Dollar Remains Under Broad-based Pressure

  • The dollar remains under some pressure but let’s keep things in perspective
  • JOLTS data and Fed Vice Chair Clarida speech are the North American highlights
  • UK Prime Minister May will stop in Berlin and Paris today on the way to the EU summit in Belgium tomorrow
  • Global trade tensions are likely to remain high no matter what happens with China
  • Oil continues to make new highs for this move as supply concerns are rising
  • Voters in Israel elect the next government and polls suggest it’s a toss-up
  • HKD traded at its strongest level since January 31; Mexico March CPI is expected to rise 4.01% y/y

The dollar is broadly weaker against the majors for the second straight day.  Aussie and Stockie are outperforming, while Swissie and euro are underperforming.  EM currencies are broadly firmer.  ZAR and TRY are outperforming, while HUF and RON are underperforming.  MSCI Asia Pacific was up 0.4%, with the Nikkei rising 0.2%.  MSCI EM is up 0.6% so far today, with the Shanghai Composite down 0.2%.  Euro Stoxx 600 is up 0.3% near midday, while US futures are pointing to a flat open.  10-year UST yields are down 1 bp at 2.51%, while the 3-month to 10-year spread is steady at 11 bp.  Commodity prices are mostly higher, with Brent oil flat, copper up 0.7%, and gold up 0.4%.

The dollar remains under some pressure but let’s keep things in perspective.  DXY has barely retraced a third of the March-April rally, and we won’t get concerned about our bullish dollar call until it breaks below 96.40.  Looking at the individual currencies, EUR has also retraced about a third of that same move, as has JPY.  GBP is lagging but has its own set of baggage.

During the North American session, the only US report is February JOLTS data.  Headline number of 7550 is expected, down from 7581 in January but barely below the record high of 7626 from November.  This series has been signaling a much tighter job market this past year, yet wage pressures have yet to appear.

Fed Vice Chair Clarida speaks today.  Fed officials have been pushing back forcefully against ideas of a rate cut this year, but the market has not yet come around.   Yes, the yield curve (3-month to 10-year) has turned back positive after brief inversion, but the Fed Funds futures strip still shows that the market is still pricing in solid odds of a rate cut in 2019 followed by another one in 2020.

UK Prime Minister May will stop in Berlin and Paris today on the way to the EU summit in Belgium tomorrow.  She will meet with Chancellor Merkel and President Macron.  Reports suggest France is shaping up to be the most skeptical with regards to granting another Brexit delay.

We have warned that global trade tensions are likely to remain high no matter what happens with China.  The Trump administration is proposing countervailing tariffs on a wide range of European goods totaling $11 bln under Section 301 trade law in response to EU subsidies for Airbus.  The USTR noted that the World Trade Organization has found that subsidies to Airbus has caused “adverse effects to the United States.”  And don’t forget the European auto issue continues to simmer.

Elsewhere, the US has taken aim at Mexico again.  While the tensions are ostensibly stemming from the border situation, Trump has threatened tariffs on Mexican autos.  Reports also suggest that the USMCA is in danger of not passing the Democrat-controlled House.  All in all, it’s clear that there will remain stiff headwinds to global trade this year.

Oil continues to make new highs for this move as supply concerns are rising.  Developments in Libya and Iran are the catalyst.  WTI is leading this move and is trading above the key retracement objective near $63.70.  Clean break sets up a test of the October high near $76.90.  Meanwhile, Brent is trading above $71 but has yet to break its key retracement objective near $72.70, break of which would set up a test of the October high near $86.75.

The oil rally may be a factor in recent dollar softness.   As we have noted before, the major currencies with the highest correlation to oil prices are CAD and NOK.  In EM, they are RUB and COP.  Of note, rising oil prices should help boost headline inflation worldwide.  While it seems strange to wish for more inflation, it’s clear that many policymakers would like to see this.

Voters in Israel today elect the next government and polls suggest it’s a toss-up.  Regardless of the election outcome, we believe strong economic fundamentals will allow Israeli assets to outperform this year.  Please see our recent MarketView piece entitled “Israel Assets to Outperform Regardless of Election Outcome.”

The Hong Kong dollar traded at its strongest level since January 31.  It’s all being driven by local liquidity, as interbank rates are finally rising in response to HKMA intervention last month.  In mid-March, overnight HIBOR was trading around 0.6% but has since risen to over 2.0%.  If liquidity remains tighter as we would expect, then HKD should firm further.

Mexico March CPI is expected to rise 4.01% y/y vs. 3.94% in February.  If so, inflation would just move outside the 2-4% target range.  Banco de Mexico releases its minutes Thursday and could yield come clues about future policy.  Consensus sees the easing cycle starting in Q4, but we think much will depend on external factors.  Next policy meeting is May 16 and no change is expected then.