- The dollar continues to get traction
- China bashing continues in the US; there will be many Fed speakers this week even as negative rates remain in focus
- Comments by BOE Chief Economist Andrew Haldane led to another bout of speculation over negative rates in the UK
- Clearstream and Euroclear have decided to suspend Turkish lira transactions on their platforms; oil prices continue their upswing
- Japan’s preliminary Q1 GDP didn’t come in as dire as expected; other regional data came in better than expected
The dollar is mixed against the majors as markets await fresh drivers. Nokkie and Aussie are outperforming, while yen and Swissie are underperforming. EM currencies are also mixed. RUB and MXN are outperforming, while INR and MYR are underperforming. MSCI Asia Pacific was up 0.1% on the day, with the Nikkei rising 0.5%. MSCI EM is flat so far today, with the Shanghai Composite rising 0.2%. Euro Stoxx 600 is up 2.0% near midday, while US futures are pointing to a higher open. 10-year UST yield is up 1 bp at 0.65%, while the 3-month to 10-year spread is flat +55 bp. Commodity prices are mostly higher, with Brent oil up 5.9%, WTI oil up 7.9%, copper up 2.1%, and gold up 1.1%.
The dollar continues to get traction. DXY traded last week near 100.556, the highest since April 24. It has been unable to build on those gains so far but we still target that day’s high near 100.867. The euro continues to flirt with the $1.08 area and remains heavy, while sterling has broken lower and is on track to move further below $1.21. USD/JPY remains stuck around 107.
China bashing continues in the US, but it’s starting to move beyond rhetoric. The Trump administration imposed additional measures to restrict access of Chinese tech companies, especially Huawei, by restricting the use of US equipment without license. Of course, Beijing is already planning retaliation. To its credit, China appears to be taking a quieter tack ahead of its National People’s Congress this weekend. We suspect Beijing would like to avoid any negative markets movements ahead of this important meeting. However, Xi may start pushing back afterwards.
There will be many Fed speakers this week even as negative rates remain in focus. Bostic speaks today. Despite the Fed pushback last week, Fed Funds futures are still pricing in a small chance of negative rates by Q2 2021. We expect more pushback this week and we continue to believe that the Fed will not go negative.
Comments by BOE Chief Economist Andrew Haldane led to another bout of speculation over negative rates in the UK. We think this is misplaced and would be inclined to position against it. Haldane said negative rates is something “we’ll need to look at – are looking at – with somewhat greater immediacy.” This seems self-evident, as all policymakers are considering extreme measures, but the bar is very high for implemented them. Indeed, other officials, including Governor Bailey, have pushed back against the notion. While we do not think the BOE will go negative, just the fact that it is being studied will be very damaging. Separately, the UK is on track to proceed with additional re-opening measures on June 1. Reports suggest that most of the planned contact tracers have been hired and the app should be rolled out soon.
Sterling will hit the trifecta again this week, in the form of Brexit risks, weak data, and dovish BOE. Cable is trading at the lowest level since March 26 and is nearing the 50% retracement objective of the March-April rally near $1.2030. EUR/GBP has likely bottomed for now and is trading at the highest level since March 31. Key retracement objectives from the March-April drop come in near .8990, .9086, and .9184.
Clearstream and Euroclear have decided to suspend Turkish lira transactions on their platforms. The move will be temporary, but it means that new settlement instructions will be refused starting May 18. Clearstream said this was “due to liquidity restrictions on the Turkish lira related to Covid-19,” though domestic settlements will continue to operate as usual. Turkish assets have stabilized over the last few sessions with USD/TRY continuing to trend lower below the key TRY7.00 level. Aside from better risk appetite towards EM, we think this is in part due to sheer lack of foreign investor participation, making the government actions to contain the currency more effective.
Oil prices continue their upswing. WTI futures are trading above $31 per barrel for the first time in two months, while Brent is trading above $34. However, both are still down some 50% this year. This rally seems to be due to a combination of continued supply cuts by the US and others, along with reopening measures and prospects of improved demand. Also of note, the contango in both WTI and Brent is quickly disappearing.
Japan’s preliminary Q1 GDP didn’t come in as dire as expected. The economy contracted -0.9% q/q vs. -1.1% expected and a revised -1.9% (was -1.8%) in Q4. In SAAR terms, GDP contracted -3.4% vs. -4.5% expected and a revised -7.3% (was -7.1%) in Q4). The numbers showed weakness across the board, with only government consumption to offset it. Despite substantial fiscal stimulus still in the pipeline, more pain is still to come from Japan’s data. Note that the lockdowns were not seen until April, and so the modest improvement in Q1 is unlikely to be sustained in Q2. Japan faces three straight quarters of contraction, and the Q3 outlook will depend on how the reopening unfolds. Restrictions have been lifted in many prefectures, and even Tokyo is making plans to reopen.
Other regional data came in better than expected. Singapore April non-oil domestic exports (NODX) contracted -5.8% m/m vs. -19.8% expected and +12.8% in March. The next semiannual MAS policy meeting isn’t until October but we see risks of another intra-meeting move if the economic outlook worsens. Elsewhere, Thailand Q1 GDP contracted -2.2% q/q vs. -4.2% expected and a revised -0.2% (was +0.2%) in Q4. Bank of Thailand meets Wednesday and is expected to cut rates 25 bp to 0.50%.