Dollar Mixed as Risk-Off Sentiment Takes a Breather

  • The dollar rally continues; during the North American session, we will get some more clues to the state of the economy
  • FOMC minutes will be released; Canada reports January CPI
  • Brazil central bank confirmed it stands ready to defend the real
  • UK January CPI surprised on the upside, mostly due to temporary factors; Turkey cut rates 50 bp to 10.75%, as expected
  • Japan data was mixed overnight; Singapore’s budget will provide a huge slug of stimulus; South Korea signaled it is working on a similar stimulus package

The dollar is mixed against the majors as risk-off sentiment takes a breather.  Nokkie and Loonie are outperforming, while yen and Stockie are underperforming.  EM currencies are mostly weaker.  ZAR and RUB are outperforming, while HUF and TRY are underperforming.  MSCI Asia Pacific was up 0.2% on the day, with the Nikkei rising 0.9%.  MSCI EM is up 0.5% so far today, with the Shanghai Composite falling 0.3%.  Euro Stoxx 600 is up 0.6% near midday, while US futures are pointing to a higher open.  10-year UST yields are down 1 bp at 1.55%, while the 3-month to 10-year spread is flat to stand at -1 bp.  Commodity prices are mostly, with Brent oil up 1.2%, copper flat, and gold up 0.6%.

The dollar rally continues.  Simply put, the dollar continues to benefit from both safe haven flows as well as investment flows that are searching for the best yield and best growth prospects.  We continue to believe that the US is amongst the least vulnerable to the impact of the coronavirus and so the dollar should continue to benefit overall.


DXY traded at a new cycle high today near 99.514 and remains on track to test the October 1 cycle high near 99.667.  After that is the May 2017 high near 99.888.  Elsewhere, the euro remains heavy and traded at a new low for this move yesterday near $1.0785, and is hovering just above it today.  There is a gap from April 2017 on the weekly charts between $1.0780-1.0820 that needs to be filled.  Once we get past that, there are no major chart points until that month’s low near $1.0570.  Sterling is having trouble sustaining a move above $1.30, while USD/JPY is making new highs above 110.



During the North American session, we will get some more clues to the state of the economy.  January PPI (headline 1.6% y/y and core 1.3% y/y expected), housing starts (-11.4% m/m expected), and building permits (2.1% m/m expected) will be reported today.  We got the first look at February US manufacturing yesterday and it was solid.  The Empire reading came in at 12.9 vs. 5.0 expected and 4.8 in January, with new orders and shipments improving sharply.  The Philly Fed survey will be reported Thursday and is expected at 10.7 vs. 17.0 in January.

FOMC minutes will be released.  Bostic, Mester, Kashkari, Kaplan, and Barkin all speak today.  All are expected to mirror the wait-and-see tone taken by Powell during his recent Humphrey-Hawkins testimony.  Indeed, Kaplan said yesterday that he favors steady rates if the impact of the coronavirus proves to be transitory, as most expect.  Kaplan is a voting member of the FOMC this year.

Canada reports January CPI.  Headline inflation is expected to tick higher to 2.3% y/y.  If so, it would be the highest since May.  However, common core inflation is expected to remain steady at 2.0% y/y.  Yesterday, December manufacturing sales came in at -0.7% m/m vs. +0.7% expected, while November was revised down to -1.0% m/m from -0.6% previously.  Relatively firm data had pushed out Bank of Canada easing expectations, but we may see some repricing if we see a return to soft data.  WIRP suggests over 15% odds of a cut at the next policy meeting March 18 vs. less than 10% last week.

Brazil central bank president Roberto Campos confirmed they are ready to step back into the FX market to defend the real.  He kept to the usual line, saying that they will act to counter “excessive moves, or [when] Brazil is becoming detached from its peers or inflation expectations are being affected.” Recall that BCB intervened twice last week (selling $1 bln via FX swaps), but the communication was once again confusing because officials had just signaled that they were comfortable with the situation in FX markets. Brazil has been one of the worst performing currencies so far this year, so Campos message is consistent. The BCB has enough credibility and firepower to impact the short-term trajectory of the currency and we think they are willing to do so now. We take a tactical view that worst is over for now, and think that BRL is likely to stabilize or maybe even outperform other EM currencies in the near-term.



