Dollar Rally Continues as Markets Await Fresh Drivers

  • The dollar rally remains on track even as markets calm after yesterday’s volatile session
  • Final February services and composite PMI readings for the eurozone were reported
  • UK reported the last of the February PMI readings
  • China lowered its growth target for this year at the annual National People’s Conference
  • Japan reported February services and composite PMIs
  • Reserve Bank of Australia kept rates steady, as expected; same for Bank Negara
  • Philippines CPI rose 3.8% y/y vs. 4.0% expected as a new central bank governor was chosen

The dollar is mostly firmer against the majors as markets await fresh drivers.  Stockie and euro are outperforming, while the dollar bloc is underperforming.  EM currencies are mixed.  ZAR and INR are outperforming, while PHP and RON are underperforming.  MSCI Asia Pacific was down 0.2%, with the Nikkei falling 0.4.  MSCI EM is up 0.2% so far today, with the Shanghai Composite rising 0.9%.  Euro Stoxx 600 is down 0.2% near midday, while US equity futures are pointing to a higher open.  10-year UST yields are up 1 bp at 2.74%.  Commodity prices are mixed, with Brent oil down 0.2%, copper up 0.8%, and gold down 0.1%.

The dollar rally remains on track even as markets calm after yesterday’s volatile session.  DXY has risen five straight days and has retraced nearly two thirds of the February drop.  Sterling is leading the move lower today as USD/JPY is having trouble breaking above 112 and EUR is finding support just above the $1.13 figure.  Global equity markets are slightly softer but appear to be stabilizing.

The North American session may provide some fresh drivers.  The US reports December new home sales, January budget data, and February non-manufacturing PMI.  Kashkari and Barkin both speak, but neither are voters this year.

Final February services and composite PMI readings for the eurozone were reported.  Headline services rose to 52.8 from 52.3 preliminary, pushing the composite PMI up to 51.9 from 51.4.  Both readings improved for Germany, France, and Italy, while Spain saw both readings worsen.  The improved services data is certainly welcome after final manufacturing PMI was so disappointing, as Spain fell to 49.9 from 52.4 in January and joined the sub-50 club of Italy (47.7) and Germany (47.6).

Still, the eurozone data do nothing to really change the fundamental picture ahead of Thursday’s EC meeting.  A dovish hold is widely expected, with lowered staff forecasts seen.  The ECB is likely to give a broad outline for its next TLTRO and may also adjust its forward guidance for a rate hike by pushing it out into 2020.

UK reported the last of the February PMI readings.  Last Friday, manufacturing PMI came in lower than expected at 52.0, while construction PMI came in lower than expected Monday at 49.5, the first sub-50 reading since March 2018.  Today, the UK reported services PMI at 51.3 (49.9 expected), which helped pull up the composite PMI to 51.5 (50.1 expected).  Next BOE meeting is March 21.  With Brexit uncertainty continuing, the bank will remain on hold.

China lowered its growth target for this year at the annual National People’s Conference.  Growth is seen between 6.0-6.5% vs. “about” 6.5% last year.  China reports February trade Friday, while February CPI and PPI will come out Saturday morning local time.  The rise in the Caixin manufacturing PMI in February suggests some impact is being felt from stimulus but more evidence of a turnaround is needed.

Japan reported February services and composite PMIs.  Services PMI rose to 52.3 from 51.6 in January, but the composite PMI still fell to 50.7 from 50.9 in January.  Recent yen weakness should take some pressure off the BOJ to do anything near-term.  Instead, the bank can hopefully keep its power dry until the consumption tax hike this fall.  Next BOJ meeting is March 15 and no change is expected then.

Reserve Bank of Australia kept rates steady, as expected.  After last month’s extremely dovish turn, we didn’t expect much to change this month.  However, the bank reinforced that dovish message by noting that household consumption is the major uncertainty due to weak growth in income and falling house prices in some cities.  Q4 GDP will be reported Wednesday, with growth expected to slow to 2.6% y/y from 2.8% in Q3.  January trade (AUD2.75 bln surplus expected) and retail sales (0.3% m/m expected) will be reported Thursday.

Bank Negara Malaysia kept rates steady at 3.25%, as expected.  It noted inflation is expected to remain low and acknowledged downside risks to the economy.  CPI fell -0.7% y/y in January.  While the bank does not have an explicit inflation target, low prices should allow it to contemplate a rate cut this year if the economic outlook worsens.

Philippines CPI rose 3.8% y/y vs. 4.0% expected as a new central bank governor was chosen.  Budget Secretary Diokno was picked by President Duterte to take over the bank after the death of previous Governor Espanilla last month.  The peso reacted badly to this overtly political choice, who as Budget Secretary advocated fiscal stimulus.  BSP halted its tightening cycle and with inflation back in the 2-4% target range, it will likely start an easing cycle sooner rather than later under Diokno.