Dollar Remains Soft Ahead of Holiday

  • The dollar continues to slide, but let’s keep things in perspective
  • During the North American session, there will only be minor US data reported
  • Likely candidates to replace outgoing Labour leader Corbyn suggest the party has learned nothing from the disastrous election
  • South Africa reported November money and private sector credit; Turkey reported November trade
  • Vice Premier Liu will travel to the US this Saturday to sign the Phase One trade deal; China reported official December PMIs
  • Singapore Prime Minister Lee said the economy managed to avoid recession in 2019

The dollar is mostly weaker against the majors ahead of the holiday.  Sterling and Stockie are outperforming, while Kiwi and euro are underperforming.  EM currencies are mostly firmer.  ZAR and IDR are outperforming, while INR and TRY are underperforming.  MSCI Asia Pacific ex-Japan was down 0.5% on the day, with Japan closed for the rest of this week.  MSCI EM is down 0.3% so far today, with the Shanghai Composite rising 0.3%.  Euro Stoxx 600 is down 0.1% near midday, while US futures are pointing to a flat open.  10-year UST yields are up 1 bp at 1.89%, while the 3-month to 10-year spread is flat at +36 bp.  Commodity prices are mixed, with Brent oil up 0.3%, copper down 0.9%, and gold up 0.5%.

The dollar continues to slide.  DXY is down for the seventh straight day and has traded below the December 12 low near 96.588.  A clean break sets up a test of the June 25 low near 95.843.  The euro broke above the December 13 high near $1.12 yesterday but there has not yet been any significant follow-through.  A clean break above $1.1210 sets up a test of the June 25 high near $1.1410.  Sterling has recouped nearly half of its post-election sell-off.  The next major retracement objectives from that drop come in near $1.3210 (50%) and $1.3280 (62%).  USD/JPY had been stuck near the 109.50 area but finally succumbed and fell to 108.75, the lowest since December 12.  The pair is nearing the December 9 low near 108.45 and is on track to test the November 1 low near 107.90.

Still, let’s keep things in perspective.  For all of 2019, the dollar is mixed against the majors.  Best performers are CAD (up 4.7% YTD) and GBP (up 3.3%), while the worst are SEK (-4.9% YTD) and EUR (-2.2%).  Against EM FX, the dollar was mostly firmer this year.  Best performers are RUB (up 12.5% YTD) and THB (up 8.6%), while the worst are ARS (-37% YTD) and TRY (-11.1%).  Our point is simply that despite this recent string of losses, the greenback has had a solid year.  While we retain our call for a firmer dollar in 2020, we acknowledge that is has suffered quite a bit of technical damage this month.

 

AMERICAS

During the North American session, there will only be minor US data reported.  October S&P CoreLogic house prices and December conference board consumer confidence (128.4 expected) come out.  There are no Fed speakers today but after the New Year’s holiday tomorrow, many speakers will hit the road.

 

EUROPE/MIDDLE EAST/AFRICA

So far, the likely candidates to replace outgoing Labour leader Corbyn suggest the party has learned nothing from the disastrous election this month.  Party chairman Ian Lavery is reportedly preparing to run against Rebecca Long- Bailey and Clive Lewis.  All three are from the far-left Corbyn wing of Labour.  If a more moderate leader is not chosen, we suspect Labour will find itself in the political wilderness for quite some time.

South Africa reported November money and private sector credit data.  Both were expected to pick up slightly but instead, both came in below expectations credit slowed.  The overall economy remains weak while inflation has eased to 3.6% y/y in November, the lowest since February 2011 and near the bottom of the 3-6% target range.  Next central bank meeting is January 16.  If weakness persists, we think a 25 bp cut to 6.25% is likely then.

Turkey reported November trade data.  The -$2.23 bln deficit was slightly larger than expected, so the 12-month total rose for the fourth straight month to -$29.54 bln.  This is the biggest total deficit since May, as exports stagnate and import demand picks up.  Yet the current account remains in surplus.  December CPI will be reported Thursday and is expected to rise 11.46% y/y vs. 10.56% in November.  If so, inflation would be the highest since August and further above the 3-7% target range.  Next central bank meeting is January 16 and steady rates are likely then.

 

ASIA

Official China press reported that Vice Premier Liu will travel to the US this Saturday to sign the Phase One trade deal.  Liu and his delegation will reportedly stay in Washington DC until the middle of next week.  We suspect the two sides will try to agree on a road map going forward for Phase Two, which is supposed to start immediately after Phase One has been finalized.  Here, the going gets much more difficult as the more contentious issues (including China subsidies) will come into focus.

China reported official December PMI readings.  Manufacturing PMI came in a tick higher than expected and was steady at 50.2, while non-manufacturing PMI fell more than expected to 53.5 from 54.4 in November.  Caixin reports its December manufacturing PMI Thursday, which is expected to fall a couple ticks to 51.6.  President Xi will deliver his annual New Year’s Eve speech shortly, and we suspect he will tout the Phase One trade deal whilst warning of further tensions ahead.

Singapore Prime Minister Lee said the economy managed to avoid recession in 2019 but admitted growth was weaker than desired.  Lee warned that US-China tensions are likely to continue, and promised that the upcoming budget will be supportive for the economy.  While we think the MAS is likely to ease monetary policy further at its semiannual policy meeting in April, Lee’s comments suggest Singapore (like much of the world) will rely more on fiscal stimulus going forward.  Advance Q4 GDP data will be reported Thursday, with growth expected to pick up slightly to 0.8% y/y from 0.5% in Q3.