Dollar Remains Resilient

  • China announced it will strengthen its oversight of intellectual property (IP) violations, one the biggest points of contention in the trade talks
  • It is a holiday shortened week in the US, but there are still some major data releases
  • After the three largest UK parties delivered their manifestos, we can be sure of one thing:  there will be more fiscal spending
  • German IFO survey today came in as expected
  • Local elections in Hong Kong gave an overwhelming majority to pro-democracy candidates; Japan-Korea tensions have eased but questions remain

The dollar is mixed against the majors at the start of a holiday week in the US.  Sterling and Stockie are outperforming, while yen and Nokkie are underperforming.  EM currencies are mostly weaker.  KRW and CNY are outperforming, while TRY and MYR are underperforming.  MSCI Asia Pacific was up 0.6% on the day, with the Nikkei rising 0.8%.  MSCI EM is up 0.4% so far today, with the Shanghai Composite rising 0.7%.  Euro Stoxx 600 is up 0.7% near midday, while US futures are pointing to a higher open.  10-year UST yields are up 2 bp at 1.79%, while the 3-month to 10-year spread has risen 2 bp to +21 bp.  Commodity prices are mixed, with Brent oil up flat, copper up 0.5%, and gold down 0.3%.

The dollar remains resilient.  Despite the lack of any top-tier US data, DXY has risen in five of the past six trading days.  Much has to do with the rest of the world, as the eurozone, UK, and Japan all reported weaker than expected November PMI readings last week.  Divergences in the growth outlook and interest rate differentials should remain in the dollar’s favor, as the Q4 slowdown is expected to be temporary.  We look for further dollar gains ahead.

China announced it will strengthen its oversight of intellectual property (IP) violations, one the biggest points of contention in the trade talks. The government will raise penalties on IP theft and even published official guidelines. On top of this, local media reported that the two sides are “very close” to closing the Phase One deal, according to local officials. We warn however that China officials have been more optimistic than the US, and we need to see confirmation from the US side.  Still, global equity markets have reacted positively.

 

AMERICAS

The US economy has slowed more sharply than expected in Q4.  The Atlanta Fed’s GDPNow model currently estimates Q4 GDP growth at 0.4% SAAR, up from 0.3% previously.  Elsewhere, the NY Fed’s Nowcast model now has Q4 growth at 0.71% SAAR, up from 0.39% previously.

It is a holiday shortened week in the US, but there are still some major data releases.  The Chicago Fed National Activity Index will be reported today.  As our faithful readers know, this is our favorite indicator for US recession risks.  A reading of -0.20 is expected after a lower than expected -0.45 reading for September.  If so, the 3-month moving average would improve to -0.17 from -0.24 in September.  This reading is consistent with an economy growing slightly below trend but is still far from the -0.7 recession-signaling threshold.  Note that a value of zero shows an economy growing at trend.  Positive values represent above trend growth, while negative values represent below trend growth.

Regional Fed manufacturing surveys for November continue this week.  Dallas Fed manufacturing index will be reported today (-3.8 expected), followed by the Richmond Fed Tuesday (6 expected).  Recall that stronger than expected Markit preliminary PMIs for November were reported Friday.  Fed Chair Powell speaks today.  WIRP shows zero chance of a cut then but rises as we move through 2020.  The Fed Funds futures market reflects this, as the January 2021 contract fully prices in one cut next year.

Canada reports September wholesale trade sales and a flat m/m reading is expected.  Recent data have come in slightly better than expected, but still signal weakness in the economy.  BOC delivered a dovish hold this month but Governor Poloz followed up with less dovish than expected comments last week, making it harder to determine the outlook for monetary policy.  Next policy meeting is December 4 and steady rates are expected.

 

EUROPE/MIDDLE EAST/AFRICA

After the three largest UK parties delivered their manifestos, we can be sure of one thing:  there will be more fiscal spending. Boris Johnson pledged to boost spending on healthcare and infrastructure while cutting taxes and promising no increase in VAT or national insurance. The Lib Dems would make a big push in the education, infrastructure and energy sectors, while increasing corporate tax and abolishing the capital gains allowance.  We covered the Labour manifesto here. Recent polls have remained stable, showing a Conservative advantage over Labour in the low single digits. Sterling remains rangebound between the $1.28-1.30 areas, but 1-month risk reversal are grinding lower, suggesting a greater demand for protection on sterling’s downside.

The German IFO survey today came in as expected, providing further evidence of green shoots for the country’s industry. The headline business climate survey was 95.0, while the expectations component was 92.1 and current assessment component was 97.9, all ticking higher from the previous month. However, the collateral effect of improving data may be to bolster domestic opposition towards fiscal stimulus despite growing calls for countercyclical action by the government.  GfK’s consumer confidence for Germany will be reported tomorrow (9.6 expected).  The euro continues to grind lower and is coming up on key support near $1.10.

 

ASIA

Local elections in Hong Kong gave an overwhelming majority to pro-democracy candidates. They took some 85% of the seats, compared to about 25% in the 2015 vote. The pro-government candidates took only 13% of the seats compared to 65% four years ago. District councilors have little power, but the result was still seen a sign of the extent of support the movement has gain amongst residents, especially given the record 71% turnout.  The results will not only add pressure on the government to give in to protestor’s demands, but it could also embolden the US congress to continue antagonizing China about the issue.

Tensions between Japan and Korea appear to have eased, but questions remain.  Reports suggested that the two sides had agreed to renew the expiring agreement (GSOMIA to share intelligence.  However, Korea later accused Japan of leaking the news and also of significantly changing the agreed upon text.  USD/JPY remains stuck near the middle of its recent 108-109.50 trading.  While we favor an upside breakout, we acknowledge that periodic bouts of trade tension will tend to boost the yen.  The 200-day moving average near 109 will likely provide some resistance as the pair edges higher today.