UK January CPI surprised on the upside, but mostly due to temporary factors. Headline inflation came in at 1.8% y/y vs. 1.6% expected and well above 1.3% in December. However, the increase was in large part due to higher energy costs. Even so, the relatively tight labor market and forthcoming stimulus suggest that the BOE is likely to stay on hold until they see a material change in outlook.  WIRP suggests slightly less than one cut is priced in now for this year compared to slightly more than one at the start of this month.

Turkey central bank cut rates 50 bp to 10.75%, as expected.  CPI rose 12.15% y/y in January and so this cut moves real rates further into negative territory.  Next policy meeting is March 19 and we suspect easing may continue then with another small cut.  The wild card is the lira.  Despite numerous measures to support the lira, it continues to weaken.  For USD/TRY, 6.19 is a key level as it is the 62% retracement objective of the big drop in 2018.  Break above would target the August 2018 high near 6.8425.

South Africa January CPI came in close to expectations. January inflation rose to 4.5% y/y, a 7-month high on the back of higher energy prices (gasoline +15% m/m).  This puts it right at the center of the 3-6% target range.  Core inflation is running at a more subdued 3.7% y/y rate. Still, this should be enough to keep SARB on hold at its March 19 meeting after January’s surprise cut, especially with the upcoming uncertainty regarding the Moody’s ratings decisions. Another reason to keep rates steady is that the rand has been under pressure since the start of the year, depreciating 6.5% against the dollar, one of the worst performing currencies.



Japan data was mixed overnight.  January adjusted trade deficit came in at -JPY224 bln vs. -JPY550 bln expected.  Exports contracted -2.6% y/y vs. -7.0% expected, while imports contracted -3.6% y/y vs. -1.8% expected.  However, December core machine order contracted -12.5% m/m vs. -8.9% expected, dragging the y/y rate down to -3.5% vs. -0.7% expected.

USD/JPY is trading at new highs near 110.35 despite the recent pickup in risk-off sentiment.  There are likely many factors but the obvious one is that Japan is much more vulnerable to the coronavirus than the US is.  Japan’s economy was already contracting in Q4 to the tune of -6.3% annualized before the coronavirus hit and so it’s in a much weaker position than, say, the US.  Next targets for the pair are the May 21 high near 110.65 and then the April 24 high near 112.40.

China is reportedly considering measures such as direct cash infusions and mergers to bail out its crippled airline industry.  Many of the largest carriers are state-owned.  Discussions are ongoing and no decisions have been made.  Elsewhere, many private companies are reportedly cutting wages and delaying paychecks as the impact of the virus has choke off their cashflows.  The PBOC set the USD/CNY fixing above 7 for the first time since December 25.  Yet there is nothing magical about this level, and the fix simply reflects significant weakness in the rest of EM FX.

Singapore’s budget will provide a huge slug of stimulus to lean against the economic impact of the virus.  It pledged the equivalent of $4.6 bln in dedicated support, taking the deficit to -2.1% of GDP for the upcoming fiscal year.  This would be the largest in at least two decades and compares to a projected -0.3% for the current fiscal year.  A big chunk of this will go to the health ministry, but also to assist lower income families. In addition, sectors most exposed to shock (tourism, aviation) will get support through property tax rebates and rental waivers.  We think the MAS will likely complement these measures with easing measures at its semiannual policy meeting in April.

South Korea’s government signaled it is working on a similar stimulus package. Nothing has been announced yet, but President Moon called for “extraordinary” measures to deal with impact of the virus, a message echoed by other officials. Finance Minister Hong said the government plans to provide liquidity support for exporters.  The BOK last cut rates 25 bp to 1.25% back in October but it has so far been unwilling to cut again.  If the situation worsens, we cannot rule out further monetary easing.  Next policy meeting if February 27.