three cuts this year, and the implied yield of 1.02% on the January 2021 contract implies another two cuts next year are nearly priced in.

The US curve remains significantly inverted.  At -36 bp, it is the most inverted since 2007 and we all know what happened in 2008.  While we can take some comfort in the fact that the 2007 was deeper (-56 bp at its peak) and longer (from July 2006 to July 2007), we acknowledge that US recession risks have indeed risen.  Before Trump announced this latest round of tariffs on China, the curve had been flirting with positive slope for several weeks.

The Fed’s Bullard was relatively upbeat yesterday.  He said policymakers have already taken into account the ongoing trade war uncertainties, adding that the Fed “cannot reasonably react” to the day-to-day trade negotiations.  Bullard added that he still sees only one more cut this year but will have to see how the data come in.  Today, Evans is the only Fed speaker on the schedule.  The US data calendar is also very light, with weekly mortgage applications and June consumer credit out today.

The yuan was fixed weaker overnight.  It was the highest fix for USD/CNY since 2008 but fell just shy of 7.   This fix was a bit surprising to us given EM FX gains seen yesterday.  Both CNY and CNH are weaker today but for now remain above the cycle lows earlier this week.

PBOC officials reportedly told foreign firms earlier that the yuan won’t continue to weaken significantly.  We find this to be, quite frankly, unenforceable.  If the rest of EM FX is selling off, we can bet the yuan will as well.  Maybe it outperforms a bit but there is zero chance that China moves back to any sort of peg or quasi-peg.  Still, the underlying signal is that the yuan won’t be “weaponized” and markets can certainly live with that.

Reserve Bank of New Zealand surprised markets with a 50 bp rate cut to 1.0%.  Consensus saw a 25 bp cut.  The bank noted that growth has slowed due to rising headwinds, and so in the absence of more stimulus, employment and inflation would likely ease relative to its targets.  Governor Orr said this cut doesn’t rule out further action and noted it is “well advanced” on its work on unconventional policy.  As such, markets are looking for another cut before year-end.

Kiwi traded at new lows for this move below .6700 before recovering a bit.  It is on track to test the January 2016 low near .6350.  A break below would set up a test of the August 2015 low near .6130.  Aussie sank in sympathy with Kiwi and is trading at its lowest level since 2009.  Indeed, it is on track to test the February 2009 low near .6250 as rate cut expectations build.  After the RBNZ cut, WIRP now suggests 68% odds of an RBA cut September 3, up from 47% previously.

Reserve Bank of India surprised markets with a 35 bp cut to 5.4%.  Consensus saw a 25 bp cut.  Governor Das said a 25 bp move was “inadequate” whilst a 50 bp was “excessive.”  The RBI cut its growth forecast for the current FY2019 beginning April 1 by a tick to 6.9%.  It also see inflation remaining below the 4% target for the rest of the year.  With the economy remaining sluggish, we expect another rate cut at the next policy meeting October 4.

Bank of Thailand surprised markets with a 25 bp cut to 1.5%.  Consensus saw steady rates.  The vote was 5-2, with the bank implying more cuts are possible as growth is expected to slow and inflation likely to come in below target.  CPI rose 1.0% y/y in July, right at the bottom of the 1-4% target range.  The Finance Ministry expects to add fiscal stimulus this year.