Dollar Firm as US Rates Rise

  • The dollar continues to climb due to higher US rates and lower US recession risks
  • Discussions on tariff reductions as part of the Phase One trade deal seem to be progressing well
  • Spain’s election this weekend is likely to result in another stalemate and an even more polarized parliament
  • Japan reported firm September earnings and spending; RBA released its Statement on Monetary Policy
  • Moody’s cut the outlook on India’s Baa2 rating to negative; China’s October trade data was a welcome upside surprise

The dollar is broadly firmer against the majors as the week draws to a close.  The yen and Swissie are outperforming, while the Scandies are underperforming.  EM currencies are mostly weaker.  KRW and TRY are outperforming, while RUB and ZAR are underperforming.  MSCI Asia Pacific was down 0.3% on the day, with the Nikkei rising 0.3%.  MSCI EM is down 0.6% 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 flat open.  10-year UST yields are down 1 bp at 1.91%, while the 3-month to 10-year spread has risen 1 bp to +37 bp.  Commodity prices are mostly lower, with Brent oil down 1.9%, copper down 0.8%, and gold down 0.3%.

The dollar continues to climb.  DXY is trading at the highest level since October 16.  It has retraced nearly half of the October-November drop and the next major retracement objectives from that move are 98.387 and 98.689.  USD/JPY finally broke above the 109.30 high from last month and is on track to test the May 21 high near 110.65.  The euro is trading at a new low for this move, as is sterling.  What gives?

We think higher US rates and lower US recession risks are doing the trick here.  The 10-year yield approached 2% yesterday before falling back a bit, and the next important level is the July 11 high near 2.15%, which coincides with the 200-day moving average.  The 3-month to 10-year curve steepened to a cycle high 40 bp today before falling back.  It’s noteworthy that the dollar is gaining despite what appears to be continued good news on the trade front.

Discussions on tariff reductions as part of the Phase One trade deal seem to be progressing well. But the Trump administration will surely try to extract further concessions out of China for any action on this front, so we should expect some hardline posturing ahead. We still think the incentive structures for completing a deal are well aligned this time around, so we are inclined to fade negative headlines or see them as buying opportunities. Separately, EC President Juncker said Trump won’t impose tariffs on the EU automobile industry. Though not confirmed by the US yet, this is consistent with comments by US Commerce Secretary Ross last week which has led to a significant outperformance of the sector.



During the North American session, the US reports September wholesale trade sales (0.2% m/m expected) and November University of Michigan consumer sentiment (95.5 expected).  The Fed’s Daly, Williams, and Brainard speak.  Next FOMC meeting is December 11 and WIRP suggests 8% odds of another cut then, which is at the lows.  Canada reports housing starts and building permits, along with the important jobs data (15.0k expected).



Spain’s election this weekend is likely to result in another stalemate and an even more polarized parliament.  The Catalan independence referendum has driven a wedge between the political establishment that has become a decisive factor. For example, it complicates (or even rules out) an alliance between the leftist parties PSOE (against a referendum) and Podemos (pro-referendum). Moreover, the Catalan issue has been one of key drivers of the strong polling by the nationalist party Vox, which has taken a strong line against separatists. Vox won 24 seats in the April elections, but polls suggest it could take around 45 this time around. The PSOE is projected to win 121 seats, two less than in April, while support for Podemos could fall to around 30 seats vs 42 in April. The right-leaning PP is set to bounce back from 66 to 91 seats. The centrist Cuidadanos party will be the biggest loser to the tune of 40 seats, if polls are correct. Investors seem well-prepared for further political paralysis, so the results are unlikely to be market moving. The risk is therefore for an upside surprise with a swift coalition forming, but this seems very unlikely in our view.



Japan reported firm September cash earnings and household spending.  Real cash earnings were expected to fall -0.4% y/y but instead rose 0.6%.  Household spending was expected to rise 7.0% y/y but instead rose 9.5%.  The BOJ just left policy on hold last week and expectations for easing have fallen.  WIRP suggests 19% odds of a cut December 19, which is near the lows in light of firmer data.  Still, the October data will be very important as the economy will start to reflect the impact of the consumption tax hike.  USD/JPY finally broke above the 109.30 high yesterday but has yet to see much follow-through buying.  Next target is the May 21 high near 110.65.

RBA released its Statement on Monetary Policy.  Growth forecasts were shaved but the bank still sees a gradual acceleration ahead with 2.25% this year, 2.75% in 2020, and 3% in 2021.  It reiterated that it’s prepared to ease further if needed but the forecasts suggest that the bar may have risen.  Indeed, it noted that “further easing could unintentionally convey an overly negative view of the economic outlook.”  Solid data and a less dovish than expected RBA stance have helped push out market expectations for easing.  WIRP suggests 14% odds of a cut December 3, which is at the lows.  AUD rose nearly 4% last month but was unable to break above a key retracement level near .6925 and has since fallen back.

Moody’s cut the outlook on India’s Baa2 rating to negative from neutral.  It cited increasing risks of a prolonged slowdown and rising debt as the major factors.  The move is worrisome, as Moody’s has the highest rating compared with BBB- for both S&P and Fitch.  The budget remains the main concern for the agency, with the deficit seen at -3.7% of GDP, higher than the -3.3% government target because of the economic slowdown and corporate tax cuts. If the economy doesn’t pick up in 2020, we think that a downgrade to Baa3 becomes more likely.

China’s October trade data was a welcome upside surprise.  Both exports (-0.9% y/y) and imports (-6.4% y/y) came in better than expected (-3.9% and -7.8%, respectively).  The overall trade balance increased to $42.8 bln, around $2 bln more than expected. Trade with the US continues to shrink but the rate of contraction (especially imports from the US) has been decelerating. The economic outlook for China continues to be weak, but not more so than what markets have factored in.  October CPI and PPI will be reported Saturday local time, with the former expected to rise 3.4% y/y and the latter to fall -1.5% y/y.  The rise in CPI inflation is due in large part to surging pork prices.  PBOC is much more concerned about supporting growth than fighting inflation right now.