Dollar Firm as Risk-Off Sentiment Intensifies

  • Apple’s warning about the risk to its Q1 revenue guidance due to the coronavirus was a reality check for the markets; the dollar rally continues
  • We get the first February reads of the US manufacturing sector this week; the US economy remains firm
  • UK-EU tensions remain high; there is growing uncertainty about the size and timing of the next UK budget
  • The UK’s latest jobs report was mixed; German ZEW survey came in well below expectations
  • The rand continues to underperform (-0.5% today) after Moody’s cut South Africa’s growth forecast

The dollar is mostly firmer against the majors as US markets reopen to a backdrop of intensifying risk-off sentiment.  Sterling and yen are outperforming, while Kiwi and Nokkie are underperforming.  EM currencies are broadly weaker.  RON and HUF are outperforming, while KRW and ZAR are underperforming.  MSCI Asia Pacific was down 1.1% on the day, with the Nikkei falling 1.4%.  MSCI EM is down 1.0% so far today, with the Shanghai Composite rising 0.1%.  Euro Stoxx 600 is down 0.5% near midday, while US futures are pointing to a lower open.  10-year UST yields are down 4 bp at 1.54%, while the 3-month to 10-year spread is down 3 bp to stand at -2 bp.  Commodity prices are mixed, with Brent oil down 1.7%, copper up 0.1%, and gold up 0.4%.

Apple’s warning about the risk to its Q1 revenue guidance due to the coronavirus was a reality check for the markets.  It served to highlight the dissonance between the likely large (and still unpredictable) economic impact from the virus and an equity rally that seems to have completely ignored this. Ongoing concerns about the coronavirus are likely to keep risk sentiment under pressure for now.  Global growth was already at risk before the virus hit and now the outlook is even cloudier.

The dollar rally continues.  DXY traded at a new cycle high today near 99.268 and remains on track to test the October 1 cycle high near 99.667.  After that is the May 2017 high near 99.888.  Elsewhere, the euro remains heavy and traded at a new low for this move yesterday near $1.0820 and is hovering just above that today.  There is a gap from April 2017 on the weekly charts between $1.0780-1.0820 that now needs to be filled.  USD/JPY has been unable to cleanly breach the 110 area due to ongoing bouts of risk-off sentiment.  We remain bullish on the dollar.



We get the first February reads of the US manufacturing sector this week.  The regional Fed manufacturing surveys for February give a first look.  The Empire reading starts the ball rolling today and it is expected at 5.0 vs. 4.8 in January.  The Philly Fed survey will be reported Thursday and is expected at 11.0 vs. 17.0 in January.  There are no Fed speakers today, but December TIC data will be reported this afternoon.

The US economy remains firm.  Advance Q4 GDP came in at 2.1% SAAR and that strength appears to be carrying over into 2020.  The Atlanta Fed’s GDPNow model estimates Q1 GDP growth at 2.4% SAAR vs. 2.7% previously.  Elsewhere, the NY Fed’s Nowcast model estimates Q1 GDP growth at 1.4% SAAR vs. 1.7% previously.  While these early reads are subject to significant revisions, we are clearly far from recession and the Fed is right to maintain steady rates in order to assess how the outlook unfolds in 2020.

Yet the US yield curve is flirting with inversion again.  At -1 bp today, it is the first inversion since February 3.  Fed easing expectations have also intensified.  According to WIRP, markets are fully pricing in a rate cut this year followed by nearly 80% odds of a second one by January 2021.  While the US economy will face some headwinds, these moves in the US rates markets are due to the still-unknown global impact of the coronavirus.  Until that impact becomes better known, markets are likely to continue pricing in a dovish Fed.  Yet this has not translated into dollar weakness due to safe haven flows and the relatively stronger US economic outlook compared to the rest of the world.

Canada reports some key data this week.  December manufacturing sales will be reported (0.8% m/m expected) today, followed by January CPI Wednesday and December retail sales Friday.  Relatively firm data in recent weeks have pushed out Bank of Canada easing expectations, as WIRP suggests only 15% odds of a cut at the next policy meeting March 18.



UK-EU tensions remain high.  The UK has pushed back against the EU’s redline notion of “level playing field” for achieving a trade deal. David Frost, the UK’s Brexit negotiator, said the UK wants to maintain “the ability to set laws that suit us — to claim the right that every other non-EU country in the world has.” The comments widen the already sizable gap in negotiating positions. That said, it’s still early days and, as usual, nothing is likely to be decided until we get closer to the year-end deadline.

There is growing uncertainty about the size and timing of the next UK budget. The unexpected reshuffling of the Cabinet means that the budget may be delayed beyond the March 11 date, but officials remain confident that it will happen before the start of the new fiscal tax year (April 5). The upshot is likely to be greater spending as the government seems to be pushing for looser borrowing limits, which former Chancellor Javid was against. There hasn’t been much reaction in the UK yield curve, with only a mild steepening since the reshuffling was announced last week.

The UK’s latest jobs report was mixed. Employment came in at 180K for December, well above expectations, but wage growth was on the weaker side. The unemployment rate remained stable at 3.8%. Once again, we don’t think the economic outlook makes a strong case for easing yet by the BOE and believe that the 75% chance of a cut this year remains exaggerated.

In Germany, the ZEW survey came in well below expectations and the previous month’s readings. The expectations component (a good activity leading indicator) crashed to 8.7 in February from 26.7 in January, while the current situation fell to -15.7 from -9.5. If you needed any more evidence of how much the German recovery is struggling to gain traction, look no further. Note that the survey does account for impact of the Coronavirus on global trade and supply chains.

The rand continues to underperform (-0.5% today) after Moody’s cut South Africa’s growth forecast.  It sees growth this year at 0.7% now vs. 1.0% previously.  While the revision may seem small, the implicit message is that there are increasing odds of a downgrade to sub-investment grade Ba1 in Moody’s March review.  Next Wednesday is key, as Finance Minister Mboweni will deliver his annual budget speech.  Our own sovereign ratings model shows South Africa’s implied rating at BB-/Ba3/BB-. Moody’s and Fitch’s ratings of Baa3 and BB+, respectively, continue to see heightened downgrade risk. Loss of investment grade from Moody’s would lead to ejection from WGBI. Even S&P’s BB rating appears too high now.



The RBA minutes didn’t bring any major surprises, confirming that officials are prepared to ease policy further if needed. Of course, the virus is seen as a “material” risk to the outlook. AUD ground down to a session low nea 0.6675 but this was more in line with the risk-off sentiment following the Apple news rather than RBA.  NZD went along with the move to trade near .6390.  Indeed, growth-sensitive currencies like the dollar bloc, Scandies, and EM are likely to continue underperforming in the current environment.