Dollar Mixed as Markets Mark Time Ahead of ECB

  • Global markets are relatively calm and marking time
  • ECB decision will be the highlight today
  • The Fed delivered a somewhat cautious Beige Book yesterday
  • During the North American session, Fed Governor Brainard speaks 
  • The Loonie remains vulnerable after the BOC delivered the dovish hold yesterday; Australia data was mixed
  • Mexico February CPI is expected to rise 3.94% y/y; Peru central bank is expected to keep rates steady at 2.75%

The dollar is narrowly mixed against the majors ahead of the ECB decision.  The dollar bloc is outperforming, while the Scandies and sterling are underperforming.  EM currencies are mostly weaker.  INR and THB are outperforming, while ZAR and TRY are underperforming.  MSCI Asia Pacific was down 0.5%, with the Nikkei falling 0.7%.  MSCI EM is down 0.6% so far today, with the Shanghai Composite rising 0.1%.  Euro Stoxx 600 is down 0.6% near midday, while US equity futures are pointing to a lower open.  10-year UST yields are down 1 bp at 2.68%.  Commodity prices are mixed, with Brent oil up 1.0%, copper down 0.1%, and gold flat.

Global markets are relatively calm, marking time ahead of the ECB decision today.  The dollar is mixed against the majors in very narrow ranges, while EM FX remains under broad pressure.  DXY is under water right now and is sustained would break the greenback’s 6-day winning streak.  Equity markets are under some modest pressure as global growth concerns remain in play.

ECB decision will be the highlight today.  A dovish hold is expected, with lowered staff forecasts likely to reflect the deteriorating growth outlook.  It will likely announce that a new TLTRO will come later this year, with details to be given at either the April 10 (most likely) or June 6 meeting.  However, we think it may be too soon to push out its official forward guidance.

Yesterday, reports suggested that the ECB will cut its outlook by enough to warrant a new TLTRO.  Inflation forecasts through 2021 will reportedly be cut.  The leak ahead of the decision supports the generally held view that the ECB will deliver a dovish hold today.  The euro made a marginal new low for this move yesterday but has since recovered to trade back above $1.13.

Here’s a summary of the December ECB forecasts.  The 2019 growth forecast was cut a tick from September to 1.7% while 2020 was kept steady at 1.7% and 2021 was added at 1.5%.  The 2019 inflation forecast was cut a tick from September to 1.6% while 2020 was kept steady at 1.7% and 2021 was added at 1.8%.  Those are all clearly too optimistic.  Just yesterday, the OECD cut its eurozone growth forecast for this year to 1.0% from 1.8% and for next year to 1.2% from 1.6%.

Ahead of the ECB decision, the eurozone reported final Q4 GDP figures.  Headline growth was steady at 0.2% q/q, but the y/y rate was revised down a tick to 1.1%.  Gross fixed capital investment rose 0.6% q/q, government expenditure rose 0.7% q/q, and household consumption rose 0.2% q/q.  Looking ahead, monthly data out so far suggest further deceleration in Q1.

The Fed delivered a somewhat cautious Beige Book yesterday that supports the notion of a pause at the March FOMC meeting.  In the previous Beige Book, 8 of the 12 Fed districts said growth was “modest to moderate.” In this latest report, 10 of the 12 districts saw growth as “slight-to-moderate.”   About half the districts noted slower activity due to the government shutdown.

During the North American session, Fed Governor Brainard speaks.  The US reports February Challenger job cuts, weekly jobless claims, Q4 unit labor costs and nonfarm productivity, and January consumer credit.  All the data are minor and not market-moving.

The Loonie remains vulnerable after the BOC delivered the dovish hold yesterday.  The bank sounded a bit less sure about further hikes but did not move to a neutral stance yet.  Also, the February Ivey PMI came in at 50.6, the lowest since September.  USD/CAD is trading at its highest level since January 4.  Break of the 1.3435 area sets up a test of the December 31 high near 1.3665.

Australia data was mixed.  January trade surplus was AUD4.55 bln vs. AUD2.75 bln expected, while retail sales rose 0.1% mm vs. 0.3% expected.   Exports grew 5% m/m and imports grew 3% m/m.  Sentiment on the Aussie remains negative given the RBA’s dovish turn.  It has retraced about half of this year’s rally and a break of the .6955 area is needed to set up a test of the year’s low near .6740 from January 3.

Mexico February CPI is expected to rise 3.95% y/y vs. 4.37% in January.  If so, inflation would move back within the 2-4% target range for the first time since December 2016.  Next policy meeting is March 28, and rates are expected to be kept steady at 8.25%.  If disinflation continues and the peso remains relatively stable, we think Banxico will probably start an easing cycle in H2.

Peru central bank is expected to keep rates steady at 2.75%.  CPI rose 2.0% y/y in February, right at the target and at the center of the 1-3% target range.  The economy is sluggish and price pressures are low, and so the bank is likely to be cautious about starting the tightening cycle.