Dollar Mixed as RBNZ and Riksbank Deliver Hawkish Holds

  • Press reports suggest President Trump is leaning towards signing the spending bills that will keep the government open
  • The US reports January CPI
  • Sweden’s Riksbank delivered a hawkish hold and dropped its FX mandate
  • RBNZ kept rates steady at 1.75%, as expectedUK January CPI came in lower than expected; the eurozone reported weaker than expected December IP
  • Czech Republic January CPI rose 2.5% y/y; Brazil December retail sales were weaker than expected

The dollar is mixed against the majors as two major central banks delivered hawkish holds.  Kiwi and Stockie are outperforming, while yen and euro are underperforming.  EM currencies are mostly weaker.  MYR and RUB are outperforming, while ZAR and BRL are underperforming.  MSCI Asia Pacific was up 0.7%, with the Nikkei rising 1.3%.  MSCI EM is flat so far today, with the Shanghai Composite rising 1.8%.  Euro Stoxx 600 is up 0.3% near midday, while US equity futures are pointing to a higher open.  10-year UST yields are flat at 2.68%.  Commodity prices are mixed, with Brent oil up 1.5%, copper down 0.1%, and gold flat.

After eight straight up days after the FOMC meeting, the dollar’s winning streak came to an end yesterday.  While DXY is up slightly so far today, we suspect it could remain in a consolidative phase for several days.  That said, we believe that the dollar rally remains intact.  The outlook for the US economy remains relatively strong compared to the rest of the world.  Yesterday’s JOLTS reading was the highest ever, supporting our view that the US labor market remains tight and that wage pressures should rise further.

Press reports suggest President Trump is leaning towards signing the spending bills that will keep the government open.  Both houses of congress will quickly vote on the measures as the Friday deadline approaches.  The House is expected to vote today and the Senate tomorrow.  No word on whether Trump will try to get border wall funding by declaring a state of emergency, though we suspect the risks have fallen due to Republican opposition.

The US reports January CPI.  Headline inflation is expected to fall substantially to 1.5% y/y from 1.9% in December, while core is expected a tick lower at 2.1% y/y.  The US then reports January PPI Thursday.  Headline is expected at a few ticks lower at 2.1% y/y and core is expected a couple of ticks lower at 2.5% y/y.  These inflation readings appear unlikely to turn bond market sentiment around at this juncture.

The heavy slate of Fed speakers continues.  Mester, Bostic (non-voter), and Harker (non-voter) speak today, then Harker speaks Thursday and Bostic speaks Friday.  All are expected to stick with the current script, that of “patience” and “flexibility.”  US rates reflect this dovish talk as well as low inflation readings, with the implied yield on the January 2020 Fed Funds futures contract still stuck below the current effective Fed Funds rate of 2.40%.

The US December budget statement will also be reported.  In November, the 12-month total deficit rose to -$882.6 bln, just below the cycle high of -$890.2 bln in August.  Sluggish revenues and surging outlays are behind the worsening fiscal outlook.  The growing deficit must be financed with increased supply of US Treasuries, which will surely test the market.

Sweden’s Riksbank delivered a hawkish hold and dropped its FX mandate.  Even though rates were kept steady as expected, the bank kept its forward guidance that sees the next hike in H2.  The bank also dropped its mandate for FX intervention to weaken the krona.  Governor Ingles said the mandate was no longer needed and added that the krona should strengthen given the prospects for the Swedish economy.

RBNZ kept rates steady at 1.75%, as expected.  Even though it pushed out the timing of the first hike until early 2021, the market is taking it as a hawkish hold after Governor Orr said that the chances of a rate cut haven’t increased.  He did note that rates could move either up or down.  The outlook is still evolving but we suspect the RBNZ will eventually tilt even more dovish in the coming months.  NZD has retraced nearly two thirds of its February swoon just today.  A break of .6855 would set up a test of the February high near .6940.

UK January CPI came in lower than expected.  Headline was expected to fall a couple of ticks to 1.9% y/y but fell further to 1.8%, while CPIH was expected a tick lower at 1.9% y/y but fell further to 1.8%.  This continues a string of soft data ahead of Brexit.  UK reports January retail sales Friday.  Both headline and sales ex-auto fuel are expected to rise 0.2% m/m.  Clearly, the risks to all these readings lies to the downside.  Same goes for sterling.

Elsewhere, the eurozone reported weaker than expected December IP.  Instead of contracting -0.4% m/m, IP fell -0.9%.  This dragged the y/y rate lower to -4.2% y/y vs. -3.3% expected.  Here too, the data have been very disappointing of late.  The ECB will issue new staff forecasts at the March 7 meeting and we think they will have to acknowledge the worsening outlook again.  The euro remains heavy despite yesterday’s bounce, and we see further weakness ahead.

Czech Republic January CPI rose 2.5% y/y vs. 2.1% expected and 2.0% in December.  Most EM inflation readings fell in January.  Czech National Bank just kept rates steady last week as concerns about slowing growth mount.  Next policy meeting is March 28 and we see steady rates then too despite today’s inflation reading.  If price pressures continue to mount, the bank may have to restart the tightening cycle later this year.

Brazil December retail sales were weaker than expected.  Sales rose only 0.6% y/y vs. 3.8% expected and a revised 4.5% (was 4.4%) in November.  IPCA inflation came in slightly lower than expected at 3.78% y/y in January, whilst COPOM signaled steady rates for the time being.  CDI market sees steady rates until Q4.   Next policy meeting is March 20, and no change is expected then.