Dollar Remains Firm Ahead of US Holiday

  • The dollar continues to edge higher; markets are showing some signs of fatigue towards positive trade headlines
  • November Chicago PMI will be the data highlight; Fed releases its Beige Book report for the upcoming December 11 FOMC meeting
  • Brazilian central bank intervened in the FX market for the first time since last August
  • In the UK, it’s all about the polls now
  • Thailand manufacturing production was weaker than expected

The dollar is mostly firmer against the majors ahead of the US holiday.  Sterling and Loonie are outperforming, while euro and Swissie are underperforming.  EM currencies are mostly weaker.  ZAR and MYR are outperforming, while PLN and SGD are underperforming.  MSCI Asia Pacific was up 0.3% on the day, with the Nikkei rising 0.3%.  MSCI EM is up 0.3% so far today, with the Shanghai Composite falling 0.1%.  Euro Stoxx 600 is up 0.4% near midday, while US futures are pointing to a higher open.  10-year UST yields are flat at 1.74%, while the 3-month to 10-year spread has fallen 1 bp to +16 bp.  Commodity prices are mostly higher, with Brent oil up 0.2%, copper up 0.4%, and gold down 0.1%.

The dollar continues to edge higher.  After yesterday’s slight hiccup, DXY is up today for the sixth day in seven and is trading at the highest level since November 14.   The euro remains heavy and is poised to break below the key $1.10 area, while USD/JPY is up for the sixth straight day.  Liquidity will be a challenge for the rest of the week as many in the US head out for the Thanksgiving holiday.

Markets are showing some signs of fatigue towards positive trade headlines. Momentum is still positive and the relatively stable yuan rate suggests that the process remains on track, but only enough for modest gains in global equity markets. However, this is the perfect set up for a risk-off episode on brinkmanship-style negative headlines on trade, so best to stay on guard. The latest headlines about the deal came from Trump, who is allegedly “holding it up because it’s got to be a good deal.”  However, this came after he said earlier that the two sides are in “the final throes of a very important deal.”



During the North American session, November Chicago PMI will be the highlight.  Headline is expected at 47.0 vs. 43.2 in October, and we note that stronger than expected Markit preliminary PMIs for November were reported Friday.  Q3 GDP will be revised (1.9% SAAR expected), along with reports of October durable goods orders (-0.9% m/m expected), personal income and spending (0.3% m/m expected for both), pending home sales (0.2% m/m expected), and weekly jobless claims (221k expected).

The US economy has slowed more sharply than expected in Q4.  The Atlanta Fed’s GDPNow model will be updated today.  It currently estimates Q4 GDP growth at 0.4% SAAR, up from 0.3% previously, but data so far this week (trade, inventories) suggest an upward revision.  Elsewhere, the NY Fed’s Nowcast model now has Q4 growth at 0.71% SAAR, up from 0.39% previously.  It is revised every Friday.

The Fed releases its Beige Book report for the upcoming December 11 FOMC meeting.  Both Chair Powell and Governor Brainard painted a positive picture of the US economic outlook in remarks this week.  Like Powell, Brainard stressed that it would take a “material change in the outlook” to prompt her to reassess the appropriate rate path.  In other words, the Fed is on hold until the data say otherwise.  The Beige Book will likely highlight ongoing downside risks from the trade war but should otherwise echo the official line that the US economy remains solid.

The Brazilian central bank intervened in the FX market for the first time since last August, and it didn’t do much to stem real depreciation. The bank unexpectedly sold real spot in two auctions yesterday and the currency continued to hit record lows. The intervention led to some confusion given recent official comments suggesting the bank wasn’t yet ready to act and that the currency level wasn’t a problem. The BCB is probably just trying to inject some two-way risk here and lean against the cyclical and external factors driving the currency weaker. Even though we have a medium-term positive view on the real, we have turned neutral on the real at the moment as the cross currents on both sides of the flow will start to balance themselves out.

Mexico reports October trade data.  Banco de Mexico also releases its quarterly inflation report, followed by its minutes tomorrow.  Inflation remains near the 3% target while economic growth remains disappointing, and so we see rate cuts continuing well into 2020.  Next policy meeting is December 19 and another 25 bp cut to 7.25% is expected.



In the UK, it’s all about the polls now.  Tonight at 10 PM London time, YouGov will release details of its so-called MRP poll.  This poll uses a bigger sample size that is meant to drill down and predict seat-by-seat results of the December 12 election.  The same poll in 2017 correctly predicted that Theresa May would lose her majority even as other surveys showed her well ahead of the opposition.  Sterling will benefit from signs that that the Tories are opening up a bigger lead but will suffer if chances of another hung parliament rise.  Stay tuned.



Thailand manufacturing production was weaker than expected as the impact of the trade war continues to hurt the entire region.  Output contracted -8.45% y/y in October vs. -5.05% expected, while September was revised down to -5.06% y/y.  Afterwards, officials cut its forecasts for manufacturing output to -3.8% y/y this year from a range from 0-1% growth previously.  The forecast for 2020 sees 2-3% growth.  Bank of Thailand next meets December 18 and chances of another cut then are rising.