Dollar Firms as US Returns from Holiday

  • The dollar has caught a bid as US markets return from holiday
  • The path to a Brexit deal has been anything but smooth
  • The EU will still hold a special summit this Sunday for leaders to approve the Brexit deal
  • Weaker than expected eurozone flash PMIs for November were reported
  • As we expected, SARB hiked rates 25 bp to 6.75% yesterday
  • Singapore October CPI rose 0.7% y/y vs. 0.8% expected; Brazil mid-November IPCA inflation is expected to rise 4.46% y/y

The dollar is mostly firmer against the majors as US markets return from holiday.  Yen and Swissie are outperforming, while Kiwi and euro are underperforming.  EM currencies are mostly weaker.  IDR and TRY are outperforming, while ZAR and HUF are underperforming.  MSCI Asia Pacific ex-Japan was down 0.2%, with Japan on holiday.  MSCI EM is down 0.5% so far today, with the Shanghai Composite falling 2.5%.  Euro Stoxx 600 is up 0.2% near midday, while US futures are pointing to a lower open.  The US 10-year yield is down 1 bp at 3.05%.  Commodity prices are mostly lower, with Brent oil down 2.5%, copper down 0.8%, and gold down 0.5%.

The dollar has caught a bid as US markets return from holiday.  However, we warn that markets remain thin as many here have taken the opportunity to log a four-day weekend.  Despite a seeming Brexit compromise in place, sterling remains heavy.  So too does the euro, weighed down by more weak data.  At least global equity markets are still showing some semblance of calm, though that can be shattered at any time.

The path to a Brexit deal has been anything but smooth.  While the UK and EU were apparently able to get an agreement in principle, Spain is now threatening to scuttle it.  Spain said the latest deal was reached in a “nocturnal and treacherous” way and Prime Minister Sanchez threatened to oppose it over the issue of Gibraltar, a disputed territory.

Many observers felt the process was unusual.  The European Commission (EC) reportedly announced that a Brexit deal had been “agreed in principle at political level” without consulting the member countries.  The EC circulated the text of the agreement even as the national ambassadors thought that the text was still a draft.  Many outstanding issues remain besides Gibraltar.

The EU will still hold a special summit this Sunday for leaders to approve the Brexit deal.  Many are still concerned that UK Prime Minister May will arrive with more changes.  We are of the belief that the EU’s patience has run out.  If the UK cannot come to the table this weekend with a final agreement that will be approved by Parliament, we do not think the EU will give it another chance.

Weaker than expected eurozone flash PMIs for November were reported.  Manufacturing fell to 51.5 vs. 52.0 expected while services fell to 53.1 vs. 53.6 expected, dragging the composite PMI lower to 52.4 vs. 53.0 expected.  All were new cycle lows.  German and French composite PMIs came in at 52.2 and 54.0, respectively, both down from October.  Manufacturing PMIs were particularly weak for both countries.

Recent eurozone data have been disappointing for those looking for a Q4 rebound.  Continued weakness will have many beginning to doubt the ECB’s ability to hike rates next year.  QE will undoubtedly end in December but talk of another TLTRO is feeding into a more dovish take on the ECB.  The ECB meeting December 13 will be key, as new staff forecasts will be released then.

During the North American session, Markit reports its flash PMI reading for the US.   Canada reports September retail sales and October CPI.  Sales are expected to be flat m/m, while headline and common core CPI are both expected to remain steady at 2.2% y/y and 1.9% y/y, respectively.  Bank of Canada meets December 5 and no change is expected.

As we expected, SARB hiked rates 25 bp to 6.75% yesterday.  Markets were split between no hike and 25 bp hike.  Inflation has been creeping higher and the rand remains vulnerable, so this was a good move.  Governor Kganyago said that the bank’s model shows four 25 bp rate hikes will be seen by end-2020.  This is more hawkish than what markets are expecting, as the economy remains very weak.

Singapore October CPI rose 0.7% y/y vs. 0.8% expected.  The MAS does not have an explicit inflation target, but low price pressures should allow it to remain on hold at its next policy meeting in April.  US-China trade tensions are likely to impact the regional export powerhouses like Singapore.

Brazil mid-November IPCA inflation is expected to rise 4.46% y/y vs. 4.53% in mid-October.  Inflation remains low and so markets have pushed out the timing of the first rate hike into 2019.  Next COPOM meeting is December 12, no change is expected then.  We think it would be a good signal for incoming central bank chief Roberto Campos Neto to hike rates at his first COPOM meeting February 6.