Dollar Mixed as Some Calm Returns to Global Markets

  • Global markets have calmed down after yesterday’s bloodbath
  • Yet the tit for tat continues; the big surprise was that China is reportedly discussing the sale of UST holdings
  • The dollar remains firm even though markets are pricing in more than one rate cut this year
  • UK reported mixed labor market data; implied rates on short sterling futures continue to fall
  • Sweden reported April CPI
  • MSCI EM FX has given up over 75% of this year’s rally; Brazil COPOM minutes will be released

The dollar is mixed against the majors as some semblance of calm returns to global financial markets. The Scandies are outperforming, while the yen and Swissie are underperforming. EM currencies are also mixed. ZAR and THB are outperforming, while PHP and TWD are 7underperforming. MSCI Asia Pacific was down 0.9%, with the Nikkei falling 0.6%. MSCI EM is down 0.5% so far today, with the Shanghai Composite falling 0.7%. Euro Stoxx 600 is up 0.7% near midday, while US futures are pointing to a higher open. 10-year UST yields are up 1 bp at 2.41%, while the 3-month to 10-year spread has steepened 2 bp to stand at 3 bp. Commodity prices are mixed, with Brent oil up 0.3%, copper up 0.4%, and gold down 0.2%.


Global markets have calmed down after yesterday’s bloodbath. President Trump said he has a feeling that the next round of talks will be “very successful.” He added that he’ll meet with President Xi at the June 28-29 G20 summit in Osaka. Recall that it was at the December G20 summit in Buenos Aires that the two sides called a truce to the trade war.

Yet the tit for tat continues. China yesterday announced retaliatory measures, after which the USTR released a list of around $300 bln of Chinese goods that could be hit in the next round of tariffs, likely around early June. In this uncertain environment, we continue to favor USD, JPY, and CHF at the expense of the dollar bloc, Scandies, and EM.

The big surprise was that China is reportedly discussing the sale of UST holdings. Higher tariffs (25%) from China were a given, which will start June 1. So too was China halting purchases of US agricultural goods. With total reported holdings of $1.13 trln as of February, selling USTs risks harming its own portfolio. We simply don’t think China will go down this road, but this certainly serves as a shot across the bow.

It’s worth noting that 10-year UST yields are now lower than they were when the China headlines hit. Same goes for 2-year yields, so that likely means that the market is not that fearful of possible Chinese dumping of USTs. We’ve always downplayed this risk and was surprised it was getting any sort of discussion amongst China policymakers.

The dollar remains firm even though markets are pricing in more than one rate cut this year. The implied yield on the January 2020 Fed Funds futures contract is currently 2.08%, a new low for this cycle. With current effective Fed Funds trading near 2.38%, this means that a second cut this year is staring to get priced in. With another cut in 2020 fully priced in as well, that means the markets are looking at three cuts total ahead.

There are plenty of Fed speakers this week. Williams, George, and Daly speak today. Yesterday, Rosengren said it’s too soon to tell whether the trade war and recent financial market turbulence will last long enough to hurt the US economy. Williams also took a similar tone yesterday. We would expect other Fed officials to take a similar wait and see approach.

UK reported mixed labor market data. Average weekly earnings were expected to tick down to 3.4% y/y, but instead eased to 3.2%. Ex-bonus earnings slowed a tick to 3.3% y/y, as expected. Unemployment was seen steady at 3.9% but fell to 3.8%, while employment rose 99k vs. 140k expected. While the labor market remains relatively strong, Brexit uncertainty is the name of the game.

Implied rates on short sterling futures continue to fall. The short sterling strip is pricing in the next hike by end-2020 while the next one is priced in for early 2023. Sterling remains heavy, trading first below $1.30 and then below the 200-day moving average near $1.2960. Cable is on track to test the April 25 low near $1.2865. After that is the February 14 low near $1.2775.

Sweden reported April CPI. Headline picked up slightly to 2.1% y/y while CPIF picked up slightly to 2.0% y/y, both as expected. Recall that at its April meeting, the Riksbank pushed the next hike out to end-2019 or early 2020 instead of sometime in H2 previously. The Riksbank added that “rate rises thereafter are expected to occur at a somewhat slower pace.” Recent data shouldn’t change this stance.

MSCI EM FX has given up over 75% of this year’s rally. It is on it track to test the January low near 1610 and then the December low near 1597. MSCI EM has giving up nearly two thirds of this year’s gain. The 62% retracement objective of that move comes in near 1004, and a break below would set up a test of the January low near 945.50.

Brazil COPOM minutes will be released. At last week’s meeting, COPOM saw balanced risks to inflation. We disagree and see upside risks, as IPCA inflation was 4.94% y/y in April. This was the highest since January 2017 and near the top of the 2.75-5.75% target range. Next COPOM meeting is June 19, and no change is expected then. However, we see risks of a hike materializing in H2.