Dollar Soft as China Data Stoke Animal Spirits

  • Risk sentiment has been boosted once again by firmer than expected China data overnight.
  • The dollar has been getting more traction, but trading remains choppy
  • We believe that any notions of Fed easing this year are way overdone
  • During the North American session, the US reports February trade and wholesale inventories
  • Canada reports March CPI and February trade data; UK reported March CPI data earlier
  • New Zealand reported weak Q1 CPI data
  • Singapore March trade data underscores ongoing weakness in the economy; South Africa reports February retail sales

The dollar is broadly weaker against the majors as Chinese data feeds into Risk-on sentiment. Stockie and Aussie are outperforming, while Kiwi and Swissie are underperforming. EM currencies are broadly firmer. TRY and ZAR are outperforming, while THB and MYR are underperforming. MSCI Asia Pacific was up 0.2%, with the Nikkei rising 0.3%. MSCI EM is up 0.4% so far today, with the Shanghai Composite rising 0.3%. Euro Stoxx 600 is flat near midday, while US futures are pointing to a higher open. 10-year UST yields are up 1 bp at 2.61%, while the 3-month to 10-year spread has steepened 2 bp to 19 bp. Commodity prices are mostly higher, with Brent oil up 0.6%, copper up 0.9%, and gold flat.

Risk sentiment has been boosted once again by firm China data overnight. Equities are rallying, as are energy and industrial commodities. EM FX remains bid too, at the expense of the dollar, yen, and Swiss franc.

China reported stronger than expected March IP, retail sales, and Q1 GDP. IP was expected to rise 5.9% y/y, but it jumped 8.5% instead. Retail sales rose 8.7% y/y vs. 8.4% expected, and GDP rose 6.4% y/y vs. 6.3% expected. The larger than expected rise in new loans and aggregate financing reported last week was a big hint that previous stimulus is working its way through the system. Now, we are seeing improvement in the economic data.

The dollar had been getting some more traction this week, but trading remains choppy. The US economy looks to be in much better shape this year than previously thought. That in turn has pushed US interest rates back up. Today’s 10-year yield of 2.61% is the highest since March 20, likewise for the 2-year yield of 2.42%. The 3-month to 10-year curve has steepened to 19 bp, the steepest since March 14, as the US bond market is finally catching up to the US equity market in signaling reduced recession risks.

Indeed, we believe that any notions of Fed easing this year are way overdone. When market expectations readjust to a less dovish take on the Fed, the dollar rally should gather more steam. A higher US rate outlook will in turn be a major headwind for EM, as are ongoing global trade tensions and risks of slow global growth.

During the North American session, the US reports February trade (-$53.4 bln expected) and wholesale inventories (0.3% m/m expected). The Fed also releases its Beige Book report for the upcoming May 1 FOMC meeting. Fed speakers today include Harker (non-voter), Bullard (voter), and Logan (non-voter). After Bostic speaks Thursday, the Fed’s media embargo ahead of the FOMC meeting goes into effect.

Press reports suggest the White House is interviewing candidates to possibly replace Herman Cain and Stephen Moore. While neither have been formally nominated, it seems unlikely that they will be able to pass Senate confirmation. Up until these two, Trump’s Fed appointees were all orthodox and well-qualified. We hope that this trend will resume.

Canada reports March CPI and February trade data. Headline inflation is expected to rise to 1.9% y/y from 1.5% in February, while common core is seen steady at 1.8% y/y. February retail sales will be reported Thursday and are expected to rise 0.4% m/m (0.2% ex-autos). BOC next meets April 24, no change is expected then.

UK reported March CPI data earlier. Both headline and CPIH inflation were steady, coming in at 1.9% y/y and 1.8% y/y, respectively. Both had been expected to rise a tick. March retail sales will be reported Thursday, with both headline and ex-auto fuel expected to fall -0.3% m/m. The UK economy remains soft as Brexit uncertainty takes its toll. We remain negative on sterling as a result, and like it back below $1.30.

New Zealand reported weak Q1 CPI data. It was expected to rise 1.7% y/y vs. 1.9% in Q4. Instead, it rose 1.5% y/y, the lowest since Q2 2018. Of course, this will feed into notions that rate cuts will be seen this year. RBNZ next meets May 8, no change is expected then but a cut in H2 seems more and more likely after the bank moved to an easing bias in Q1. Despite its recovery today, NZD remains vulnerable. Break of the .6715 area today sets up a test of the January low near .6575.

Singapore March trade data underscores ongoing weakness in the economy. NODX contracted -11.7% y/y vs. -2.2% expected. The MAS just left policy unchanged last week, citing slow growth and low price pressures. Given the difficult external environment, we suspect it will also remain on hold at its next policy meeting in October.

South Africa reports February retail sales, which are expected to rise 0.6% y/y vs. 1.2% in January. Earlier, March CPI rose 4.5% y/y vs. 4.6% expected and 4.1% in February, which is right in the middle of the 3-6% target range. SARB is wrestling with both sluggish growth and rising price pressures, and so there is no clear-cut policy response. Next policy meeting is May 23, and no change is expected then.