Dollar Limps into the Weekend

  • President Trump appears to be moving closer to invoking an emergency and tapping unused disaster relief funds to build his wall
  • Yet such drastic solutions would not bode well for the upcoming debt limit debate
  • Press reports suggest that the Article 50 Brexit date will be extended beyond March 29; it was quickly denied
  • During the North American session, the US reports December CPI
  • UK reported November trade, GDP, and IP; Italy reported weak November IP
  • Australia reported November retail sales
  • Brazil reported December IPCA consumer inflation

The dollar is broadly weaker against the majors as the week winds down.  The Antipodeans are outperforming, while yen and Swissie are underperforming.  EM currencies are mixed.  CNY and BRL are outperforming, while TRY and INR are underperforming.  MSCI Asia Pacific was up 0.5%, with the Nikkei rising 1%.  MSCI EM is up 0.4% so far today, with the Shanghai Composite rising 0.7%.  Euro Stoxx 600 is up 0.1% near midday, while US equity futures are pointing to a lower open.  The US 10-year yield is down 3 bp at 2.71%.  Commodity prices are mostly higher, with Brent oil up 0.3%, copper up 0.7%, and gold up 0.4%.

President Trump appears to be moving closer to invoking an emergency and tapping unused disaster relief funds to build his wall.  More specifically, he is looking at an unused $13.9 bln in the budget of the Army Corps of Engineers that came from a disaster spending bill passed last year.  The military construction budget is also being considered as a source of unspent funds.  While these solutions would surely be challenged by the House and in the courts, the move could end the stalemate in Washington and reopen the government.

Yet such drastic solutions would not bode well for the upcoming debt limit debate.  Nor would the rating agencies look kindly on such a dysfunctional solution to the government closure.  We suspect that markets would use a state of emergency as an excuse to keep selling the dollar.

Press reports suggest that the Article 50 Brexit date will be extended beyond March 29.  UK cabinet members were quoted, but it was later denied by the Prime Minister’s office.  The writing has been on the wall, and so it appears some are hoping to delay Brexit to stave off (temporarily, at least) a no-deal outcome.

Sterling rallied on this news and then gave back its gains after the denial.  However, we don’t view a delay as particularly bullish since the two sides are simply delaying what seems to be an insurmountable gap.  Cable got as high as $1/2850 before running out of steam.  We think moves above $1.28 will be hard to sustain since Brexit uncertainty remains in place.

During the North American session, the US reports December CPI.  Headline inflation is expected to ease to 1.9% y/y from 2.2% in November, while core is expected to remain steady at 2.2% y/y.  If so, the data would likely do little to change market sentiment with regards to potential Fed tightening.  The monthly budget statement from Treasury was due out today but has been delayed due to the shutdown.  There are no Fed speakers today after yesterday’s deluge.

Last night, Fed Vice Chairman Clarida sounded a note of caution, echoing comments from Chairman Powell earlier in the day.  The Fed has been on a full court press this year to reassure markets that it won’t tighten too aggressively.  For now, it has worked, and equity markets have responded as one would expect.

On the other hand, US rates markets have not reacted as much as one would expect.  Yes, the January 2020 Fed Funds futures contract has taken back the rate cut priced in last week, but it is pricing in steady rates this year.  The US yield curve has continued to flatten, with most measures still creeping towards inversion.

The UK reported November trade, GDP, and IP.  The trade deficit was wider than expected at -GBP2.9 bln, while GDP grew a slightly higher than expected 0.2% m/m.  Lastly, IP contracted -0.4 m/m vs. +0.2% expected, dragging he y/y rate down to -1.5% vs. -0.7% expected.

Italy reported weak November IP.  It contracted -1.6% m/m vs. -0.3% expected, dragging he y/y rate down to -2.6% vs. +0.4% expected.  France’s IP reading yesterday was similarly dismal as the two vie for worst-looking economy in the eurozone.  Both will find it hard to keep the budget outlook from deteriorating in this environment.

The euro is struggling to maintain any of its recent gains, though the $1.15 area offered some support during the pullback.  While the October 16 high near $1.1620 remains in play, it may be an uphill struggle considering continued weakness in the eurozone data.

Australia reported November retail sales overnight.  Sales rose 0.4% m/m vs. 0.3% expected.  The improved market sentiment also helped AUD break above .7200 and trade at its highest level since December 14.  It is on track to test the December 4 high near .7395, though the 200-day moving average near .7330 may provide some interim resistance.

Japan reported November trade and current account data overnight.  The adjusted current account surplus was JPY1.4 trln vs. JPY1.1 trln expected.  The yen remains hostage to global developments, though USD/JPY has been stuck in a very narrow range this week.  Given ongoing pressure on the dollar, we suspect this pair will edge lower to test support near 108.

Brazil reported December IPCA consumer inflation.  IPCA rose 3.75% y/y vs. 3.71% expected.  The inflation target fell to 4.25% this year from 4.5% in 2018, but the tolerance range remains +/- 1.5 percentage points.  Thus, inflation is below target and moving towards the bottom of the 2.75-5.75% target range.  Markets do not see a start to the tightening cycle in Brazil until H2 2019.  Next COPOM meeting is February 6, and rates are widely expected to be kept steady at 6.5%.