Dollar Rangebound as Markets Await Fresh Drivers

  • Last night’s prime time address by President Trump contained little of substance
  • US-China trade talks in Beijing reportedly ended on a positive note
  • US rates markets are starting to normalize; FOMC minutes will be released
  • UK parliamentary debate begins today ahead of the planned January 15 vote
  • Bank of Canada is expected to keep rates steady at 1.75%
  • National Bank of Poland is expected to keep rates steady at 1.5%; Mexico reports December CPI

The dollar is mostly softer against the majors within recent ranges as markets await fresh drivers.  The dollar bloc is outperforming, while Stockie and yen are underperforming.  EM currencies are mixed.  CNY and PHP are outperforming, while TRY and INR are underperforming.  MSCI Asia Pacific was up 1.4%, with the Nikkei rising 1.1%.  MSCI EM is up 1.3% so far today, with the Shanghai Composite rising 0.7%.  Euro Stoxx 600 is up 0.8% near midday, while US equity futures are pointing to a higher open.  The US 10-year yield is up 1 bp at 2.74%, the high for the year.  Commodity prices are mostly higher, with Brent oil up 1.7%, copper up 0.8%, and gold down 0.3%.

The dollar remains largely confined to recent ranges as markets await fresh drivers.  The euro remains stuck below $1.15, while sterling remains stuck below $1.28.  Global equity markets continue to rally on optimism regarding US-China trade talks as well as receding fears of an imminent US recession.  In this current risk-on environment, the foreign currencies are likely to remain bid.

Last night’s prime time address by President Trump contained little of substance.  He did not declare a national emergency, but instead spoke of a humanitarian crisis at the border.  Yet he did not offer any new way out of the current impasse.  As such, the partial shutdown looks set to continue.  Congressional leaders will reportedly meet with Trump today, and some press reports suggest cracks are appearing in the Republican ranks as the shutdown drags on.

US-China trade talks in Beijing reportedly ended on a positive note.  China will release a statement soon, but one spokesperson noted that the one-day extension shows both sides are serious about the talks.  Cleary, enough progress was made to warrant continued dialogue.  Later this month, USTR Lighthizer is expected to meet with Vice Premier Liu He to continue talks.

US rates markets are starting to normalize.  The US 10-year yield is currently near 2.74%, the highest since December 31, while the 2-year yield is currently near 2.59%, the highest since December 27.  The implied yield on the January 2020 Fed Funds futures contract is currently at 2.43%, the highest since December 26 and no longer pricing in a rate cut this year.  However, these moves have not been enough to lend the dollar support today.

The US economy remains firm.  The Atlanta Fed’s GDPNow model is tracking Q4 growth at 2.8% SAAR vs. 2.6% last week, while the New York Fed’s Nowcast model is still tracking 2.5% SAAR growth.  While growth is admittedly slowing sequentially from the 4.2% SAAR peak in Q2 2018, it remains above trend (~2%).

FOMC minutes will be released.  Before last Friday, we thought markets would be very interested in the minutes.  To what extent did the Fed discuss equity markets movements?  How concerned was the Fed about ongoing trade tensions?  After last Friday’s Powell speech, interest has likely ebbed.  Ahead of the minutes, Bostic, Evans, and Rosengren all speak and are likely to stick with Powell’s script.

UK parliamentary debate begins today ahead of the planned January 15 vote.  Opposition Labour said it would table a motion of no confidence in the government if the Brexit vote fails.  May’s efforts to win over DUP MPs appears to have failed.  Also, some Tory MPs defected and voted to restrict the government’s power to raise taxes in the event of a no-deal Brexit.  This was a symbolic defeat for May as she attempts to keep her party in line.

Bank of Canada is expected to keep rates steady at 1.75%.  Previously, the market was basically split between no hike and a 25 bp hike.  CPI rose 1.7% y/y in November, the lowest since January but within the 1-3% target range.  Data have been coming in soft of late, and so we see agree with the dovish shift in the markets.

USD/CAD traded at a new high for this move near 1.3665 on December 31 before reversing lower.  This week’s clean break below the 1.3355 area sets up a test of the December 3 low near 1.3160.  Looking further out, a break below the 1.3120 would set up a test of the October low near 1.2785.

National Bank of Poland is expected to keep rates steady at 1.5%.  CPI rose only 1.1% y/y in December, the lowest since December 2016 and further below the 1.5-3.5% target range.  The bank has pledged steady rates through 2019 but could extend it at this meeting if price pressures remain low.

Mexico reports December CPI, which is expected to rise 4.86% y/y vs. 4.72% in November.  Inflation continues to climb above the 2-4% target range, but a stable peso may allow the central bank to keep rates steady at the next policy meeting February 7.  November IP will be reported Friday and is expected to rise 0.1% y/y vs. 1.0% in October.