Dollar Rally Continues Ahead of ADP Report

  • ADP releases its estimate of private sector jobs and +190k is expected
  • The Fed releases its Beige Book report for the upcoming March 20 FOMC meeting
  • Bank of Canada is widely expected to keep rates steady at 1.75%
  • Brexit talks have reportedly broken down (again)
  • The OECD cut its global growth forecast (again)
  • Turkey central bank kept rates steady at 24.0%, as expected; National Bank of Poland is expected to keep rates steady at 1.5%

The dollar is broadly firmer against the majors ahead of the ADP jobs report.  Yen and euro are outperforming, while Aussie and Nokkie are underperforming.  EM currencies are mostly weaker.  PHP and INR are outperforming, while MYR and KRW are underperforming.  MSCI Asia Pacific was flat, with the Nikkei falling 0.6%.  MSCI EM is up 0.2% so far today, with the Shanghai Composite rising 1.6%.  Euro Stoxx 600 is flat near midday, while US equity futures are pointing to a lower open.  10-year UST yields are down 1 bp at 2.71%.  Commodity prices are mostly lower, with Brent oil down 0.1%, copper flat, and gold down 0.2%.

Strong US data yesterday helped keep the dollar bid.  December homes sales rose 3.7% m/m vs. -8.7% expected, while February ISM non-manufacturing PMI came in at 59.7 vs. 57.4 expected.

That momentum has carried over today, with DXY up for a fifth straight day.  For EUR, the break below $1.1305 yesterday sets up a test of the February 15 low near $1.1235.  Sterling   remains vulnerable to negative Brexit news (see below), while USD/JPY has so far been unable to make a clean break above 112.  Perhaps more strong US data will prove to be the deciding factor.

ADP releases its estimate of US private sector jobs and +190k is expected.  We already have two pieces of the February jobs puzzle and they are conflicting.  Weekly initial jobless claims number for the survey week (the one that includes the 12th of the month) fell to 216k (later revised to 217k).  This is the lowest reading since the week of January 18 (last month’s survey week) when claims came in at 200k.  On the other hand, the jobs component in February ISM fell from 55.5 to 52.3.

The Fed releases its Beige Book report for the upcoming March 20 FOMC meeting.  The report should present a cautious, balanced picture of the US economy.  There are also some Fed speakers today, including Williams (voter) and Mester (non-voter).

US December trade will be reported today.  It’s worth noting that despite all the various tariffs and trade measures taken by Trump, the total deficit continues to widen.  The 12-month total through November was -$883 bln, the largest on record.  This doesn’t mean our trading partners are taking advantage of us.  Rather, the deficit reflects relative growth rates.  The US is growing faster than many of our trading partners, driving up imports and the deficit.

Bank of Canada is widely expected to keep rates steady at 1.75%.  Last week, headline inflation slumped to 1.4% y/y in January from 2.0% in December, while Q4 GDP growth slowed to 0.4% annualized from 2.0% in Q3.  Canada reports February Ivey PMI and December trade today as well.  February jobs data will be reported Friday.  Jobs are expected to shrink -2.5k vs. +66.8k in January.

Brexit talks have reportedly broken down (again).  As usual, Prime Minister May is finding it impossible to meet the demands of both her government and the EU.  Despite a softer tone of late, the DUP said it can’t back her deal in its current form and said that only a time limit on the Irish backstop would be acceptable.  The EU has so far refused to budge on this matter.  May’s chief whip told the cabinet that he isn’t confident of getting a deal passed next week.

The OECD cut its global growth forecast (again).  It noted that global growth continues to lose momentum, adding that “Growth outcomes could be weaker still if downside risks materialize or interact.”   The forecast for eurozone growth was cut to 1.0% from 1.8%, with Germany cut to 0.7% from 1.6%.  The OECD noted that Brexit posed a persistent threat of “sizeable negative spillovers” to other countries whilst cutting its UK growth forecast to 0.8% from 1.4%.

Australia Q4 GDP came in weaker than expected.  Growth was 2.3% y/y vs. 2.6% consensus and 2.8% in Q3.  This was the weakest since Q2 2017 and feeds into market expectations of an RBA rate cut this year.  AUD is trading at its lowest level since January 4 and has given up around half of this year’s gains.  A break below the .6955 area is needed to set up a test of the January 3 low near .6740.

Turkey central bank kept rates steady at 24.0%, as expected.  It said upside risks to inflation still prevail, adding that further tightening will be delivered if needed.  February CPI was reported Monday at 19.67% y/y vs. 19.90% expected and 20.35% in January.  However, the 3-7% inflation target range has become irrelevant.  The bank was likely under some pressure to cut rates but can’t do so now given recent lira weakness.

National Bank of Poland is expected to keep rates steady at 1.5%.  CPI rose 0.9% y/y in February, below the bottom of the 1.5-3.5% target range.  The central bank has started to raise the possibility of a rate cut.  However, recently announced fiscal stimulus are likely to do the heavy lifting for now.