Dollar Mixed as Oil Rebounds on Tanker Attack

  • President Trump has now threatened sanctions over the Nord Stream 2 project
  • We got another downside miss for inflation yesterday
  • Oil prices rebounded today after two tankers were apparently attacked
  • Swiss National Bank kept policy unchanged, as expected; Australia reported May jobs data
  • Banco de Mexico said an easing cycle was unlikely under the ongoing threat of tariffs
  • Peru central bank is expected to keep rates steady at 2.75%

The dollar is mixed against the majors as global trade concerns remain high. Loonie and Swissie are outperforming, while the Antipodeans are underperforming. EM currencies are broadly weaker. ZAR and CZK are outperforming, while TRY and IDR are underperforming. MSCI Asia Pacific was down 0.5%, with the Nikkei falling 0.5%. MSCI EM is down 0.4% so far today, with the Shanghai Composite rising 0.1%. Euro Stoxx 600 is up 0.2% near midday, while US futures are pointing to a higher open. 10-year UST yields are down 1 bp at 2.11%, while the 3-month to 10-year spread is unchanged and stands at -10 bp. Commodity prices are mixed, with Brent oil up 3.5%, copper down 0.5%, and gold up 0.2%.

The feel-good vibe from the suspension of US tariffs on Mexico has pretty much evaporated. New fronts on the trade war have opened up even as US-China tensions remain high. Equity markets are jittery, and EM remains under pressure in this environment. It’s worth noting that Europe seems to be in the hot seat now. Earlier this week, President Trump complained about the “devalued” euro.

Now, Trump has threatened sanctions over the Nord Stream 2 project. This is a natural gas pipeline from Russia to Germany. Who would Trump sanction? We suspect Germany since Trump also threatened to move US troops out and relocated them to Poland. More details are needed but the knee-jerk reaction was to sell the euro. With a close yesterday below the Tuesday low near $1.13, we got an outside down day for the euro that points to further losses ahead.

We got another downside miss for US inflation yesterday. But it’s not just the US, but rather the entire world is feeling felt the effects of a 15% drop in oil prices last month. Oil has tacked on another 4% drop so far this month and so June inflation readings should also come in soft. Still, we do not believe that low inflation is the trigger for a Fed cut, but rather softness in the real sector. That’s why this Friday retail sales data is so important.

Oil prices rebounded today after two tankers were apparently attacked. Before that, supply concerns were going the other way as both API and DOE reported huge builds (4.85 mln barrels, respectively) in crude stockpiles. Brent futures price tested the 62% retracement objective of this year’s rally near 59.75, and a break below would set up a test of the December low near 49.95.

Swiss National Bank kept policy unchanged, as expected. Markets were disappointed and took the franc higher. While no one really expected any change to policy, markets were looking for a more dovish hold and we felt it would push back against recent CHF strength. Central bank President Jordan noted that risks are “more pronounced than at our previous monetary policy assessment” and that the Swiss franc was “somewhat stronger” and “highly valued.”

Australia reported May jobs data. The headline 42.3k gain looks good but it was made up of 39.8k in part-time jobs. The April gain was revised up to 43.1k but consisted largely of a 43.4k in part-time jobs. The unemployment rate ticked up to 5.2% as did the participation rate to 66%. Downside risks to the economy remain strong and so we see further easing ahead after the RBA just cut rates 25 bp. Next policy meeting is July 2, and it may be too soon for another hike. We favor a cut at either the August 6 or September 3 meetings.

Banco de Mexico Deputy Governor Heath said an easing cycle was unlikely under the ongoing threat of tariffs. He added that this threat could be a permanent one as long as Trump is in office. Heath noted that there are other risks and uncertainties too that would prevent Mexico from easing even if the Fed did. We concur and believe that market pricing in an easing cycle this year is too optimistic.

Peru central bank is expected to keep rates steady at 2.75%. CPI rose 2.73% y/y in May, the highest since September2017 but still within the 1-3% target range. Given the sluggish economy and the drop in copper prices, we believe the central bank will keep rates steady this year. Indeed, given Chile’s surprise rate cut last Friday, we cannot rule out an eventual cut by neighboring Peru later this year.