Dollar Mixed as Eventful Week Ends

  • The lack of follow-through for the dollar is disappointing but we’re sticking with our strong dollar call
  • The FOMC media embargo has ended; Canadian politics are heating up
  • PBOC lowered the 1-year loan prime rate 5 bp to 4.20%; Japan reported August CPI and BOJ tweaked its bond-buying
  • India announced corporate tax cuts; Taiwan reported weak August export orders; BRL has underperformed after COPOM cut rates 50 bp

The dollar is mixed against the majors as an eventful week draws to a close.  Swissie and euro are outperforming, while Kiwi and Nokkie are underperforming.  EM currencies are mostly firmer.  MYR and KRW are outperforming, while PLN and HUF are underperforming.  MSCI Asia Pacific was up 0.4% on the day, with the Nikkei rising 0.2%.  MSCI EM is up 0.5% so far today, with the Shanghai Composite rising 0.2%.  Euro Stoxx 600 is up 0.3% near midday, while US futures are pointing to a higher open.  10-year UST yields are flat at 1.78%, while the 3-month to 10-year spread is unchanged at -13 bp.  Commodity prices are mostly higher, with Brent oil up 0.6%, copper up 0.3%, and gold up 0.3%.

There were four major central bank meetings yesterday and three in EM.  Yet FX markets were surprisingly quiet, with most currencies trading in very narrow ranges.  The calm has been extended today.  The lack of follow-through for the dollar is disappointing but we’re sticking with our strong dollar call.  Once US rate markets believe the Fed, we should see the next leg higher for USD.

To wit, WIRP suggests 41% odds of a Fed cut October 30.  The CME model shows 43%.  We think both readings still vastly overestimate the odds of a cut but it may take several more solid US data prints to convince markets.

In that regard, the US reported jobless claims of 208k for the BLS survey week for September.  This suggests another solid jobs report on October 4.  Consensus is currently 140k vs. 130k in August.  We note that 208k is the lowest reading for a BLS survey week since April.  We also got another reading for September manufacturing and it was solid.  The Philly Fed manufacturing index came in at 12.0 vs. 10.5 expected.

The FOMC media embargo has ended.  Vice Chair Clarida will be on CNBC today at 10 AM ET.  Also on the schedule for today are Williams (voter), Rosengren (voter), and Kaplan (non-voter).  Their tone will be very important for those of us trying to figure out the Fed’s next move.  As the Dot Plots show, there is a real split in the FOMC.  Bullard said he viewed a 50 bp cut this week as prudent risk management in the face of elevated downside risks.

During the North American session, there are no major US reports.  Canada reports July retail sales.  Headline sales are expected to rise 0.6% m/m vs. a flat reading in June, while sales ex-autos are expected to rise 0.3% m/m vs. 0.9% in June.

Canadian politics are heating up due to the brownface scandal engulfing current Prime Minister Trudeau.  The fact that it comes about a month before the election is noteworthy.  Polls were already showing Trudeau locked in a close race and this just makes things harder for him.  Let’s see some new opinion polls to gauge if this has any impact on voter intentions.

Sterling has rallied on some optimism regarding Brexit.  Yesterday, EC President Juncker said he was doing “everything” to prevent a no-deal Brexit.  Juncker has been pretty negative all through the process and so the rare optimism got some attention.  That said, a deal remains difficult and we think that’s why the rally has run out of steam just below $1.26.  Irish Foreign Minister Coveney warned today that a deal is “not close.”

PBOC lowered the 1-year loan prime rate 5 bp to 4.20%, as expected.  However, it left the 5-year LPR steady at 4.85%.  Under the new framework, the central bank sets these benchmark reference rates on the 20th of each month.  Policymakers have been easing policy steadily in recent months but have refrained from aggressive rate cuts.  We believe this strategy will continue as the trade war extends with no end in sight.

Japan reported August national CPI.  As expected, headline slowed to 0.3% y/y vs. 0.5% in July and ex-fresh food slowed to 0.5% y/y vs. 0.6% in July.  August department store sales came in firm, rising 2.3% y/y nationwide and 4.7% y/y in Tokyo.  After keeping policy steady yesterday, the BOJ cut its regular bond purchases across the three longest tenors by a combined JPY50 bln in an effort to steepen the curve.

India announced corporate tax cuts worth about $20.5 bln in an effort to boost the economy.  The move is risky, as slow growth has already strained the budget and endangered the government’s fiscal targets.  Yesterday, RBI Governor Das said there’s room for further easing due to low inflation.  Next RBI meeting is October 4 and another rate cut is likely then.

Taiwan reported weak August export orders.  Orders plunged -8.3% y/y vs. -2.6% expected and -3.0% in July and was the worst reading since March.  The entire region continues to suffer from the US-China trade war.  Until tariffs are eliminated, those negative impulses are likely to continue.

BRL has underperformed after COPOM cut rates 50 bp to a record-low 5.5% Wednesday evening.  That move was expected but the language supports another 50 bp cut at the next meeting October 30.  We think that is simply too much for investors to swallow.  In addition, we expect EM to remain under broad-based pressure and so USD/BRL could easily go above 4.20 to test the all-time high near 4.2480 from September 2015.