Dollar Firm in Posting a Strong Week and Month

  • There has been very little new information for markets to digest over the Thanksgiving period
  • There are no US data releases or Fed speakers today; Canada Q3 GDP growth is expected to slow to 1.3% SAAR
  • Preliminary November CPI for the eurozone came in a 1.0% y/y for November, slightly higher than expected
  • Korea left rates unchanged at 1.25%, as expected; India Q3 GDP growth is expected to slow to 4.5% y/y
  • China reports official November PMI readings Saturday local time

The dollar is mostly firmer against the majors as the week and month wind down.  Kiwi and Stockie are outperforming, while Nokkie and Swissie are underperforming.  EM currencies are mostly weaker.  ZAR and HUF are outperforming, while KRW and PHP are underperforming.  MSCI Asia Pacific was down 0.9% on the day, with the Nikkei falling 0.5%.  MSCI EM is down 0.9% so far today, with the Shanghai Composite falling 0.6%.  Euro Stoxx 600 is down 0.1% near midday, while US futures are pointing to a lower open.  10-year UST yields are flat at 1.76%, while the 3-month to 10-year spread has fallen 1 bp to +17 bp.  Commodity prices are mostly lower, with Brent oil down 0.7%, copper down 1%, and gold flat.

There has been very little new information for markets to digest over the Thanksgiving period. The dollar is ending the week little changed but the DXY index is up 1% on the month.  With the US economy looking better and better, we are sticking with our strong dollar call.  Stocks in Developed Markets are broadly higher, with the EuroStoxx 600 up 1.0% on the week and the S&P 500 up around 1.5%, though futures are pointing to a small negative open.  MSCI EM is set for the third consecutive down week, while the EM FX index is down for the fifth consecutive week and down some 6.5% so far this year.

The main development on the trade front over the last few days has been the US bill in support of Hong Kong protests.  President Trump signed the bill, but the reaction in markets and in Beijing has been mild. News sources report that the focus has shifted to whether Trump will implement any of the measures outlined in the bill. Everything suggests that Trump will placate any of its impact on China in order to protect the trade deal. In short, both sides want a trade deal and will do whatever they can to protect it.

 

AMERICAS

There are no US data releases or Fed speakers today.  Canada Q3 GDP growth is expected to slow to 1.3% SAAR from 3.7% in Q2.  Recent data have come in slightly better than expected, but still signal weakness in the economy.  BOC delivered a dovish hold this month but Governor Poloz followed up with less dovish than expected comments last week, making it harder to determine the outlook for monetary policy.  Next policy meeting is December 4 and steady rates are expected.  CAD has stabilized near the 1.33 but we think weakness will resume.

Chile October IP is expected to contract -6.2% y/y vs. -0.2% in September.  The negative impact of the protests will become more pronounced in the weeks ahead. Indeed, Finance Minister Briones warned of a “significant” economic slump in October and November.  Unemployment is expected to rise a couple of ticks to 7.2%, which may also add to popular discontent. USD/CLP is likely to continue making new all-time highs, with 850 within sight.

 

EUROPE/MIDDLE EAST/AFRICA

Preliminary November CPI for the eurozone came in a 1.0% y/y for November, slightly higher than expected. This follows a 3-year low of 0.7% last month. Core inflation rose to 1.3% y/y.  While there was some improvement, inflation is still well below the 2.0% target. The region’s unemployment rate remained at 7.5% for October, as expected.  Elsewhere, Germany reported mixed data.  October retail sales fell -1.9% m/m vs. 0.2% m/m expected, while November unemployment fell -16k vs. +6k expected.

 

ASIA

The Bank of Korea left rates unchanged at 1.25%, as expected. Officials trimmed their growth forecast to 2.0% in 2019 and a bit higher for 2020, highlighting external risks to the economy. There was one dissenting vote in favor of a cut, but we think the bar is very high for any action in the foreseeable future, unless there is an unexpected flareup in the US-China trade conflict. Also, note that the term for the dissenting MPC member (Shin In-seok) is over in April.  Also, October IP fell -1.7% m/m vs. -0.3% expected.  Sunday local time, Korea reports November trade data.  Exports continue to contract due to the regional impact of the US-China trade war.  

India Q3 GDP growth is expected to slow to 4.5% y/y from 5.0% in Q2.  If so, this would be the slowest rate since Q1 2013.  No wonder policymakers are adding stimulus whenever possible.  The RBI has cut rates several times already and more will come.  Next policy meeting is December 5 and another 25 bp cut to 4.90% is expected.

China reports official November PMI readings Saturday local time.  Manufacturing is expected to improve to 49.5 from 49.3 in October, while non-manufacturing is expected to improve to 53.1 from 52.8 in October.  This will be the first snapshot of the mainland economy in November and overall weakness is expected to persist until trade tensions have been addressed.  Until then, expect further injections of targeted stimulus from time to time.