Dollar Firm as Markets Consolidate After Yesterday’s Carnage

  • The dollar continues to climb; the US data highlight will be February retail sales
  • The pain in the US high yield sector continues, but it’s still very concentrated on the energy sector
  • ZEW reported very weak Germany and eurozone sentiment measures; UK reported solid labor market data
  • BOJ bought a record JPY121.6 bln of ETFs today; RBA minutes were released; New Zealand announced a fiscal package equal to 4% of GDP

The dollar is broadly firmer against the majors.  Loonie and Swissie are outperforming, while Aussie and Stockie are underperforming.  EM currencies are mostly weaker.  ZAR and MXN are outperforming, while HUF and PLN are underperforming.  MSCI Asia Pacific was down 0.2% on the day, with the Nikkei rising 0.1%.  MSCI EM is down 1.4% so far today, with the Shanghai Composite falling 0.3%.  Euro Stoxx 600 is down 0.4% near midday, while US futures are pointing to a higher open.  10-year UST yields are up 9 bp at 0.81%, while the 3-month to 10-year spread is up 6 bp to stand at +59 bp.  Commodity prices are mostly lower, with Brent oil down 0.3%, copper down 0.8%, and gold down 2.7%.

The dollar continues to climb.  After it took an immediate hit from the Fed emergency cut, DXY has recovered nearly three quarters of its recent swoon and is on track to test the February 20 peak near 99.91.  While we remain constructive on the dollar, we acknowledge greater volatility ahead.  The euro is likely to test support near $1.1050, while sterling is making new lows below $1.22 and is on track to test the September low near $1.1960.  USD/JPY remains subject to swings in risk sentiment.



The two-day FOMC meeting that was to start today has been cancelled in light of the emergency weekend cut.  This is no surprise after the Fed delivered 150 of easing over the past two weeks and restarted aggressive QE.  Next scheduled meeting is April 29.  From what we can tell, the media embargo should be over but there are no scheduled appearances until Bullard speaks March 24.  We would hope that the Fed announces more speakers ahead, as it is now more important than ever for the bank to communicate its intentions to the markets.

The US data highlight will be February retail sales.  Headline sales are expected to rise 0.2% m/m, while ex-auto sales are expected to rise 0.1% m/m.  The so-called control group used for GDP calculations is expected to rise 0.4% m/m.  IP will also be reported and is expected to rise 0.4% m/m vs. -0.3% in January.  Today also sees January business inventories (-0.1% m/m expected) and JOLTS job openings (6401 expected).  Canada reports manufacturing sales (-0.6% m/m expected).

The regional Fed manufacturing surveys for March started rolling out this week.  Empire survey was reported yesterday at -21.5 vs. 3.0 expected and 12.9 in February.  Philly Fed survey will be reported Thursday and is expected at 10.0 vs. 36.7 in February.  Manufacturing had just begun to recover from the US-China trade war, but the outlook has gotten much worse now from the virus.

The pain in the US high yield sector continues, but it’s still very concentrated on the energy sector. Over the last six months, the Bloomberg Barclays HY index has returned -6% compared to -36% for the energy component. There is no surprise here given the sharp drop in oil prices and expectations for depressed prices to continue for some time.  We think the Fed has been relatively timid in its actions towards the credit markets in general. We wouldn’t be surprised if the next measures are meant to support this sector, perhaps starting with commercial paper (CP).



France came out with another slew of strong-handed economic measures as the country enters into a 2-week lockdown. President Macron said that the country was “at war” and that “no companies would be left exposed to the risk of bankruptcy.” The government will grant €300 bln of state guarantees for corporate loans and will allow companies to delay tax and social security payments. The Italy-style lockdown means that people are not allowed to congregate in public places and can only go out for grocery shopping and physical exercise.

Yesterday, Spain’s regulators imposed a month-long ban on short selling. The move is due to “extreme volatility” and an attempt to avoid “the risk of disorderly trading.” This is a step up from its one-day short-selling ban last week. France, Italy, and Belgium imposed 1-day bans. The Spanish IBEX is down 34% this year, not far from the moves seen in other European markets.

ZEW reported very weak Germany and eurozone sentiment measures.  For Germany, current conditions sank to -43.1 while expectations plunged to -49.5.  Both were expected at -30.  Eurozone expectations fell to -49.5.  The survey was taken March 9-16.  A eurozone recession is all but a foregone conclusion.  What’s not known is how long or how deep it will be.

UK reported solid labor market data.  February jobless claims rose 17.3k, while January unemployment rose a tick to 3.9% and employment rose 184k (149k expected) to a record high of 32.99 mln.  Lastly, average weekly earnings rose 3.1% vs. 3.0 expected.  Yet markets are braced for a sharp deterioration in the economic numbers as the impact of the virus is felt in March and beyond.  The government has started to backtrack on its comparatively softer policy by banning mass gatherings. Chancellor Sunak included a GBP12 bln relief package in his first budget, and is expected to announce further support measures later today.

Yesterday, the Riksbank held an emergency meeting and expanded its QE program.  The bank will boost asset purchases by up to SEK300 bln ($31 bln) that will include municipal bonds, mortgage bonds, and even corporate bonds.  Separately, Sweden’s FSA lowered its countercyclical buffer rate to zero.  These moves come after measures taken Friday that boosted the central bank’s lending to Swedish commercial banks.  It said it is prepared to take additional measures if necessary.  After getting rates back to zero, we suspect it will try to avoid going negative again.

The Czech central bank was the first of the CEE region to cut rates in an emergency meeting. It cut the target rate by 50 bp to 1.75% and said more cuts could be coming. Officials also said they are prepared to act in in FX markets if moves in the koruna become disorderly. Other central banks in CEE are likely to follow suit with reports suggesting that Poland is gearing up to act soon.



Bank of Japan bought a record JPY121.6 bln of ETFs today.  This comes a day after the BOJ doubled the total amount it can buy to JPY12 trln.  It’s clear that both the BOJ and ECB are reluctant to take rates more negative, though the door has been left open.  Rather, increased asset purchases the main stimulus lever, at least for now.  Next regularly scheduled BOJ meeting is April 28 and WIRP suggests only 10% odds of a rate cut then.

RBA minutes were released.  At that meeting, the bank cut rates 25 bp to 0.5% and left the door open for further easing.  The bank said it will announce further policy steps this Thursday to support the economy, with many expecting another 25 bp cut to reach the widely recognized lower bound of 0.25%.  After that, the RBA has signaled willingness to try unconventional measures, with yield curve control more likely than just outright asset purchases, according to Deputy Governor Debelle.

New Zealand announced a fiscal package equal to 4% of GDP.  Finance Minister Robertson said, “A recession in New Zealand is now almost certain, with the advice that we are receiving that the shock will be larger than that seen during the Global Financial Crisis.”  The economy is expected to contract -1% in the year through March 2021, and Robertson said the contraction would be -3% without fiscal stimulus.  Interest rates are at the lower bound, and so further stimulus will have to come either from the fiscal side or from unconventional monetary policy.