Dollar Mixed as Risk Appetite Improves

  • Markets rallied in the early London session after headlines of a “significant breakthrough” for coronavirus vaccine
  • The dollar continues to climb; ADP reports its private sector jobs estimate; betting markets have responded to the partial results from the Iowa caucus
  • Brazil COPOM is expected to cut rates 25 bp to 4.25%; Poland is expected to keep rates steady at 1.5%
  • UK and eurozone reported strong final January PMI readings
  • Thailand unexpectedly cut rates by 25 bp to 1.00%; Monetary Authority of Singapore sent a dovish signal to the markets

The dollar is mixed against the majors as risk sentiment continues to improve.  Nokkie and Aussie are outperforming, while euro and Swissie are underperforming.  EM currencies are also mixed.  ZAR and RUB are outperforming, while SGD and KRW are underperforming.  MSCI Asia Pacific was up 0.7% on the day, with the Nikkei rising 1.0%.  MSCI EM is up 0.7% so far today, with the Shanghai Composite up 1.3%.  Euro Stoxx 600 is up 1.2% near midday, while US futures are pointing to a higher open.  10-year UST yields are up 4 bp at 1.64%, while the 3-month to 10-year spread is up 2 bp to stand at 8 bp.  Commodity prices are mostly higher, with Brent oil up 2.9%, copper up 2.0%, and gold down 0.1%.

Risk sentiment improved in the early London session after headlines of a “significant breakthrough” for coronavirus vaccine. The death toll of the virus is now near 500 with 25K confirmed cases worldwide.  Despite the rebound in risk sentiment, the reaction in commodity prices has been decidedly milder. Crude oil and copper futures are up 2-3%, the first increase after nearly three weeks of heavy declines, while iron ore has yet to react, registering a small decline today.

The coronavirus impact is looking like a convenient excuse for both sides to underdeliver on the US-China Phase One deal commitments. Parts of the agreement already looked like a stretch, especially the near $80 bln for 2020, and now it becomes easier to explain why they won’t materialize. Indeed, White House adviser Kudlow said that the “export boom” from the trade deal could be delayed, but also added that “proportionate actions” will be taken if China doesn’t live up to the deal.

The dollar continues to climb.  DXY has clawed back all of Friday’s loss and then some, and is on track to test last Wednesday’s cycle high near 98.188.  After that is the November 29 high near 98.544.  The euro remains heavy after the failed test of the $1.11 area and looks likely to break below $1.10.  Elsewhere, USD/JPY continues to rise.  Yes, that pair is always subject to periods of risk-off impulses but the rally remains largely intact.  Break of the 109.55 area today sets up a test of the January 17 high near 110.30.  This week’s data so far confirm our view that the US economy remains strong and that any notions of Fed easing are overdone.  We remain bullish on the dollar.



ADP reports its private sector jobs estimate today, where a 158k gain is expected.  This comes ahead of the January jobs data Friday, where consensus sees 162k vs. 145k in December, unemployment steady at 3.5%, and hourly average earnings picking up a tick to 3.0% y/y.  December trade and January ISM non-manufacturing PMI will also be reported.  Brainard speaks.

The betting markets have responded to the partial results from the Iowa caucus.  Pete Buttigieg appears to have performed better than expected, boosting his odds of being the Democratic candidate in November by 6 percentage points to 16%.  Sanders fell 6 percentage points to 39%, but perhaps the most noteworthy move has been the precipitous decline in Biden’s odds from 43% at the start of the year to just 20% now.  Yet we must note that Iowa is given too much importance in such a long process.  Former President Bill Clinton won neither Iowa nor New Hampshire in 1992 yet won the nomination that year.  Please see our “Democratic Primary Timeline” for an in-depth look at the process.

Brazil COPOM is expected to cut rates 25 bp to 4.25%.  A handful of analysts see steady rates.  BRL continues to underperform ahead of the decision due to concerns about the tone of the statement as there are risks that it signals room for more cuts.  Policymakers are more focused on boosting the economy than fighting inflation.  January IPCA inflation will be reported Friday, which is expected at 4.35% y/y vs. 4.31% in December.  If so, inflation would be the highest since May 2019 and in the top half of the 2.5-5.5% target range for 2020.



Eurozone final January PMIs surprised to the upside. The services PMI came in at 52.5 vs. 52.2 flash, as improvements Germany and Italy were enough to offset drops in Spain and France.  Likewise, the composite PMI increased to 51.3 vs. 50.9 flash, with Germany and Italy again offsetting Spain and France.  Lastly, December retail sales came in very weak at -1.6% m/m vs. -1.1% expected.  Eurozone data out last Friday were unequivocally weak and call into question the dubious assertion that growth will pick up significantly in 2020.

The UK reported strong final January services and composite PMI readings today.  Services was revised up a full point to 53.9, dragging the composite up nearly a point to 53.3. Yet we can’t get too excited about this.  Brexit has come and gone, but uncertainty will remain as both sides try to negotiate a new trade deal before the transition period ends December 31.  We see continued downside risks to the data, along with an eventual BOE rate cut this year.

National Bank of Poland is expected to keep rates steady at 1.5%.  CPI rose 3.4% y/y in December, the highest since October 2012 and near the top of the 1.5-3.5% target range.  While there are signs that the economy is slowing, high inflation should keep the bank on hold for now.



Bank of Thailand unexpectedly cut rates by 25 bp to 1.00%.  Most analysts were expecting a hold, but the potential impact of the virus was surely the swing fact given the importance of tourism for the country.  There are other factors at play to cloud the outlook, including a delay in implementing the budget and the consequences of a severe drought. As such, the bank lowered its growth forecast and now expects inflation to come in below the 1-3% target range.  January CPI will be reported a day later on Thursday, which is expected to rise 0.97% y/y vs. 0.87% in December.

Monetary Authority of Singapore sent a dovish signal to the markets.  It said “There is sufficient room within the policy band to accommodate an easing of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) in line with the weakening of economic conditions” due to the coronavirus outbreak.  The MAS noted that the currency basket that it manages has been fluctuating near the upper end of its target range since October and so could move lower.  It maintained its policy outlook and said it will hold its regular semiannual policy meeting in April.  Obviously, there is a risk that the MAS adjusts its policy band weaker then.