Dollar Rally Back on Track

  • Growth concerns continue to reverberate across global markets
  • The dollar rally back on track after a hiccup from the weaker than expected Chicago PMI
  • This is a big data week for the US; the US economy remains strong yet the US 3-month to 10-year curve remains inverted
  • Sterling is on the backfoot as PM Boris Johnson steps up his confrontational approach
  • Turkish CPI surprised on the upside at 12.15% y/y, putting the central bank in an even harder position
  • Chinese equity markets re-opened after the extended closure to the tune of a near 8% decline

The dollar is broadly firmer against the majors as the new week begins.  The dollar bloc is outperforming, while Nokkie and sterling are underperforming.  EM currencies are mostly weaker.  ZAR and THB are outperforming, while CNY and IDR are underperforming.  MSCI Asia Pacific was down 0.8% on the day, with the Nikkei falling 1.0%.  MSCI EM is down 0.6% so far today, with the Shanghai Composite down 7.7% after China markets reopened after the extended holiday.  Euro Stoxx 600 is flat near midday, while US futures are pointing to a higher open.  10-year UST yields are up 3 bp at 1.53%, while the 3-month to 10-year spread is up 2 bp but remains inverted at -1 bp.  Commodity prices are mixed, with Brent oil down 0.1%, copper up 0.5%, and gold down 0.6%.

Growth concerns continue to reverberate across global markets.  Oil has been hit particularly hard, with Brent gapping lower today to trade at the lowest level since January 2019 before rebounding.  Charts point to a test of the December 2018 low near $50.  Reports suggest OPEC+ is mulling an emergency meeting to discuss a possible response.  Potential dates are February 8-9 and February 14-15, while the next regular meeting is scheduled for March 5-6.

The dollar rally is back on track after a hiccup from the weaker than expected Chicago PMI report last week.  DXY has clawed back over half of Friday’s loss and needs to break above the 97.869 to set up a test of last week’s high near 98.188.  The euro was turned back after a failed test of the $1.11 area, as was sterling its test of the $1.32 area.  This week’s data should confirm our view that the US economy remains in strong shape and that any notions of Fed easing are overdone.  We remain bullish on the dollar.

 

AMERICAS

This is a big data week for the US.  Ahead of the Friday jobs report, January ISM manufacturing PMI and auto sales start the ball rolling today.  After the big miss for Chicago last week (42.9 vs. 48.9 expected), the ISM reading will be of great interest.  ISM manufacturing PMI is expected to rise to 48.5 from a revised 47.8 (was 47.2) in December.  Auto sales will also be reported today and are expected to rise to a 16.8 mln annualized rate from 16.7 mln in December.  Bostic speaks today.

The US economy remains strong.  Advance Q4 GDP came in last week at 2.1% SAAR and that strength appears to be carrying over into 2020.  The Atlanta Fed’s GDPNow model estimates Q1 GDP growth at 2.7% SAAR, while the NY Fed’s Nowcast model estimates Q1 GDP growth at 1.6% SAAR.  While these early reads are far apart and subject to significant revisions, we are clearly far from recession and the Fed is right to maintain steady rates for now and assess how the outlook unfolds in 2020.

The US 3-month to 10-year curve remains inverted.  The US economy is nowhere near recession and we think the bond market is wrong here.  Of all the major economies, the US is probably the best-positioned in terms of impact from the coronavirus.  Yet implied rates now suggest a much higher chance of the Fed easing this year which, in our view, has gone way too far.  Bloomberg WIRP now suggests a full cut is priced in by the July 29 meeting and a second full cut priced in by the January 2021 meeting.

 

EUROPE/MIDDLE EAST/AFRICA

Sterling is on the backfoot as PM Boris Johnson steps up his confrontational approach to trade talks with the EU.  Over the weekend, he threatened to walk away from the talks if there is no alternative to accept a policy of unifying regulations with the bloc (a.k.a. level playing field). Boris is also touting an Australia-like agreement, which many view as a slightly softer proxy for not having any substantial deal since it will rely on WTO rules in most areas.  We view this as bluster and brinksmanship.  Still, we see continued softness in the data, along with an eventual BOE rate cut this year.  Final January manufacturing PMI came in at 50.0 vs. 49.8 preliminary but had little impact.  This will be followed by construction PMI Tuesday and final services and composite readings Wednesday.

Turkish CPI surprised on the upside at 12.15% y/y, putting the central bank in an even harder position. This is the third consecutive month of acceleration for both the core and headline readings. It seems to be a matter of time until pressure from President Erdogan to bring rates (11.25% now) to single digits comes into conflict with the reality of stubbornly sticky inflation. Recall that the central bank released its inflation report last week in which it kept its year-end inflation forecast at 8.2% and 5.4% for end-2021. More easing is coming, but it will rekindle questions about the central bank’s credibility and spill over into the lira. Swap rates are up some 30 bp across the 1-year horizon, but the lira is unchanged.

Final eurozone January manufacturing PMI rose a tick from the flash reading to 47.9.  Spain and Italy picked up significantly from December to 48.5 and 48.9, respectively, while France and Germany both rose a tick from the flash readings to 51.1 and 45.3, respectively.  Final services and composite readings will be reported Wednesday.  Eurozone data out last Friday were unequivocally weak and call into question the dubious assertion that growth will pick up significantly in 2020.

 

ASIA

Chinese equity markets re-opened after the extended closure to the tune of a near 8% decline, along with heavy declines in commodity futures. These losses came against the backdrop of an emergency stimulus package announced by the Chinese government over the weekend. China’s London-based ETF is up 1.3%, suggesting that, despite the declines in the local market, the situation is stabilizing. Some of the key points from the Chinese stimulus measures include 1) cutting the reverse repo rate by 10 bps; easing of other rates likely soon, 2) Injecting liquidity equivalent to $21.4 bln via 7- and 14-day reverse repos, 3) discounted lending for certain sectors, and 4) urging banks to provide credit to support companies and individuals affected

On the FX side, the yuan depreciated 1.2% on its first day of trading to RMB7.023. The pair is back to December levels, unwinding much of the post-trade deal gains. Caixin manufacturing PMI was released today (51.1, as expected), but was ignored as the survey was conducted before impact of the virus was felt.