Dollar Firms as Brexit Concerns Linger

  • The dollar continues to get some traction; Canada reports November CPI
  • UK November CPI came in slightly higher than expected; German IFO surprised to the upside
  • Czech National Bank is expected to keep rates steady at 2.0%
  • Japan reported another weak month of trade data; Thailand kept rates unchanged at 1.25%, as expected
  • PBOC made a marginal adjustment to its 14-day reverse repo rate; HKD continues to firm

The dollar is broadly firmer against the majors.  Loonie and Aussie are outperforming, while euro and Stockie are underperforming.  EM currencies are mostly weaker.  ZAR and MYR are outperforming, while TRY and CZK are underperforming.  MSCI Asia Pacific was down 0.1% on the day, with the Nikkei falling 0.6%.  MSCI EM is up 0.3% so far today, with the Shanghai Composite falling 0.2%.  Euro Stoxx 600 is up 0.1% near midday, while US futures are pointing to a higher open.  10-year UST yields are down 1 bp at 1.87%, while the 3-month to 10-year spread has fallen 2 bp to +32 bp.  Commodity prices are mostly lower, with Brent oil down 0.4%, copper down 0.7%, and gold up 0.2%.

The dollar continues to get some traction as a result of renewed Brexit concerns and strong US data (see below).  DXY is up two days in a row for the first time since the last week of November, and has recouped over a third of its December swoon.  Sterling is testing the December 12 low near $1.3050 and a break below would set up a test of the November 22 low near $1.2825.  The euro had been holding up this week but has succumbed today to renewed dollar gains.



There are no US data reports to speak of today.  Only weekly mortgage applications will be reported.  Yesterday, the US data continued to come in firmer than expected.  November IP rose 1.1% m/m vs. 0.9% expected, housing starts rose 3.2% m/m vs. 2.4% expected, and building permits rose 1.4% m/m vs. -3.5% expected.  Lastly, October JOLTS job openings came in at 7267 vs. 7009 expected, which supports the view that the labor market remains strong.  Recall average hourly earnings have been ticking higher and this should continue.  Bottom line:  US economy remains on solid footing even as the rest of the world struggles.

We will hear the last Fed speakers for this year.  Brainard spoke earlier at an ECB event in Frankfurt and Evans speaks later today in Indianapolis.  Brainard spoke mainly about cryptocurrencies and stayed off the topic of US monetary policy.  After Evans, the holiday season kicks in and there are no more Fed speakers until January 3.  The next FOMC will take place January 29 and no change is expected then.  Indeed, given our constructive outlook on the US economy, we see no further cuts in 2020.  That said, the bar to a rate hike is very high and we simply see steady rates next year.

Canada reports November CPI.  Headline inflation is expected to pick up to 2.2% y/y, while common core is expected to remain steady at 1.9% y/y.  This will be followed by October wholesale trade sales (-0.4% m/m expected) Thursday and October retail sales (0.5% m/m expected) Friday.



The pound continues to slide as concerns over the end-2020 cliff-edge weigh on sentiment. The prospect of another period of heightened uncertainty and political brinkmanship outweighed the positive headlines on the ratings front. As a result of the favorable election results, S&P changed its UK outlook from negative to stable, while Fitch took it off Rating Watch Negative. We disagree, as the economic fundamentals continue to worsen.  Indeed, our own sovereign ratings model still shows the UK’s implied rating at A+/A1/A+. This continues to suggest strong downgrade risks to actual ratings of AA/Aa2/AA.  Please see our recent piece “Hard Brexit Redux?” for an in-depth look at the UK.

Ahead of the BOE decision tomorrow, UK November CPI came in slightly higher than expected.   Headline and CPIH inflation both came in steady at 1.5% instead of consensus readings of 1.4%.  November retail sales will be reported (0.2% m/m expected) Thursday, followed by final Q3 GDP (1.0% y/y expected) and current account data (-GBP15.5 bln expected) Friday.  Today’s inflation readings aside, the real sector data have been coming in uniformly weak and we expect this to continue.

German IFO surprised to the upside, adding to the narrative of a recovery in the industry for next year. The December business climate survey came in at 96.3, with the expectations at 93.8 and the current assessment at 98.8.  All were above forecasts as well as the previous month’s readings.

Czech National Bank is expected to keep rates steady at 2.0%.  CPI rose 3.1% y/y in November, above the 1-3% target range for the first time since October 2012.  With the economy slowing, we see steady rates in 2020 coupled with some risk of rate cuts if the slowdown gathers force.



Japan reported another weak month of trade data.  November exports contracted -7.9% y/y vs. -8.9% expected, while imports contracted -15.7% y/y vs. -12.8% expected.  It was the twelfth straight month that exports contracted, which remain under pressure from the US-China trade war and slowing global growth.  The adjusted trade balance came in at -JPY60.8 bln and was the ninth straight month in deficit.   This comes a day ahead of the BOJ decision, where policy is widely expected to remain on hold even as the government pushes through a supplemental budget.

The PBOC made a marginal adjustment to its 14-day reverse repo rate, cutting it 5 bp from 2.70% to 2.65%. The small cut will help with year-end tightness in funding markets, but also sends a signal that more easing is in the cards for next year. While we agree with this view, we don’t think officials will frontload easing. Monetary policy in China is still a fine balancing act between stimulating the economy and managing the long-term path towards deleveraging the financial system. Moreover, there should be some positive economic impacts in the pipeline from the de-escalation of the US-China conflict. The yuan is stable against the dollar, trading just below the RMB 7.00 level, and local equity indices are little changed. 

The Hong Kong dollar continues to firm, trading at its strongest level since July 4.  It has firmed eight straight days, the longest such streak since early 1987.  Yet USD/HKD remains above the 7.75 level where the HKMA is obligated to sell HKD and buy USD.  The move is purely technical, as cash hoarding ahead of the year-end has tightened local liquidity and driven HIBOR and HKD forward points up.  HKD strength comes despite a BOE’s estimate that $5 bln of portfolio investment in Hong Kong had been pulled due to the protests.  The HKMA disputed this estimate, noting that this did not necessarily equite to actual outflows from Hong Kong.

Bank of Thailand kept rates unchanged at 1.25%, as expected.  However, the bank remains uncomfortable with the strengthening of the baht.  Assistant Governor Mallikamas said that the committee will continue monitoring the currency level to gauge if more action is needed. Earlier this year, regulators took measures to reduce inflows by limiting non-resident local accounts while also relaxing rules on outflows. Lastly, the BOT lowered its growth forecasts to 2.5% this year and 2.8% in 2020, down from 2.8% and 3.3%, respectively.  This leaves the door open for cuts next year since inflation is already running well below the target.