Dollar Firm as US Returns from Holiday

  • With US-China talks ongoing, we got some good trade news from Europe
  • President Trump speaks before the New York Economic Club today
  • The UK Conservative party – and the pound – received a boost yesterday on news that the Brexit Party will not run against them in the elections
  • UK labor market data was mixed; German data continue to suggest small green shoots; Japan reported weak October machine tool orders

The dollar is broadly firmer against the majors as the US returns from holiday.  Stockie and euro are outperforming, while Kiwi and Swissie are underperforming.  EM currencies are mixed.  KRW and PHP are outperforming, while RUB and PLN are underperforming.  MSCI Asia Pacific was up 0.4% on the day, with the Nikkei rising 0.8%.  MSCI EM is up 0.5% so far today, with the Shanghai Composite rising 0.2%.  Euro Stoxx 600 is up 0.3% near midday, while US futures are pointing to a flat open.  10-year UST yields are flat at 1.94%, while the 3-month to 10-year spread is flat at a cycle high +40 bp.  Commodity prices are mixed, with Brent oil up 0.7%, copper down 0.4%, and gold down 0.2%.

The dollar is recovering from yesterday’s minor losses.  DXY has retraced about half of its October-November drop and a break of the 98.689 area is needed to set up a test of the October 1 high near 99.665.  The euro is still trading at multi-week lows, while sterling is benefiting from some election-related optimism (see below).

With US-China talks ongoing, we got some good trade news from Europe.  Reports suggest efforts by German carmakers to delay planned tariffs this month by the US have paid off.  Trump is now expected to extend this deadline again after German companies pledged to shift more of their global production to the US.  As always, we await official confirmation but this would be another dose of good news for global trade as the threatened 25% tariffs on European autos would certainly have led to retaliatory measures.



Even though the US returns from holiday today, there are no data releases.  The action starts tomorrow with October CPI.  Clarida, Harker, and Kashkari speak, however.  WIRP suggests only 6% odds of a cut December 11, a new low, as Fed officials are sticking with the party line that a pause is in place.  Higher rates should continue to support the greenback.  The US 10-year yield is flirting with 2%, while the 3-month to 10-year curve is at a cycle high 40 bp.  Lastly, Fed Funds futures are now pricing in less than one cut next year.  US data later this week should help determine whether US rates will continue to go higher.  We remain constructive on the US economy and believe that this will ultimately support our strong dollar call.

President Trump speaks before the New York Economic Club today.  It’s always difficult to predict what he might discuss, but markets will be looking for comments on trade and the Fed’s monetary policy.  Trump will most likely try to re-seize control of the economic narrative after losing it last week to comments from both US and China officials.  Yet when all is said and done, we believe a Phase One deal will be struck that eliminates existing tariffs.

Protests in Chile have pushed the government into overhauling its constitution. The current one is a holdover from the Pinochet era so one can make the case that an overhaul is long overdue.  Yet many are concerned that the government will rush this through in order to appease protestors without considering the longer-term impact on foreign investment and such.  USD/CLP traded at a new all-time higher yesterday above 760 and is likely to march higher as political uncertainty persists.



The UK Conservative party – and the pound – received a boost yesterday on news that the Brexit Party will not run against them in the elections.  Brexit Party leader Farage said they will not compete where Conservatives candidates hold seats. The next step would be for them to stand down in leave-leaning areas with Labour-held seats to give the Conservatives a shot at winning them as well.  Sterling appreciated 0.6% against the dollar yesterday, though it has given up a bit of the gains this morning to trade near $1.28, still far from the October high of $1.3013.

UK labor market data was mixed.  Unemployment fell a tick to 3.8% and employment fell -58k vs. -102k expected.  However, weekly earnings rose 3.6% and were weaker than expected, while jobless claims rose 33k.  Overall, the data fit in with recent weakness in other areas of the economy as Brexit uncertainty continues.  While the BOE is definitely on hold until Brexit uncertainty has cleared up, we think rates are more likely to fall than to rise afterwards.  Next policy meeting is December 19 and no change is expected then.

German data continue to suggest small green shoots. While the ZEW Survey’s current situation component remains weak at -24.7 in November, the expectation component came in at -2.1, the highest in six months. It also far better than the -13.0 expected and the -22.8 figure seen last month. We may still get a technical recession but today’s print, along with recent improvement in Germany’s industrial data, gives us hope that the economy is finally stabilizing.  However, this is still a far cry from actual improvement.  

Turkey’s external accounts continue to improve. The September current account surplus came in at $2.5 bln, better than expected and the third consecutive month of surplus. This compares with an average of -$2.7 bln over the last five years. The government projects a small deficit over the next two years as the benefits of lira’s large real and nominal depreciation fade.

Later today, President Erdogan will meet with President Trump. They will discuss, amongst other things, the controversial purchase of the S-400 missile system from Russia and the possible purchase of the US Patriots missiles. We think the risk going into this event is to the upside for Turkish assets given our view that Trump is now acting as a buffer to protect Turkey against Congressional actions.



Japan reported weak October machine tool orders.  Orders contracted -37.4% y/y vs. -35.5% in September and nearly matches the low of -37.9% posted in June.  Q3 GDP will be reported Thursday, with growth expected at 0.9% SAAR vs. 1.3% in Q2.  WIRP suggests only 14% odds of a cut at the next BOJ meeting December 19, a new low.  USD/JPY continues to edge higher but is having trouble breaking above the 109.50 area.  We look for an upside breakout that targets the May 21 high near 110.65.