Dollar Remains Bid as US Returns From Holiday

  • The US bond market reopens today and we suspect US rates will be the market focus again
  • Italy remains in the crosshairs as the war of words continues
  • Markets seem to be more optimistic about a Brexit compromise ahead of some key meetings
  • The yen has outperformed in recent days and has resisted the dollar rally
  • Press reports suggests the Trump administration is concerned about the yuan’s recent weakness
  • Hungary September CPI rose 3.6% y/y; Mexico September CPI is expected to rise 5.0% y/y

The dollar is mostly firmer against the majors as the US returns from holiday and US rates edge higher.  The yen and Swissie are outperforming, while the euro and sterling are underperforming.  EM currencies are broadly weaker.  CNY and PHP are outperforming, while ZAR and MXN are underperforming.  MSCI Asia Pacific was down 0.9%, with the Nikkei falling 1.3% after reopening from holiday.  MSCI EM is down 0.3% so far today, with the Shanghai Composite rising 0.2%.  Euro Stoxx 600 is down 0.4% near midday, while US futures are pointing to a lower open.  The US 10-year yield is up 1 bp at 3.24%.  Commodity prices are mostly higher, with Brent oil up 0.9%, copper up 0.6%, and gold down 0.1%.

The US bond market reopens today and we suspect US rates will be the market focus again after a day off Monday.  The 10-year yield made a new high near 3.26% but has since stabilized near 3.25%.  The Fed’s Kaplan, Harker, and Williams speak today.  No US data today ahead of the key PPI reading tomorrow and CPI on Thursday.  Global equity markets remain under pressure, but today it’s more of a slow simmer than a boil.  However, it’s clear that the US rates story has started to impact equity markets.

Italy remains in the crosshairs as the war of words continues.  Yesterday, Italian Deputy Prime Minister Salvini said Europe’s enemies are Jean-Claude Juncker and the EU bureaucracy in Brussels.  He later said that the tone of debate needs to “go down a notch.”  Today, local press is reporting that Italy’s Parliamentary Budget Office is likely to reject the government’s draft budget.  The committee head will speak later today.

Italian bonds remain under pressure, with the 10-year yield up 14 bp to 3.70%, the highest since February 2014.  The 2-year yield is up 10 bp to 1.62%, the highest since June.  The euro feels heavy but has held up relatively well.  It is now breaking below this past week’s low near $1.1460, and a test of the August low near $1.13 seems likely soon.

Markets seem to be more optimistic about a Brexit compromise ahead of some key meetings.  UK Brexit Secretary Raab appears before parliament today.  EU ambassadors will hold a pre-summit meeting in Luxembourg Friday ahead of the full EU summit on October 17.  Meanwhile, the BOE warned that the EU has made “limited progress” in addressing the financial risks of a no-deal hard Brexit.

Sterling is holding above $1.30 but feels heavy.  Break below the figure would set up a test of the September low near $1.2785.  Some intermediate support would likely be seen at last week’s low near $1.2920.   Sterling has outperformed the euro with the help of Italy, and so EUR/GBP has fallen to .8767, a level not seen since June.  The April low near 0.8621 is likely to be tested.

The yen has outperformed in recent days and has resisted the dollar rally.  After touching a new cycle high near 114.55 last Thursday, USD/JPY has dropped like a rock and tested the 113 area.  It has stabilized a bit after support held at the figure.  A break below 112.50 warns of a deeper correction, while a break below 112 would set up a test of the September low near 110.40.  Japan reported August current account data overnight at an adjusted JPY1.43 trln vs. JPY1.52 trln expected.

Press reports suggests the Trump administration is concerned about the yuan’s recent weakness.  This comes a week ahead of the Treasury Department’s semiannual FX report to Congress next week.  Treasury Secretary Mnuchin is reportedly facing pressure from the White House to formally designate China a currency manipulator in the report.  From the April report: “In this Report, the Monitoring List comprises China, Japan, Korea, Germany, Switzerland, and India, the latter being added to the Monitoring List in this Report.”

Yet we note that CNY is down only -6% YTD and is in the middle of the EM pack.  Indeed, INR and IDR are both doing worse than CNY at -14% and -11%, respectively.  So is PHP at -8% YTD.  In our view, CNY weakness is basically along the lines of wider EM FX.  We take Chinese officials at their word that they will not seek a weaker currency.  The devaluation in the summer of 2015 led to widespread and destabilizing capital outflows from China, and policymakers don’t want to see a repeat of that.

Speaking of surplus countries, Germany reported August trade and current account data.  The trade surplus was EUR17.2 bln vs. EUR16.2 bln expected, while the current account surplus was EUR15.3 bln vs. EUR16.2 bln expected.  Exports contracted -0.1% m/m while imports contracted -2.7% m/m.  Theory tells us that countries with high savings rates tend to run large external surpluses.  Saving less is something that the US really cannot dictate to others.

Hungary September CPI rose 3.6% y/y vs. 3.5% expected and 3.4% in August.  If so, this would be the highest since January 2013 and nearing the top of the 2-4% target range.  The central bank has started to talk about exiting unconventional policies, but we expect it will remain cautious.  Next policy meeting is October 16, no change is expected then.

Mexico September CPI is expected to rise 5.0% y/y vs. 4.9% in August.  Banco de Mexico delivered a hawkish hold last week, with one voting for an immediate hike.  The next policy meetings are November 15 and December 20, and what happens then will depend in large part on how the peso is trading.  August IP will be reported Friday, which is expected to rise 0.9% y/y vs. 1.3% in July.