Dollar Softens as Market Sentiment Improves

  • Market sentiment has improved from potential positive developments in Brexit and US-China trade talks
  • During the North American session, ADP reports March private sector jobs (175k expected)
  • The oil rally seems to be a function of an improved global outlook as well as tighter OPEC supplies
  • Eurozone and UK reported March services and composite PMI readings
  • Australia reported firm data overnight
  • Turkey March CPI rose 19.71% y/y; National Bank of Poland is expected to keep rates steady at 1.5%

The dollar is broadly softer against the majors as market sentiment improves.  The Scandies and Antipodeans are outperforming, while the yen and Swissie are underperforming.  EM currencies are mostly firmer.  The CEE currencies are outperforming, while INR and TRY are underperforming.  MSCI Asia Pacific was up 0.8%, with the Nikkei rising 1%.  MSCI EM is up 0.9% so far today, with the Shanghai Composite rising 1.2%.  Euro Stoxx 600 is up 0.6% near midday, while US futures are pointing to a higher open.  10-year UST yields are up 4 bp at 2.52%, while the 3-month to 10-year spread steepened 5 bp to stand at 11 bp.  Commodity prices are mostly higher, with Brent oil up 0.5%, copper up 1%, and gold flat.

Market sentiment has improved from potential positive developments in Brexit and US-China trade talks.  As a result, the foreign currencies have bounced back from yesterday’s losses.   The Scandies and Antipodeans are outperforming, while EM FX is broadly firmer.  After trading at the highest level since March 8 yesterday, DXY has reversed lower.

UK Prime Minister May proposed a “cross-party” approach to a Brexit agreement.  Talks with Corbyn will be held today.  Given the lack of Tory support for her plan, May is clearly hoping that Labour and Corbyn will come to the rescue.  Whilst some believe this gambit raises the chances of a softer Brexit, we are not convinced.  Quite frankly, it is not in Labour’s interest to come to May’s rescue, not when it’s waiting in the wings to win the next elections.

Sterling has recovered because of the renewed Brexit optimism.  Cable is trading back near the $1.32 area, the highest since last Thursday.  A break above the $1.3225 area is needed to set up a test of the March 13 high near $1.3380.

Elsewhere, China Vice Premier Liu arrives in Washington for another round of talks that begin today.  China has spoken of “new progress” after last week’s round of talks in Beijing.  China has also made some concessions ahead of these talks, raising hopes that a deal is imminent.

During the North American session, ADP reports March private sector jobs (175k expected).  ISM non-manufacturing PMI will also be reported (58.0 expected).  Fed speakers today are Bostic (non-voter), George (voter), Barkin (non-voter), and Kashkari (non-voter).

Higher oil prices are noteworthy and could add to inflationary impulses worldwide.  Brent crude is testing the $70 area today and it has not traded above this level since November 12.  A break above the $72.70 area is needed to set up a test of the October high near $86.75.  WTI is leading this move as it is already approaching its last major retracement of the same move near $63.70.

The oil rally seems to be a function of an improved global outlook as well as tighter OPEC supplies.  DOE reports weekly crude oil inventory data today at 1030 AM ET, where a -600k barrel drawdown is expected.  Of the majors, CAD and NOK have the highest correlation with oil prices.  In EM FX, it’s RUB and COP.

The eurozone reported March services and composite PMI readings.  They came in at 53.3 and 51.6 vs. the expected 52.7 and 51.3, respectively. Looking at the country breakdown, the improvement in the services PMI was not enough to prevent the composite from falling a tick to 51.4, while France saw both readings improve to 49.1 and 48.0, respectively.  Italy and Spain were the big movers to the upside, with their composite readings improving to 51.5 and 55.4, respectively.

UK also reported March services and composite PMI readings.  They came in at 48.9 and 50.0 vs. the expected 50.9 and 51.1, respectively.  The composite reading is the lowest since July 2016 and puts the UK economy right at the boom/bust threshold.  With Brexit uncertainty ongoing, this leaves the BOE no choice but to wait and see.  Next policy meeting is May 2 and no change is expected then.

Australia reported firm data overnight.  February retail sales rose 0.8% m/m vs. 0.3% expected, while the trade surplus was AUD4.8 bln vs. AUD3.7 bln expected.  Still, there is no doubt that the Australian economy is facing serious headwinds.  However, we think some market calls for two rate cuts this year overstates the dovish case.

Turkey March CPI rose 19.71% y/y vs. 19.63% expected and 19.67% in February.  Inflation is likely to move higher due to the weak lira and rising oil prices.  Last week, the bank suspended one-week repo auctions at 24%, which pushed the average cost of funds up to 25.5%.  Next policy meeting is April 25.  If the lira comes under greater pressure as we expect, more tightening measures to support it may be announced.

National Bank of Poland is expected to keep rates steady at 1.5%.  March CPI rose 1.7% y/y vs. 1.6% expected, which puts it near the bottom of the 1.5-3.5% target range.  Low price pressures and headwinds to growth should allow the central bank to keep rates steady into 2020.