Dollar Mixed as Risk-off Impulses Take Hold

  • Markets should be prepared for negative headlines as we approach the endgame of the first stage of the US-China trade deal
  • Due to the US holiday, there are no US data reports
  • The political campaign in the UK has shifted into high gear; UK data came in largely weaker than expected
  • Spain’s election went roughly as expected: back to political limbo
  • Japan reported weak September core machine orders; China reported weak October money and loan data

The dollar is mixed against the majors even as risk-off sentiment takes hold.  Kiwi and sterling are outperforming, while the Scandies are underperforming.  EM currencies are mostly weaker.  THB and RON are outperforming, while KRW and CLP are underperforming.  MSCI Asia Pacific was down 0.7% on the day, with the Nikkei falling 0.3%.  MSCI EM is down 1.2% so far today, with the Shanghai Composite falling 1.8%.  Euro Stoxx 600 is down 0.6% near midday, while US futures are pointing to a lower open.  The US bond market is closed for holiday.  Commodity prices are mostly lower, with Brent oil down 1.3%, copper down 0.9%, and gold up 0.5%.


The dollar is mixed today even as risk-off impulses take hold.  Some growing pessimism about the US-China trade deal (see below) is creeping into markets, with sentiment also hurt by weak new loan data out of China.  EM FX is underperforming in this environment.  Global equity markets are mostly down today, led by a big drop in China.  Global equity markets are mostly down today, led by a big drop in China.

As we had warned last week, markets should be prepared for more negative headlines as we approach the endgame of the first stage of the US-China trade deal. The most eye-catching headlines were Trump’s comment that “if we don’t make that right deal, we’re not going to make a deal.” He also cast doubt on the notion of rolling back existing tariffs. Also of note, the yuan has depreciated for the second consecutive session after a string of eight stronger closes and is now back above the CNY7.00 level. Once again, our instinct is to fade these headlines.



Due to the US holiday, there are no US data reports. However, the Fed’s Rosengren speaks today in Oslo, Norway.  US equity markets are open but with the US bond market closed, FX markets are left without the key driver for this recent dollar rally.  This is a big data week for the US and we look for an extension of the recent rise in US yields, which should continue to support the greenback.  The 10-year yield is flirting with 2%, while the 3-month to 10-year curve is at a cycle high 40 bp.  Lastly, Fed Funds futures are now pricing in less than one cut next year.  WIRP suggests only 8% odds of a cut December 11, near the lows.



The political campaign in the UK has shifted into high gear. After a turbulent week for both major parties, the focus has shifted to Labour party’s spending plans and the position of the Brexit Party. On the latter, Nigel Farage is under pressure to step aside and stop pressuring Boris Johnson to pursue a “clean Brexit.” The Brexit Party is projected to take between 6-10% of the votes, which are pro-Brexit supporters that likely would otherwise vote for the Conservatives. Separately, the Conservative party has continued to attack Labour’s spending plans, which include nationalization of energy and water utilities and creating a National Investment Bank. Recent polls show an advantage of just over 10 percentage points for the Conservatives over Labour.

Sterling has been weakening over the last few weeks but mostly going along the broad dollar trend.  If weakness persists, $1.27 should offer some support as it coincides with the 200-day moving average as well as the 38% retracement objective of the October rise.  Still, positioning continues to adjust with the trend of closing short trades in the futures markets accelerating (chart).

UK data came in largely weaker than expected.  Q3 GDP grew 1.0% y/y vs. 1.1% expected and 1.3% in Q2.  Investment dragged down the headline figure again due to Brexit uncertainty.   September industrial production fell -0.3% m/m vs. -0.1% expected, while construction output fell -0.2% m/m vs. -0.5% expected.  Lastly, the trade deficit was -GBP3.36 bln vs. -GBP2.0 bln expected.  The BOE just delivered a dovish hold last week.  The vote was 7-2, with two dissents in favor of a cut.  While the bank is on hold until Brexit uncertainty has cleared up, we think rates are more likely to fall than to rise afterwards.  Next policy meeting is December 19 and no change is expected then.

Spain’s election went roughly as expected: back to political limbo.  With half of the votes counted, the Socialists retained their place as the largest party in Parliament with 120 (-3 seats from April), but nowhere near the 176 needed for a majority. The PP came in at second place with 87 (+21) seats, while the far-right Vox party rose to 52 seats (+28) to become the third-largest party. The leftist Podemos won 35 seats (-7), but the biggest loser was Ciudadanos with only 10 seats (-47). There is no obvious solution to a coalition, especially with the Catalan referendum issue creating a divide between some of the otherwise likely partners on the left. On the right, a PP + Vox + Ciudadanos would add up to around 150 votes, no not enough either.



Japan reported weak September core machine orders.  They were expected to rise 0.9% m/m but instead contracted -2.9%.  Current account data were also reported, with the adjusted surplus coming in at JPY1.49 trln vs. JPY1.66 expected.  WIRP suggests 17% odds of a cut at the next BOJ meeting December 19.  USD/JPY has been unable to break above the 109.50 area and is drifting lower to test support near 109.  We look for an upside breakout that targets the May 21 high near 110.65.

China reported weak October money and loan data.  New loans were CNY661 bln vs. CNY800 expected, while aggregate financing rose CNY619 bln vs. CNY950 bln expected.  Both figures were a big drop-off from September and will raise doubts about the efficacy of targeted PBOC easing measures.  Trade data surprised to the upside last Friday, but downside risks persist until the trade war is resolved.  Over the weekend, CPI inflation came in higher than expected at 3.8% y/y, the highest since December 2012 and largely due to surging pork prices.  PPI contracted a greater than expected -1.6% y/y, which points to disinflationary pressures in the pipeline.