Dollar Firm as Markets Search for Direction

  • FX markets continue to struggle for direction
  • The UK Parliament narrowly voted to block a no-deal Brexit late last night
  • President Trump will reportedly meet China Vice Premier Liu today at the White House
  • The ECB account of the March meeting will be released today ahead of its meeting next Wednesday
  • Weak German factory orders were reported; Italy cut its 2019 growth forecast to 0.1% from 1.0% previously
  • Reserve Bank of India cut rates 25 bp, as expected; other Asian EM central banks sounded notes of caution

The dollar is mostly firmer against the majors as markets search for direction.  The yen and Aussie are outperforming, while the Scandies are underperforming.  EM currencies are broadly weaker.  IDR and SGD are outperforming, while INR and TRY are underperforming.  MSCI Asia Pacific was down 0.2%, with the Nikkei rising 0.1%.  MSCI EM is down 0.2% so far today, even with the Shanghai Composite rising 0.9%.  Euro Stoxx 600 is down 0.3% near midday, while US futures are pointing to a higher open.  10-year UST yields are down 2 bp at 2.50%, while the 3-month to 10-year spread flattened 2 bp to stand at 9 bp.  Commodity prices are mixed, with Brent oil flat, copper down 0.6%, and gold up 0.1%.

FX markets continue to struggle for direction.  Still, it’s noteworthy that despite all the potentially damaging developments to the dollar, it remains relatively firm.  This goes to the heart of our strong dollar call – despite the uncertain US economic outlook and dovish Fed pivot, things have deteriorated just as much in the rest of the world.  News out of the eurozone today underscore this.

DXY has been choppy all week after a nice run of four straight up days last week.  The euro is barely trading above the year’s low near $1.1175, while sterling has yet to capitalize on what appears to be lower odds of a no-deal Brexit.  USD/JPY is trading near the top of recent trading ranges, though it is struggling to break above the 200-day moving average near 111.50.

The UK Parliament narrowly voted to block a no-deal Brexit late last night.  The 313-312 vote couldn’t be any closer.  Coupled with Prime Minister May’s efforts to engage opposition Labour, it does seem that the base case remains some sort of soft Brexit with a likely delay.  Indeed, talks yesterday between May and Corbyn were said to be “constructive.”  Markets view these recent developments as lowering the odds of a no-deal Brexit.

There’s been a lot of talk about preserving some sort of customs union with the EU.  To be clear, a customs union allows its members to eliminate trade barriers amongst themselves whilst maintaining common tariffs against the rest of the world.  On the other hand, a Free Trade Area allows each country to maintain different tariff levels against the rest of the world.

We are a bit surprised that it isn’t trading higher after the Parliamentary vote.  Risks of a no-deal Brexit were weighing on sterling, but so far there has not been much upside as it has been capped by the $1.32 area.  While sterling is likely to see some knee-jerk bounces on positive Brexit news (long delay, softer Brexit), we think those gains will be hard to sustain.

During the North American session, the US reports Challenger job cuts and weekly jobless claims.  In terms of Fed speakers, we get Mester and Harker today.  Fed officials continue to stress that while it has hit the pause button, the notion of rate cuts anytime soon is highly unlikely.  Canada Ivey PMI will be reported too.

President Trump will reportedly meet China Vice Premier Liu today at the White House.  Trade talks are ongoing, and reports suggest a trade deal is getting close.  We have long felt that some sort of compromise would be struck in Q2 and so would not be surprised at some sort of announcement this month.  Indeed, reports suggest the two sides are already discussing where to hold the Trump-Xi summit announcing the deal.

The ECB account of the March meeting will be released today ahead of its meeting next Wednesday.  Given its dovish actions last month, no new stimulus is expected next week.  However, we may get more details about the TLTRO that is planned for September.  We also know that policymakers are getting increasingly concerned about the impact of negative interest rates, and so the account could shed some light on this.  The euro remains heavy and is likely to remain heavy going into the ECB meeting.

Weak German factory orders were reported earlier.  Orders sank -4.2% m/m in February vs. an expected gain of 0.3%, which dragged the y/y rate down to -8.4% from a revised -3.6% (was -3.9%).  Investors and policymakers alike should be concerned that the largest eurozone economy is still weakening.

Adding to the gloom, reports suggest Italy has cut its 2019 growth forecast to 0.1% from 1.0% previously.  In turn, this will boost the budget deficit to an estimated 2.3-2.4% of GDP from a planned 2.04%.   We believe markets have been too sanguine about the risks Italy poses, and so this news should be a wake-up call.

Malaysia reported February trade.  Exports sank -5.3% y/y vs. an expected 2.3% gain, while imports contracted -9.4% y/y vs. an expected 0.9% gain (in ringgit terms).  The economy remains at risk and so the central bank is unlikely to hike rates this year.  Next policy meeting is May 7, and no change is expected then.  We cannot rule out a rate cut in H2 if the economy continues to deteriorate.

Reserve Bank of India cut rates 25 bp, as expected.  The vote was 5-1, but it kept its neutral stance and so further cuts are not exactly a done deal.  On top of already announced fiscal stimulus, the RBI is doing its part to help Modi ahead of the April-May elections.  CPI rose 2.6% y/y in February, which is in the bottom half of the 2-6% target range.  As such, another cut was justified.

Other Asian EM central banks sounded notes of caution.  Bank Indonesia said it is keeping rates steady for now given global uncertainties, adding that it will use macroprudential policies to boost growth. After it hiked 175 bp over the course of the last year, we had flagged BI as the next likely bank in the region to cut rates, but it seems we will have to wait until H2.  Next policy meeting is April 25 and rates are likely to be kept steady then.

Elsewhere, Bank of Thailand said financial stability risks remain in place.  It added that these issues will be addressed by macroprudential policies.  The belief that rates had stayed too low for too long was the major reason BOT started the tightening cycle last year.  Today’s comments suggest rates are on hold now.  Next policy meeting is May 8 and rates are likely to be kept steady then.