Dollar Firm From Relative Strength in the US Economy

  • The dollar rally continues as developments elsewhere underscore its relative attractiveness
  • President Trump gave his delayed State of the Union address last night
  • Press reports suggest that the ECB is not yet convinced of the need for another TLTRO
  • After holding rates steady this week, RBA shifted more dovish; Canada January Ivey PMI will be reported
  • Bank of Thailand kept rates steady at 1.75%, as expected
  • National Bank of Poland is expected to keep rates steady at 1.5%; Brazil COPOM is expected to keep rates steady at 6.5%

The dollar is broadly firmer against the majors as the economic outlook elsewhere continues to weaken.  The yen and sterling are outperforming, while the dollar bloc is underperforming.  EM currencies are broadly weaker.  IDR and PHP are outperforming, while BRL and ZAR are underperforming.  MSCI Asia Pacific was flat, with the Nikkei rising 0.1%.  MSCI EM is also flat so far today, with China markets closed all week for the Lunar New Year holiday.  Euro Stoxx 600 is up 0.1% near midday, while US equity futures are pointing to a lower open.  10-year UST yields are down 1 bp at 2.69%.  Commodity prices are mixed, with Brent oil down 0.7%, copper up 0.3%, and gold down 0.2%.

The dollar rally continues as developments elsewhere underscore its relative attractiveness. Weak data out of the eurozone and a dovish tilt by the RBA are today’s drivers (see below), but these are simply the continuation of a trend that’s been playing out for weeks now, if not months.  That is, despite the uncertainties facing the US, the outlook has worsened even more in other key countries.

President Trump gave his delayed State of the Union address last night.  This is usually a PR exercise, and last night was no different.  Despite reports that Trump would lay out plans to declare a state of emergency over border wall funding, he instead stuck to a well-worn script.  Trump touted an “economic miracle” taking place in the US that could only be derailed by “war and investigation.”  Whilst calling for unity, he gave no ground as he spoke of a US overrun by criminals pouring over the southern border.

Internationally, Trump continued to push his “America First” world view.  He complained of endless wars and said that US soldiers in Syria would be returning home.  Trump announced a second summit this month with North Korean leader Kim Jong-un and called for regime change in Venezuela.  There was no mention of the US-China trade war.

With the FOMC out of the way, the Fed’s media embargo has ended.  Quarles (voter) and Powell (voter) speak today, followed by Kaplan (non-voter), Clarida (voter), and Bullard (voter) Thursday and then Daly Friday (non-voter).  US rates remain low, with the 10-year yield back below 2.70% and the implied yield on the January Fed Funds futures contract still below 2.40%.  That the dollar continues to rally supports our view that developments elsewhere are driving dollar strength right now.

Press reports suggest that the ECB is not yet convinced of the need for another TLTRO.  This would seem to rule out the March 7 meeting for any announcements of a new operation.  Yet continued weakness in the eurozone economy is likely to tip the ECB eventually into a more dovish policy stance.  Germany reported weak December factory orders today.  Instead of rising the consensus 0.3% m/m, orders instead plunged -1.6%.  This dragged the y/y rate down to -7.0% from a revised -3.4% (was -4.3%) in November.

Between weak data and ongoing Brexit uncertainty, the euro remains heavy.  It is trading at its lowest level since January 25.  A break below the $1.1375 area would set up a test of the January 24 low near $1.1290.

Sterling is also sinking from the same negative drivers.  It sank below $1.30 yesterday to trade at its lowest level since January 22.  Despite today’s modest bounce, we still expect cable to fall to $1.2830, which represents half of this year’s rally.  Next major retracement objective after that is $1.2735, break of which would set up a test of the January low near $1.2440.

After holding rates steady this week, RBA shifted more dovish.  The RBA maintained a tightening bias with its decision, but Governor Lowe today shifted to a neutral stance and noted that risks of a hike or cut “appear to be more evenly balanced.”  The RBA will release its quarterly forecast updates Friday and it will clearly deliver an economic scenario that reflects its more dovish stance.  AUD sank to the lowest level since January 25 and is on track to test that day’s low near .7075.  Break below that would target the January 4 low near .7000.

Canada January Ivey PMI will be reported today.  Friday will see January jobs data and consensus sees 5k jobs added.  Details of last month’s +7.8k gain were not good, as -19.3k full-time jobs were offset by a 27.1k gain in part-time jobs.  Bank of Canada next meets March 6 and a 25 bp hike to 3.0% is widely expected.

USD/CAD broke below the key 1.3120 area Friday but has since reversed higher.  The pair is trading at the highest level since January 30 and a break of the 1.3260 is needed to set up a test of the January 24 high near 1.3375.

Bank of Thailand kept rates steady at 1.75%, as expected.  The vote was 4-2, with the dissenters favoring another 25 bp hike.  It said that its accommodative policy remains appropriate.  CPI rose 0.3% in January, well below the 1-4% target range.  While it started the tightening cycle in December with a 25 bp hike, the pace will clearly be very cautious.

National Bank of Poland is expected to keep rates steady at 1.5%.  CPI rose 1.2% in December, the lowest since December 2016 and below the 1.5-3.5% target range.  Governor Glapinski sees stable rates into 2020 but has recently started to extend his dovish forward guidance of no rate hikes into 2021.

Brazil COPOM is expected to keep rates steady at 6.5%.  Brazil reports January IPCA consumer inflation Friday, which is expected to rise 3.83% y/y vs. 3.75% in December.  If so, inflation would be in the bottom half of the 2.75-5.75% target range.  Market sees no hike until year-end.