Dollar Soft as Some Glimmers of Hope Appear

  • Risk-on sentiment is creeping back into the markets
  • The Senate finally makes an effort towards ending the US shutdown
  • Sterling is bid on reports that opposition Labour will support a proposal in Parliament to extend the Article 50 deadline beyond March 29
  • US-China relations are likely to remain rocky
  • US reports January Richmond Fed index; Canada reports November retail sales
  • Bank of Japan met overnight and left policy unchanged, as expected
  • New Zealand Q4 CPI rose 1.9% y/y; South Africa December CPI rose 4.5% y/y; Brazil mid-January IPCA inflation was 3.77% y/y

The dollar is mixed against the majors as some risk-on sentiment creeps back.  Kiwi and sterling are outperforming, while yen and Swissie are underperforming.  EM currencies are mostly firmer.  ZAR and TRY are outperforming, while MYR and CZK are underperforming.  MSCI Asia Pacific was down 0.4%, with the Nikkei falling 0.1%.  MSCI EM is down 0.1% so far today, with the Shanghai Composite rising 0.1%.  Euro Stoxx 600 is up 0.1% near midday, while US equity futures are pointing to a higher open.  10-year UST yields are up 2 bp at 2.76%.  Commodity prices are mostly higher, with Brent oil up 0.9%, copper up 0.4%, and gold flat.

Risk-on sentiment is creeping back into the markets.  There are a variety of factors, including some small progress in ending the US shutdown as well as possible efforts to prevent a no-deal Brexit for the UK.  The dollar is a bit softer, along with the haven currencies JPY and CHF.  Equities are up, bonds are down.  Yet this is par for the course, with markets likely to swing between risk-on and risk-off for much of Q1.

The Senate finally makes an effort towards ending the US shutdown.  Senate leaders have agreed to hold votes Thursday on competing bills and marks the first time that the Senate has acted during the entire length of the shutdown.  One includes $5.7 bln in funding for the wall while the other would reopen the government thought February 8 with border funding to be decided later.  While neither bill is expected to garner the 60 votes needed to pass, this could be the start of a negotiation process.  Stay tuned.

US-China relations are likely to remain rocky.  Canadian officials said that the formal US extradition process for Huawei executive Meng Wanzhou will proceed.  Pessimism also intensified on reports that the US rejects China offer of preparatory trade talks.  This was later denied by Kudlow.  He nevertheless acknowledged a “degree of difficulty” in getting a deal, which he said hinges on enforcement and structural issues.

During the North American session, the US reports January Richmond Fed index.  Looking at the regional Fed manufacturing index readings so far, Empire fell from 11.5 to 3.9 while Philly rose from 9.1 to 17.0.  Kansas City will be reported Thursday and Dallas next Monday.  Due to the media embargo ahead of the January 30 FOMC meeting, there will be no Fed speakers this week.

Canada reports November retail sales.  Headline is expected to contract -0.6% m/m, ex-autos by -0.4% m/m.  Yesterday, wholesale trade and manufacturing sales came in weaker than expected.  For now, market is expecting another 25 bp hike at the next meeting March 6.  Lower oil prices are taking a toll on the Loonie, with USD/CAD trading at its highest level since January 7.

Bank of Japan met overnight and left policy unchanged, as expected.  In doing so, the BOJ also cut its inflation outlook again.  It now sees inflation in FY2019 starting in April at 0.9% vs. 1.4% previously, while FY2020 inflation is seen at 1.4% vs. 1.5% previously.  Lower oil prices were cited as the major factor, but the forecasts don’t include expected cuts to cell phone fees or the plan to provide free education for young children.  The BOJ said the free tuition alone would cut another 0.3 percentage points from core inflation in FY2019 and 0.4 in FY2020.

It’s clear that with a 2% inflation target, the BOJ remains committed to maintaining stimulus past the forecast horizon and into FY2021, if not beyond.  The planned sale tax hike in October injects further uncertainty into the economic outlook.  Before the BOJ decision, Japan reported December trade data and exports contracted a larger than expected -3.8% y/y.  After the decision, Japan reported December department store sales at -0.7% nationwide.

USD/JPY remains bid.  The pair has recouped the entire January 3 flash crash and the pair is on track to test the December 26 high near 111.40.  The 200-day moving average comes in near there at 111.20 currently.  The 110 area could provide some near-term resistance.

New Zealand reported Q4 CPI overnight.  Inflation was 1.9% y/y vs. 1.8% expected and was steady from Q3.  We see no policy implications.  The market has started to push out the timing of the RBNZ’s first hike into early 2020.  NZD is bid today, more from the risk-on sentiment than from the Kiwi data.  NZD is on track to test the January 15 high near .6850, but much will depend on global factors.

South Africa December CPI rose 4.5% y/y, as expected and down from 5.2% in November.  SARB just delivered a dovish hold last week.  Its model now prices in only one 25 bp hike by end-2021 compared with three such hikes by end-2020 forecasted back in November.  Next policy meeting is March 28.  While SARB would like to keep rates steady then, much will depend on how the rand is trading.

Brazil mid-January IPCA inflation rose 3.77% y/y vs. 3.81% expected and 3.86% in mid-December.  Inflation remains solidly in the bottom half of the 2.75-5.75% target range.  Next COPOM meeting is February 6, no change expected then.  Indeed, the market has pushed out the timing of the first hike closer to Q4 now.