Dollar Firms as US-China Tensions Flare

  • The US Senate unanimously passed a bill in support of the Hong Kong protestors, inviting retaliatory threats from China
  • FOMC minutes will be released; Canada reports October CPI
  • A snap poll after the first UK debate gave a slight edge to Prime Minister Johnson
  • South Africa’s CPI came in slightly below expectations, bolstering our out-of-consensus call for a cut by the SARB tomorrow
  • Japan and Taiwan reported weak trade data; PBOC shaved 5 bp off benchmark Loan Prime Rates

The dollar is mostly firmer against the majors as risk-off sentiment takes hold on US-China tensions.  Yen and Swissie are outperforming, while the Scandies are underperforming.  EM currencies are mostly weaker.  PHP and TRY are outperforming, while ZAR and MXN are underperforming.  MSCI Asia Pacific was down 0.6% on the day, with the Nikkei falling 0.6%.  MSCI EM is down 0.4% so far today, with the Shanghai Composite falling 0.8%.  Euro Stoxx 600 is down 0.8% near midday, while US futures are pointing to a lower open.  10-year UST yields are down 4 bp at 1.74%, while the 3-month to 10-year spread has fallen 4 bp to +19 bp.  Commodity prices are mostly higher, with Brent oil up 0.3%, copper up 0.1%, and gold up 0.3%.

The dollar is clawing back some of its recent losses as risk-off sentiment takes hold.  DXY is trading at the highest level since Friday.  The growth sensitive majors (dollar bloc and Scandies) and EM FX are taking the biggest hit today, while the yen and Swiss are outperforming.  The euro and sterling are seeing limited losses.  Global equity markets are down, while bond markets are up.

Risk appetite took a hit after the US Senate unanimously passed a bill in support of the Hong Kong protestors, inviting retaliatory threats from China.  It requires an annual review to decide whether Hong Kong is sufficiently autonomous to warrant its special trading status with the US.  The House has already passed a similar bill last month and must be reconciled with the Senate version.  Once again, we reiterate our call to fade these headlines, but with the understanding that there will be more volatility to come.

As we had expected (see A New Stage of the US-China Conflict), the US Congress will likely become a greater source of volatility in bilateral relations.  We expect President Trump to move into a buffer role (as he did for Turkey) between Congress and China in order to safeguard control of his foreign policy and a potential trade deal.  Up until now, officials from the Trump administration had sought to frame the trade war and Hong Kong protests as two separate and distinct issues.  However, Vice President Pence said yesterday that it would be difficult for the US to sign a trade deal with China if violence is used to quell the Hong Kong protests.  This is a very risky shift in strategy and we suspect China will not be happy with this.  Stay tuned.



FOMC minutes will be released.  At that meeting, the Fed kept rates steady after cutting the previous three meetings.  Powell has stressed that it would take a “material reassessment” of its outlook to trigger any change in policy.  Perhaps the minutes will give us a better idea of what this might entail.  There are no Fed speakers today.   Markets have basically priced out any move in December, with WIRP suggesting a measly 5% chance of a cut.

Canada reports October CPI.  Both headline and common core inflation are seen steady at 1.9% y/y.  BOC recently delivered a dovish hold and data have been coming in on the weak side.  Both factors have weighed on the Loonie this month, taking it from 1.3040 in late October to 1.3310 currently.  This is the highest for USD/CAD since October 10 and the pair is on track to test the October high near 1.3350 and then the September high near 1.3385.



A snap poll after the first UK debate gave a slight edge to Prime Minister Johnson.  Johnson’s margin over Corbyn was a razor-thin 51-49%, but the fact that Corbyn scored nearly on par with Johnson could be seen as a bigger victory given his relatively low popularity as a starting point.  Implied betting odds place a 67% probability of a Conservative majority, reflecting their 10 percentage point lead in recent polling.  Still, it’s early days and more debates are scheduled before the December 12 elections.

South Africa’s CPI came in slightly below expectations, bolstering our out-of-consensus call for a cut by the SARB tomorrow. Inflation rose 3.7% y/y (3.9% expected) in October, the lowest level since early 2011 and at the lower end of SARB’s 3-6% target range. The downward surprise in the headline figure was linked to lower food and fuel prices, as core CPI remained steady at 4.0%.  The rand is underperforming on the day, down 0.4% against the dollar with local rates down a few basis points.



Japan reported weak October trade data.  An adjusted -JPY34.7 bln deficit was reported vs. an expected JPY248 bln surplus.  Exports contracted -9.2% y/y vs. -7.5% expected, while imports contracted -14.8% y/y vs. -15.2% expected.  This was the eleventh straight contraction in exports, the longest such streak since 2016.  Trade was a drag on Q3 growth and this is likely to carry over into Q4 as well.  USD/JPY has been pinned to a 108-109.50 range since mid-October.  It is currently near the center of that range and while we still favor an upside breakout, the pair is likely to drift lower near-term until this bout of risk-off sentiment wears off.

PBOC shaved 5 bp off its benchmark Loan Prime Rates.  The one-year and five-year rates are now 4.15% and 4.80%, respectively.  This was not surprising after the bank lowered a couple of its money market rates earlier this month and continues the central bank’s policy of cautious easing.  This strategy is likely to continue until the trade war has been resolved as any sort of large-scale stimulus could be taken as a sign of weakness.

Taiwan reported weak October export orders.  They contracted -3.5% y/y vs. -4.5% expected and -4.9% in September.  This suggests little relief to regional trade over the next six months.  Tomorrow, Korea will report trade data for the first twenty days of November.  These two data points typically provide a good reading for the entire region in terms of activity and growth.