Dollar Firm as Europe Returns from Holiday

  • The dollar is firmer on the first full day of trading since last Thursday
  • US rates are moving higher and that should help underpin the dollar
  • As expected, the US announced an end to waivers for buying Iranian oil
  • Another factor behind rising US yields is the improved US outlook
  • President Trump announced that Herman Cain had withdrawn his nomination to the Fed
  • UK Parliament returns from recess today; Japan reported March department store and supermarket sales
  • Surging oil prices will have a mixed impact for EM; Singapore March CPI rose 0.6% y/y

 The dollar is mostly firmer against the majors as Europe returns from holiday. Sterling and yen are outperforming, while Swissie and Aussie are underperforming. EM currencies are broadly weaker. RUB and MYR are outperforming, while ZAR and MXN are underperforming. MSCI Asia Pacific was up 0.2%, with the Nikkei rising 0.2%. MSCI EM is down 0.1% so far today, with the Shanghai Composite falling 0.5%. Euro Stoxx 600 is down 0.2% near midday, while US futures are pointing to a lower open. 10-year UST yields are flat at 2.58%, while the 3-month to 10-year spread has steepened 1 bp to 17 bp. Commodity prices are mostly higher, with Brent oil up 0.4%, copper up 0.2%, and gold down 0.2%.

The dollar is firmer on the first full day of trading since last Thursday. With Europe back from holiday, the dollar is trying to claw back some of Monday’s mild losses. Note that after this Friday, Japan markets will be closed for the so-called Super Golden Week. Japan won’t return from holiday until May 7.

US rates are moving higher and that should help underpin the dollar. The 10-year yield is back near 2.60% and the 2-year back near 2.40%. Higher oil prices and the likely impact on headline inflation worldwide may be a factor boosting yields. The one missing piece of the puzzle for the dollar rally remains Fed easing expectations. The Fed Funds futures strip is still pricing in solid odds of a rate cut this year followed by another one next year. This makes no sense to us.

As expected, the US announced an end to waivers for buying Iranian oil. Even though Saudi Arabia and UAE later pledged to ensure a balanced and stable oil market, oil prices surged. Brent oil made a marginal new high today just below $75 per barrel, the highest since November 1 and on track to test the October high near $86.75. The waivers given to China, Greece, India, Italy, Japan, South Korea, Taiwan and Turkey are set to expire May 2. Note that the major currencies with the highest correlation to oil prices are CAD and NOK. For EM, they are RUB and COP.

Another factor behind rising US yields is the improved US outlook. The Atlanta Fed’s GDPNow model is now tracking 2.8% SAAR for Q1, up from 2.4% previously. Elsewhere, the New York Fed’s Nowcast model is tracking 1.4% SAAR for Q1 and 1.9% for Q2. Both models have seen their forecasts rise sharply in recent weeks. It’s worth noting that market consensus for Q1 at 2.2% SAAR is close to the average of these two.

During the North American session, the US reports March new home sales (-2.7% m/m expected) and Richmond Fed manufacturing index (10 expected). Existing home sales data yesterday came in at a weaker than expected -4.9% m/m. The media embargo for the May 1 FOMC meeting has gone into effect and so there are no Fed speakers until after that meeting.

Yesterday, President Trump announced that Herman Cain had withdrawn his nomination to the Fed. Cain was not formally nominated yet, but early trial balloons were shot down quickly by four Republican Senators, making passage pretty much impossible. No word on the other Fed candidate, Stephen Moore. Like Cain, Moore has not been formally nominated yet.

UK Parliament returns from recess today. We suspect it will be a long, slow slog ahead in terms of getting a deal passed. We are not getting our hopes up just yet. Talks with opposition Labour will resume today but so far, they aren’t really going anywhere as reports suggest Corbyn is in no hurry to bail out May.

Meanwhile, press reports suggest May has been given an ultimatum: step down by June or be ousted. May will reportedly be told that 70% of Tory MPs want her to resign for bungling the Brexit process and overseeing a sharp fall in public support for the party. Leadership rules currently would not allow a challenge to her until December, and MPs are threatening a rule change. Sterling remains little changed, sitting right near the $1.30 area as it awaits further Brexit news.

Japan reported March department store and supermarket sales overnight. Tokyo sales rose 0.6% y/y while nationwide sales rose 0.1% y/y. Supermarket sales rose 0.5% y/y. All three of these data series offer hope that the strong labor market will keep consumption firm ahead of the consumption tax hike in October. USD/JPY remains little changed just below the 112 area.

Data come ahead of the BOJ meeting Thursday. While no change in policy is expected, we think it will be a dovish hold. Press reports suggest forecasts to be released will show inflation still struggling to reach the 2% target in FY2021, supporting the case for further stimulus ahead. BOJ official Maeda said it would consider further easing if the economy loses momentum.

Surging oil prices will have a mixed impact for EM. Higher oil has spurred COP and RUB to be the best performers over the past week. While the oil exporters will benefit from higher oil, the biggest EM countries (in terms of population and GDP) will experience greater headwinds for their economies. These include (but are not limited to) China, India, Korea, Taiwan, Poland, South Africa, and Turkey. Note that over the past week, the high beta EM currencies have fared the worst and include TRY, ZAR, and BRL.

Singapore March CPI rose 0.6% y/y vs. 0.7% expected. Core inflation fell to 1.4% vs. 1.7% expected, and data underscore the lack of any price pressures. While the MAS does not have an explicit inflation target, low price pressures and growing headwinds to the economy should keep it on hold at its next semiannual policy meeting in October.