The Dollar - Now What?

Dollar Soft as US Political Uncertainty Persists

  • After a brief respite Friday, the dollar is back under pressure; DXY was unable to break above 94 Friday despite the safe haven bid
  • President Trump appears to be doing better; polls taken after his illness became known are starting to trickle out and the early signs are not good for Trump; this is a very quiet week in terms of US data
  • European data came in very firm; Brexit talks continue and it was French President Macron’s turn to harden his stance; Turkey September CPI came in slightly lower than expected
  • Japan reported firmer final September PMI readings; so did Australia ahead of the RBA decision and budget announcement tomorrow; Singapore reported weak August retail sales

Governments in Europe and the US continue to walk back the economic reopening in reaction to a second wave virus outbreak. New York City is closing non-essential businesses and schools in nine areas where infection spikes have occurred. In Europe, France looks set to shut down bars in Paris while the UK and the Italian governments are threatening new restrictive measures.

After a brief respite Friday, the dollar is back under pressure. The lack of a significant safe haven bid for the dollar last week is telling. It suggests that the FX market is pricing in greater odds of a Democratic sweep which many (including us) think would be dollar-negative. Yes, it may be too early to see how Trump’s illness impacts the race but with less than a month to go to the election, President Trump is simply running out of time to turn things around. One can also make a strong case that heightened political uncertainty in the US is also weighing on the dollar. Can Congress and the White House strike a stimulus deal in this environment? Simply put, it’s hard to put a dollar-positive spin on any of this news.

DXY was unable to break above 94 Friday despite the safe haven bid. It is down today and has weakened five of the past six trading days. Keep an eye on the 93.51 area, as a break below would set up a test of the September 21 low near92.749. Similar retracement objective for the euro comes in near $1.1775. Sterling remains bid on Brexit optimism but has been unable to break above the $1.30 area so far. We believe the broad-based weak dollar trend remains intact.

 

AMERICAS

President Trump appears to be doing better. Reports suggest that he will be released from the hospital soon.  However, the situation remains hard to read with a lot of suspicion about how closely curated the news flow about the president has been. Moreover, it’s still not known how this event will play with the electorate. Will it garner sympathy? Will he be seen as irresponsible?

Polls taken after his illness became known are starting to trickle out and the early signs are not good for Trump. A Reuters/Ipsos poll taken October 2-3 shows Biden opening up a 10 point lead amongst likely voters, 51% to 41%. That same poll showed 65% agreed that “if President Trump had taken coronavirus more seriously, he probably would not have been infected. This comes after an NBC poll taken right after last Tuesday’s debate showed Biden with a 14 point lead. The latest read from betting odds put Biden’s odds at just over 60%.

This is a very quiet week in terms of US data. September ISM services PMI today is the only top-tier release and it is expected to drop to 56.2 from 56.9 in August. Final Markit services and composite PMIs will also be reported today. There is also a full slate of Fed speakers this week, with Evans and Bostic kicking things off today.

 

EUROPE/MIDDLE EAST/AFRICA

European data came in very firm. Eurozone reported August retail sales jumped 4.4% , nearly double the consensus 2.5%. As a result, the y/y rate rose to 3.7% y/y vs. 2.2% consensus and was the strongest reading since November 2017. The final September eurozone services and composite PMIs managed to rise a few ticks against their flash estimates to 48.0 and 50.4, respectively. Germany’s readings improved to 50.6 and 54.7, respectively, while France remained steady at 47.5 and 48.5, respectively. On the negative side, Spain’s September services PMI collapsed to 42.4 from 47.7 in August as the second wave of infections take hold, dragging its composite down to 44.3 from 48.4 in August. Italy’s services PMI, however, took the opposite turn with a upside surprise to 48.8, which pulled the composite up to 50.4 from 49.5 in August.

Brexit talks continue and it was French President Macron’s turn to harden his stance. The long-standing fishing dispute has come up again as one of main obstacles for an agreement. We find it difficult to imagine that this issue will prove decisive given the small shares of the UK and French economies it represents. State aid and the UK’s Internal Market Bill, which are still unresolved, seem like much more difficult obstacles to overcome. After this week’s talks in London, they will continue next week in Brussels. For the UK both services and the composite PMIs were revised upwards by a full point and more from their flash estimates to 56.1 and 56.5, respectively.

Turkey September CPI came in slightly lower than expected. The headline print was 11.75% y/y, about the same as the prior month, though core ticked higher to 11.32%. Food items and services helped take off the edge for now, but core remains worrying. And of course, the trend of weaker currency will start passing through soon, making it hard to draw an optimistic outlook. The central bank’s surprise hike last month was a good first step, but more will have to be done. The central bank has continued to do backdoor tightening and has boosted the average cost of funds to 11.32%, above the old ceiling of 11.25% but still well below the new ceiling of 13.25%.  Next policy meeting is October 22 and another outright rate hike is possible then if the lira continues to weaken.

 

ASIA

Japan reported firmer final September PMI readings. Final September services and composite PMIs both rose over a point from the preliminary readings to come in at 46.9 and 46.6, respectively. While both remain below the 50 boom/bust level, the continued improvement is welcome.

Australia reported firmer final September PMI readings. Final September services and composite PMIs came in at 50.8 and 51.1, respectively. Both improved from the preliminary readings and are welcome news ahead of the RBA decision and budget announcement tomorrow. The RBA is expected to keep its powder dry and remain on hold as the government is widely expected to deliver aggressive fiscal stimulus. A handful of analysts see RBA easing tomorrow, while WIRP suggests nearly two thirds odds that the RBA cuts rates.

Singapore reported weak August retail sales.  Headline sales contracted -5.7% y/y vs. -5.8% expected, while ex-autos contracted -8.4% y/y vs. -6.0% expected.  Advance Q3 GDP will be reported sometime over the next week and is expected to rise 33.1% SAAR vs -42.9% in Q2.  The MAS usually meets on the same day.   We expect no change in policy at this semiannual meeting, as policymakers have signaled that fiscal policy will carry much of the load going forward.  Its last policy meeting was moved up from April to March 30 and policy was eased then by reducing the slope of the S$NEER band to zero appreciation starting at the prevailing level.  The MAS also eased at the October 2019 meeting by reducing the slope of the S$NEEER slightly.