Dollar Firm as Trade Optimism Grows

  • Signs are still pointing to a Phase One trade deal in the coming weeks
  • Eurozone and UK reported final manufacturing PMIs
  • Moody’s lowered the outlook on South Africa’s Baa3 rating to negative; Fitch raised Turkey’s outlook to stable from negative whilst affirming its BB- rating
  • Philippine central bank Governor Diokno said easing for this year is over; Kiwi rose to a two-month high on positive trade developments

The dollar is mostly firmer against the majors as the new week begins.  The Antipodeans are outperforming, while Swissie and yen are underperforming.  EM currencies are mostly firmer.  ZAR and KRW are outperforming, while PLN and CZK are underperforming.  MSCI Asia Pacific ex-Japan was up 1.1% on the day, with Japan closed for holiday.  MSCI EM is up 1.1% so far today, with the Shanghai Composite rising 0.6%.  Euro Stoxx 600 is up 0.9% near midday, while US futures are pointing to a higher open.  10-year UST yields are up 5 bp at 1.76%, while the 3-month to 10-year spread has steepened 5 bp to +25 bp.  Commodity prices are mostly higher, with Brent oil up 1.2%, copper up 0.4%, and gold down 0.2%.

The dollar is starting off the week on a firm note.  DXY is up for the first time since October 25 after a week straight of losses.  Given the lack of any major US data or events this week we think it will be hard for the dollar to sustain significant upward momentum.  That said, we believe the US economy will continue to outperform and that should help drive dollar outperformance in the coming weeks.  Global equity markets are rallying today on positive market sentiment.

Signs are still pointing to a Phase One trade deal in the coming weeks.  Commerce Secretary Ross said that talks were “very far along” ahead of a meeting with Prime Minister Li at a regional ASEAN summit in Bangkok.  Ironically, Asian leaders are expected to announce the China-backed Regional Comprehensive Economic Partnership that would lower tariffs amongst its members, which doesn’t include the US.



Last week’s US data was solid.  Jobs growth of 128k would have been even higher without the impact of the GM autoworkers strike (-41.6k) and the census (-20k).  We think the PMI readings were also distorted downward by the strike.  Now that the strike has ended, we should see some improvement this month.  The NY Fed Nowcast model is tracking 0.8% SAAR for Q4, whilst the Atlanta Fed GDPNow model is tracking 1.1% SAAR.  Yes, this is a slowdown from the 1.9% SAAR posted in Q3 but we suspect this will get revised upwards as we move past the GM strike distortions.

During the North American session, the US reports September factory orders and the Fed’s Daly speaks.  Next FOMC meeting is December 11 and WIRP suggests only 10% odds of another cut then.  Elsewhere, US rates also point to an improved outlook.  The 10-year yield is creeping back up while the 3-month to 10-year curve is back at +25 bp, the highest since March.  Higher US rates should be seen as dollar-supportive.



The eurozone final manufacturing PMI came in at 45.9 for October, slightly better than the flash reading of 45.7.  Germany’s final PMI came in at 42.1, slightly higher than the 41.9 flash reading but still deep in contractionary territory, while France improved a couple of ticks to 50.7.  Spain’s PMI surprised on the downside at 46.8 vs. 47.7 in September as new orders disappointed with firms highlighting political uncertainty ahead of the November 10 elections.  Italy’s reading was right on expectations at 47.7 vs. 47.8 in September, with new orders showing the 15th consecutive month of contraction.  Final services and composite PMIs will be reported Wednesday, along with September retail sales.

The parade of October UK PMI readings continues.  Construction PMI came in at 44.2 vs. 44.1 expected and 43.3 in September.  This will be followed by services and composite readings Tuesday, expected at 49.7 and 49.4, respectively.  Last Friday, manufacturing PMI came in at 49.6 vs. 48.2 expected and 48.3 in September.

Moody’s decided not to downgrade South Africa into junk territory but instead lowered the outlook to negative. The outcome was mostly expected, and the rally in the currency and government bonds (-12 bps) was in part due to the removal of this major risk event. If Moody’s joins other agencies in rating South Africa as junk, the country will be kicked out from the FTSE GBI index, triggering substantial outflows. We think a downgrade is inevitable and could come after February’s budget statement, and Moody’s said as much in its statement.  As such, we would fade this relief rally in South Africa as bad times are coming.

Fitch raised Turkey’s outlook to stable from negative whilst affirming its BB- rating.  Our proprietary ratings model sees the country at B/B2/B.  Aside from a complex and unstable geopolitical situation, we think Turkey is still one of the most vulnerable economies to a change in global market sentiment. That said, we recognize the economic data has been improving, notably the external accounts and inflation. The October CPI print, released this morning, came in at 8.55% y/y, down from 9.26% in the previous month. This is the lowest level since the end of 2016, but the decline was in part due base effects and the currency, factors which should wear off. Still, the central bank has already cut rates 10 percentage points this year, and there is probably more to come at the next policy meeting December 12.  The lira continues to appreciate along with better global sentiment towards EM, but the gains have been modest.

Kiwi rose to a two-month high near 0.6465 on positive trade developments.  Prime Minister Ardern announced that New Zealand and China had successfully concluded talks to upgrade their existing free trade agreement.  Tariffs on 12 wood and paper products will be eliminated over a 10-year period, giving 99% of New Zealand’s wood and paper trade preferential access.  NZD has since given back most of its gains but the improved global trade backdrop should continue to support it as well as neighboring AUD.

Philippine central bank Governor Diokno said easing for this year is over.  It has cut policy rates 75 bp and lowered the reserve ratio 400 bp, which he noted was “more than enough.”  Yet the language doesn’t rule out further easing next year.  October CPI will be reported tomorrow and is expected to rise 0.8% y/y vs. 0.9% in September.  If so, inflation would be the lowest since April 2016.  Next policy meetings are November 14 and December 12, and further cuts are certainly justified.  If inflation continues to fall, we think Diokno may change his tune and cut again before year-end.