Dollar Resumes Climb Ahead of US Retail Sales and PPI

  • The dollar rally has resumed
  • Press reports suggest the US is weighing a 60-day extension of the tariff deadline
  • US December retail sales and January PPI will be reported
  • Eurozone, Germany, and Japan all reported preliminary Q4 GDP
  • China reported January trade; the EM FX washout continues

The dollar is mixed against the majors.  The Antipodeans are outperforming, while sterling and Stockie are underperforming.  EM currencies are mostly weaker.  The CEE currencies are outperforming, while RUB and INR are underperforming.  MSCI Asia Pacific was down 0.1%, with the Nikkei flat.  MSCI EM is down 0.3% so far today, with the Shanghai Composite falling 0.1%.  Euro Stoxx 600 is up 0.4% near midday, while US equity futures are pointing to a higher open.  10-year UST yields are down 2 bp at 2.69%.  Commodity prices are mostly higher, with Brent oil up 1.3%, copper up 0.9%, and gold down 0.1%.

The dollar rally has resumed.  After a short one-day correction Tuesday, the markets are back to buying dollars.  The euro made a marginal new low for this move near $1.1250 today on its way to testing the November 12 low near $1.1215.  USD/JPY is trading above 111 and is at the highest level since December 27.  The 200-day moving average lies near at 111.30, and the recent break above 110.35 sets up a test of the December 13 high near 113.70.

Press reports suggest the US is weighing a 60-day extension of the tariff deadline.  President Trump reportedly said he was open to this idea, though he was not inclined to do so.  China had reportedly asked for a 90-day extension but was rebuffed.  USTR Lighthizer and Treasury Secretary Mnuchin are in Beijing for the latest round of talks.  At this stage, we believe markets would happily accept another can-kick down the road.

US December retail sales will be reported.  Headline sales are expected to rise 0.1% m/m, while sales ex-autos are expected flat.  The so-called Control Group used for GDP calculations is expected to rise 0.4% m/m.  Note that the Atlanta Fed’s GDPNow model is now tracking 2.7% SAAR growth for Q4, up from 2.5% previously.  Elsewhere, the New York Fed’s Nowcast model is now tracking 2.4% SAAR growth in Q4 and 2.2% for Q1, down from 2.6% and 2.4% previously.

US also reports January PPI.  Headline is expected at a few ticks lower at 2.1% y/y and core is expected a couple of ticks lower at 2.5% y/y.  Yesterday, CPI came in slightly higher than expected, with headline up 1.6% y/y and core up 2.2% y/y.  That helped push US yields higher and gave the dollar a bid.  Yields remain low, but these inflation readings may be the early steps in turning bond market sentiment around.  Weekly jobless claims will also be reported today, which are expected to fall to 225k.

Harker is the sole Fed speaker today.  He is not a voting member of the FOMC this year.  Harker spoke yesterday and warned of the risks to the US of rising government debt.  He noted that the impact of the tax cuts is waning and acknowledged that January CPI reading was “soft.”

Eurozone reported preliminary Q4 GDP.  As expected, it grew 0.2% q/q, the same as in Q3.  The y/y rate is also seen steady at 1.2%.  Germany reported Q4 GDP Thursday and it barely escaped a technical recession.  Growth was flat q/q vs. 0.1% expected and -0.2% q/q in Q3.  The European Commission just its updated economic forecasts this month and acknowledged the deteriorating outlook.  We think things are likely to get worse before they get better.

China reported January trade.  Exports were expected to contract -3.3% y/y but instead rose 9.1% y/y.  Imports fell -1.5% y/y vs. -10.2% expected.  The data were likely distorted by the Lunar New Year, with exporters frontloading shipments ahead of the holiday.  CPI and PPI will be reported Friday, but that data is inconsequential.  Policymaker are clearly focused on boosting growth at this time.

Japan reported Q4 GDP.  GDP grew as expected 1.4% SAAR after contracting a revised -2.6% (was -2.5%) SAAR in Q3.  Private consumption was a bit weaker than expected, while business spending was stronger than expected.  The looming consumption tax hike this fall is surely making policymakers nervous.  The BOJ just met, and pretty much signaled stimulus will continue well into FY2021, if not longer.  USDJPY is trading at the highest level since December 31.  A break above the 110.35 area would set up a test of the December 13 high near 113.70.

The EM FX washout continues.  Virtually every EM currency has given up their post-FOMC gains, the lone exception being MYR (+0.5%).  The worst performers have been ZAR (-6.3%), BRL (-3.3%), and TRY (-2.8%).  It’s clear that low US rates are not enough to sustain the EM FX rally.  Rather, we are missing what we see as a more important ingredient and that is strong global growth.