Dollar Soft as Risk-On Sentiment Persists

  • The dollar remains under pressure; amongst a heavy US data load, highlight will be ADP private sector jobs data; BOC is expected to keep policy steady
  • UK pushed back against reports suggesting a compromise on some key Brexit issues; Germany’s latest domestic stimulus plan failed to pass the first negotiating hurdle
  • ECB released details of its PEPP operations for the first time; Turkey reported higher than expected May CPI and clamped down on FX-based hedge funds
  • Australia Q1 GDP contracted -0.3% q/q vs. -0.4% expected; Indonesia continues to be one of the success stories for EM

The dollar is mostly weaker against the majors as risk on sentiment persists. Kiwi and Nokkie are outperforming, while yen and Swissie are underperforming. EM currencies are mostly firmer. IDR and ZAR are outperforming, while TRY and INR are underperforming. MSCI Asia Pacific was up 1.3% on the day, with the Nikkei rising 1.3%. MSCI EM is up 1.4% so far today, with the Shanghai Composite rising 0.1%. Euro Stoxx 600 is up 1.4% near midday, while US futures are pointing to a higher open. 10-year UST yield is up 2 bp at 0.70%, while the 3-month to 10-year spread is up 2 bp at +56 bp. Commodity prices are mostly lower, with Brent oil down 1.1%, WTI oil down 0.4%, copper down 0.1%, and gold down 0.5%.

The dollar remains under pressure. DXY traded today at the lowest level since March 12 near 97.287. Break below the key 97.837 level this week sets up a test of the March 9 low near 94.65. The euro is trading at the highest level since March 16 and is on track to test the March 9 high near $1.15. Sterling is trading near $1.26 and may encounter resistance at the April high near $1.2650 and then the 200-day moving average near$1.2675. Lastly, USD/JPY finally broke above 108 to trade at the highest level since April 9 near 108.85. Next key level is 109.50, as a break above that sets up a test of the March 24 high near 111.70.


The US has a heavy data load today. ISM reports its non-manufacturing PMI, which is expected to improve to 44.4 from 41.8 in April. Monday, its May manufacturing PMI came in at 43.1 vs. 43.8 expected and 41.5 in April. There are downside risks to ISM after Chicago PMI missed to the downside last week. Final May Markit services and composite PMI readings will also come out today, along with April factory orders (-13.4% m/m expected).

The highlight will be ADP private sector jobs data. Here, consensus stands at -9 mln. This comes ahead of May US jobs data Friday. Consensus for that report is currently -7.5 mln vs. -20.537 mln in April, with the unemployment rate seen rising to 19.5% from 14.7% in April. With the media embargo in effect for the June 10 FOMC meeting, there are no Fed speakers this week.

May auto sales came in stronger than expected yesterday. Sales recovered to an annualized 12.21 mln pace vs. 11.1 mln expected and 8.58 mln in April. That April reading was the lowest on record dating back to 1976. May retail sales data will be reported June 16 and with auto sales bouncing back, there is some chance of a modest rebound in headline sales from the -16.4% m/m drop in April. Note that sales ex-autos still plunged -17.2% m/m in April, so we cannot just blame weak auto sales that month. Furthermore, the outlook for June is not good considering the nationwide riots and looting that will surely depress overall consumption.

Bank of Canada is expected to keep policy steady. This will be the first meeting under incoming Governor Macklem. His predecessor Poloz has done much of the heavy lifting already, and so Macklem can take a wait and see approach for now. However, Macklem has already made several dovish comments that suggest he would not hesitate to add more stimulus if needed. Canada May jobs data will be reported Friday. “Only” 500k jobs are seen lost compare to nearly -2 mln in April. Still, this is equivalent to a -5 mln reading in the US.


UK government spokesman pushed back against reports suggesting they were ready to compromise on some key Brexit issues. With the deadline so close, it’s no surprise that Prime Minister Johnson would want to default back to brinkmanship tactics. Yet the tealeaves from the media suggest a bit more room to compromise from both sides on items such as fisheries and maybe the playing field request. The pound seems to agree, holding on to its recent gains, up 2% against the dollar and 1% against the euro since the start of the week. UK final May services and composite PMI readings improved from the preliminary readings to 29.0 and 30.1, respectively. This will be followed by construction PMI tomorrow.

Germany’s latest domestic stimulus plan (worth €100 bln) failed to pass the first negotiating hurdle, but it’s not dead yet. Merkel couldn’t convince the Social Democrats, who are asking for more aggressive measures to support workers and demanding a state wage-support program as well as a €300 per child family bonus. Merkel’s CDU is trying to limit related debt issuance and pushing for loans for mid-sized companies. Our best guess here is that a compromise will be struck as both sides have a lot to lose from failing to act, and the differences don’t seem unsurmountable.

The ECB released details of its Pandemic Emergency Purchase Programme (PEPP) operations for the first time. The central bank has so far bought EUR234.7 bln through the end of May. EUR186.6 bln was in government bonds, EUR35.4 bln in commercial paper, EUR10.6 bln in corporate bonds, and EUR2.1 bln in covered bonds. The ECB bought EUR37.4 bln of Italian debt since the plan started, which is a higher share of the total country purchases (22%) than what the so-called capital key calls for (15%). The only other significant deviations from the capital key were France (7% below) and Spain (3% above).

This comes ahead of the ECB meeting tomorrow, where it is widely expected to increase the size and duration of PEPP. We will be sending out a preview later today, where consensus sees an increase in the PEPP of EUR500 bln to EUR1.25 bln and an extension beyond year-end. Given the dire economic outlook portrayed by ECB officials recently, anything less would be very surprising. Still, reports suggest some policymakers are reluctant to increase PEPP so soon and so we see some risk of a disappointing outcome.

Turkey reported higher than expected May CPI. Headline inflation accelerated to 11.39% y/y vs. 10.87% expected and 10.94% in April. Inflation had decelerated for two straight months but now moves further above the 3-7% target range. The acceleration is particularly disappointing given the lira firmed over 2% last month. Next policy meeting is June 25, and another cut then is still likely. Indeed, inflation has been above the target range this entire easing cycle, as policymakers focus entirely on boosting growth. Elsewhere, regulators clamped down on hedge funds that invest primarily in FX-based assets. New funds will no longer be allowed to be set up, while existing funds will be taxed 15%.


Australia Q1 GDP contracted -0.3% q/q vs. -0.4% expected. In y/y terms, growth slowed to 1.4% from 2.2% in Q4, as expected. Final May services and composite PMI readings improved from the preliminary readings to 26.9 and 28.1, respectively. April trade and retail sales will be reported tomorrow, with sales expected to contract -17.9% m/m. Despite ongoing weakness in the data, the RBA signaled this week that it sees some cause for optimism and are in wait and see mode to see how the economic outlook develops as restrictions are lifted.

Indonesia continues to be one of the success stories for EM, as seen by the record bids in its latest local bond auction. The Treasury received around 4x bid-to-cover ratio for its auction worth the dollar equivalent of $1.7 bln. Increased confidence along with resilient global risk appetite has continued to shift the local yield curve lower and drive the benchmark 10-year yield down some 80 bp on the month to 7.0%. According to data compiled by Bloomberg, foreigner investors own some 30% of local debt. The rupiah has appreciated 5.5% on the month and is almost flat on the year against the dollar.