Dollar Mixed on Profit-Taking Ahead of the Weekend

  • Today brings some profit-taking on long dollar positions ahead of the weekend
  • To be clear, the divergence theme is alive and kicking; next week brings the FOMC meeting
  • The US data highlight today will be advance Q1 GDP
  • President Xi pledged that China would not devalue the yuan; US-China trade talks inch closer to a deal
  • Japan reported March IP, retail sales, unemployment, and April Tokyo CPI; markets are now closed until May 6 for “Super Golden Week.”
  • Sweden reported firm March retail sales
  • Russia and Colombia central banks expected to remain on hold

The dollar is mixed against the majors as some profit-taking sets in ahead of the weekend. Kiwi and Stockie are outperforming, while yen and Loonie are underperforming. EM currencies are mixed. THB and INR are outperforming, while MXN and RUB are underperforming. MSCI Asia Pacific was down 0.1%, with the Nikkei falling 0.2%. MSCI EM is flat so far today, with the Shanghai Composite falling 1.2%. Euro Stoxx 600 is flat near midday, while US futures are pointing to a lower open. 10-year UST yields are down 1 bp at 2.52%, while the 3-month to 10-year spread has flattened 1 bp to 12 bp. Commodity prices are mixed, with Brent oil down 1.6%, copper up 0.8%, and gold up 0.3%.

Today brings some profit-taking on long dollar positions ahead of the weekend. DXY was up three straight days and made a new cycle high yesterday but it is softening a bit today. The euro has been unable to extend yesterday’s move lower and is stabilizing, though it feels heavy. We believe the dollar rally will continue next week, though there will likely be some corrective days here and there.

To be clear, the divergence theme is alive and kicking. So far this week, five central banks have met and all five delivered dovish holds. Two more central banks meet today (see below). While they are likely to present a more balance outlook for rates, they may take a softer tone and highlight risks to growth.

Next week brings the FOMC meeting. While it is likely to adhere to its mantra of “patience” and “flexibility,” we do not believe anything that’s newly dovish will emerge. If anything, the Fed may sound more upbeat on the economy given that it has bounced back nicely from the soft spot at the beginning of the year.

The US data highlight today will be advance Q1 GDP. Consensus sees 2.3% SAAR growth, up from 2.2% SAAR in Q4. For the last three years and in four of the past five, Q1 growth has been the slowest of the quarters. Let’s see if that holds or breaks this year.

The Atlanta Fed’s GDPNow model is now tracking 2.7% SAAR for Q1, down from 2.8% previously. Elsewhere, the New York Fed’s Nowcast model is tracking 1.4% SAAR for Q1 and 1.9% for Q2. Both models have seen their forecasts rise sharply in recent weeks. It’s worth noting that market consensus is currently 2.3% SAAR, which is close to the average of the two models.

President Xi pledged that China would not devalue the yuan. He added that policymakers will keep the exchange rates basically stable at reasonable levels. Perhaps he was responding to market concerns or maybe he was giving a nod to the US, which has brought up this topic in the trade talks. Either way, the PBOC seemed to underscore this with a much stronger than expected CNY fix today.

Speaking of US-China trade talks, reports suggest the two sides are close. A deal seems likely in Q2, but whether it is in May or June has yet to be determined. In the same speech today, Xi spent a fair amount of time talking about structural reform efforts in China, another sticking point for the US. On the other hand, other reports suggest the US is considering compromising on the issue of pharmaceutical patent protection. All the signs of a deal are cropping up.

Japan reported March IP, retail sales, unemployment, and April Tokyo CPI. IP contracted -0.9% m/m vs. expectations for a flat reading, while unemployment ticked up to 2.5%. Retail sales rose 0.2% m/m vs. expectations for a flat reading. Elsewhere, headline Tokyo CPI rose 1.4% y/y vs. 1.1% expected, while ex-fresh food rose 1.3% y/y vs. 1.1% expected. Both accelerated from March and suggests upside risks to national CPI that will be reported May 24.

Yet the real sector weakness is disappointing. IP weakness was likely driven by the export sector. Retail sales in Japan is the big question mark given the planned consumption tax hike in October. We are likely see a boost in sales ahead of that tax, as consumers frontload purchases to avoid paying it, only to see sales slump afterwards.

Markets are still scratching their heads regarding the BOJ statement. Forward guidance was set at spring 2020 even as new forecasts for FY2021 inflation remain below the 2% target. Why not extend explicit forward guidance to FY2021? This conundrum coupled with risk-off sentiment yesterday prevented USD/JPY from seeing any follow-through buying on the break above 112.

Japan markets are now closed until May 6 for the “Super Golden Week.” What is normally a three-day holiday will be stretched to six this year. Markets are now closed until May 6, and many market participants are already fretting about the thin market conditions and the possibility of another dollar/yen flash crash. The one seen earlier this year took place on January 3, a bank holiday that followed a three-day holiday period from December 31-January 2.

Sweden reported firm March retail sales. Sales were expected to rise 0.2% mm but instead rose 0.5%. February gain was revised higher to 0.3%. Yet the Riksbank was clearly concerned about growth with its dovish tilt this week. A lot can happen between now and year-end, when the bank expects to hike again. Next policy meeting is July 3, no change is expected then.

Central Bank of Russia is expected to keep rates steady at 7.75%. CPI rose 5.3% y/y in March, above the 4% target and the highest since December 2016. Still, markets are looking for rate cuts to start in H2 and will be looking to Governor Nabiullina to offer some hints on the timing. With the ruble coming under pressure with the rest of EM, the central bank has leeway to keep rates steady for now.

Colombia central bank is expected to keep rates steady at 4.25%. CPI rose 3.21% y/y in March, the highest since November and in the top half of the 2-4% target range. However, considering heightened global uncertainty, we believe the central bank will remain on hold for the time being. Consensus sees the first hike in Q3 but that will depend in large part on external factors.