Dollar Firm as US Rates Rise

  • The dollar is getting some more traction despite some easing in geopolitical tensions
  • The US 10-year yield at 2.73% is the highest since February 5
  • February ISM manufacturing PMI is due out
  • Eurozone reported final manufacturing PMI readings
  • UK reported manufacturing PMI for February; Canada reports Q4 GDP
  • Japan reported January labor market data and February Tokyo CPI
  • Caixin China manufacturing PMI came in stronger than expected; Korea reported weak February trade data

The dollar is mixed against the majors as the week winds down.  The dollar bloc is outperforming, while yen and sterling are underperforming.  EM currencies are mostly weaker.  RUB and MXN are outperforming, while TRY and THB are underperforming.  MSCI Asia Pacific was up 0.3%, with the Nikkei rising 1%.  MSCI EM is up 0.3% so far today, with the Shanghai Composite rising 1.8%.  Euro Stoxx 600 is up 0.5% near midday, while US equity futures are pointing to a higher open.  10-year UST yields are up 1 bp at 2.73%.  Commodity prices are mixed, with Brent oil down 0.1%, copper up 0.3%, and gold down 0.3%.

The dollar is getting some more traction despite some easing in geopolitical tensions.  Pakistan has offered to return the captured pilot, while North Korea has issued some constructive comments after the summit broke down.  The yen has suffered the most today as well as for the entire week.  Higher US rates are also helping the greenback and we see this trend continuing.

The US 10-year yield at 2.73% is the highest since February 5.  The 2-year yield has risen too but not as much, leading the yield curve to its steepest level since February 4.  Given our more positive outlook on the US economy, we think the yield curve should steepen further.  The short end is anchored for now so steepening will have to come from the long end.  Perhaps some more strong US data points would do the trick.

February ISM manufacturing PMI is due out.  We see upside risks to the consensus 55.8 reading vs. 56.6 in January after yesterday’s firm Chicago PMI reading.  That came in much higher than expected at 64.7 and was the highest since December 2017.  We still think Q1 is shaping up to be pretty good in terms of growth and recent data support this view.

December personal income and spending will also come out today.  Markets will likely focus on the core PCE component of this report.  It is expected to remain steady at 1.9% y/y, just below the Fed’s 2% target.  Any upside surprise here will feed into US curve steepening.  February auto sales will also be reported today.

Eurozone reported final manufacturing PMI readings.  Headline came in at 49.3 vs. 49.2 preliminary and still represents a sharp drop from 50.5 in January.  The country breakdown remains worrisome.  Spain fell to 49.9 from 52.4 in January, joining the sub-50 club of Italy (47.7) and Germany (47.6).  France improved to 51.5 from 51.4 preliminary.  Final eurozone services and composite PMIs will be reported next week.

Italy reported deteriorating fiscal data.  The budget deficit came in at -2.1% of GDP in 2018 vs. -1.9% expected.  What’s worse, the 2017 deficit was revised to -2.4% (was -1.9%).  On the other hand, Germany reported stronger than expected January retail sales (3.3% m/m) and February unemployment (-21k).

The UK reported manufacturing PMI for February.  As expected, it eased to 52.0 from a revised 52.6 (was 52.8) in January.  This is the lowest reading since October.  Construction, services, and composite PMI readings will be seen next week.  Next BOE policy meeting is March 21 and no change is expected then.  With Brexit uncertainty continuing, the central bank remains in wait-and-see mode for now.

The sterling rally has run out of steam after it traded as high at $1.3350 on February 27.  Some major retracements from the February rise are worth noting, which come in near $1.3130 and $1.3060.  The real test will be the 62% objective, which comes in near $1.2995 and coincides with the 200-day moving average.   

Canada reports Q4 GDP.  Annualized GDP growth is expected to slow to 1.0% from 2.0% in Q3.  Recent data have largely come in softer.  Earlier this week, headline inflation dropped sharply to 1.4% y/y, while common core was steady at 1.9% y/y.  The next BOC meeting is March 6 and consensus sees no change then.

USD/CAD is nearing the trendline on the daily charts drawn of the October and February lows.  Today, that trendline comes in near 1.3125 and a break below would set up a test of that October 2018 low near 1.2785.

Japan reported January labor market data and February Tokyo CPI.  Headline inflation was 0.6% y/y 0.4% expected, while ex-fresh food was 1.1% y/y vs. 1.0% y/y expected.  This is a welcome development and bodes well for the national CPI reading that will be reported March 22.

Next BOJ policy meeting is March 15 and no change is expected then.  USD/JPY traded at its highest level since December 20 after breaking above the 200-day moving average near 111.35.  It is on track to test the December 13 high near 113.70.  We presume that this recent yen weakness will take some heat off the BOJ to act quickly.  Kuroda’s recent dovishness should be looking further ahead, as he is likely concerned about the impact of the consumption tax hike that will be enacted this fall.

Caixin China manufacturing PMI came in stronger than expected.  It rose to 49.9 vs. 48.5 expected and 48.3 in January.  This is the highest since November and comes after the official PMI slid to 49.2 from 49.5 in January.  Still it’s hard to get too excited about one number.  As the Korean trade data shows (see below), regional headwinds appear to be still growing.

Korea reported weak February trade data.  This provides the first snapshot of global trade and it wasn’t pretty.  Exports contracted 11.1% y/y and imports by -12.6% y/y.  This is the third straight month that exports have contracted y/y and the magnitude is still growing.  The weak global growth outlook is the major reason that remain negative on EM.