Dollar Stabilizes as Markets Consolidate

  • The dollar has stabilized but remains near the recent lows
  • UK House of Commons Speaker Bercow denied Johnson a repeat vote on his Brexit plan yesterday
  • Press reports suggest US and China are approaching an agreement on trade
  • Canadian Prime Minister Trudeau won a second term but will lead a minority government
  • Hungary is expected to keep rates steady; Israel Prime Minister Netanyahu was unable to form a government

The dollar is mostly firmer against the majors on profit-taking and consolidation.  Kiwi and Stockie are outperforming, while Swissie and Aussie are underperforming.  EM currencies are mixed.  ZAR and TRY are outperforming, while MYR and PHP are underperforming.  MSCI Asia Pacific was up 0.2% on the day, with the Nikkei rising 0.3%.  MSCI EM is up 0.4% so far today, with the Shanghai Composite rising 0.5%.  Euro Stoxx 600 is up 0.1% near midday, while US futures are pointing to a lower open.  10-year UST yields are down 2 bp at 1.78%, while the 3-month to 10-year spread has risen 2 bp to stand at +17 bp.  Commodity prices are mixed, with Brent oil up 0.6%, copper down 0.3%, and gold up 0.2%.

The dollar has stabilized but remains near the recent lows.  Some profit-taking and consolidation is to be expected after such FX big moves over the past two weeks, and the dollar remains vulnerable to renewed selling.  DXY is flirting with the 200-day moving average near 97.40 after breaking below it Friday.  The euro rally ran out of steam just below $1.12 and feels heavy.  Sterling is also consolidating after making a run at $1.30.

UK House of Commons Speaker Bercow denied Johnson a repeat vote on his Brexit plan yesterday.  As such, Parliament now goes to the next round of voting on the general principles of the bill tonight followed by possible amendments Wednesday and Thursday.  The text was just released yesterday, leaving MPs disgruntled over not having enough time to consider it.  The government remains hopeful it will be able to get the deal over the line, but it’s an uphill battle between a close deadline, a difficult vote count, and the threat of disruptive amendments.  Sterling is steady at around $1.2950 and implied volatility measures have started to come down.

 

 

Press reports suggest US and China are approaching an agreement on trade, very much in line with our view.  White House economic advisor Kudlow said he sees a possibility that the December tariff round may not go into effect if current trade talks go well.  However, we note that this is not the only hurdle.  The US also needs to soften their position on “enforcement mechanisms,” which led to the breakdown of the previous deal.  The APEC meeting on November 16-17 will be the key day to watch.  Please see our recent piece “A New Stage of the US-China Conflict” for an in-depth look at the situation.

 

AMERICAS

Fed manufacturing surveys for October will continue to roll out this week.  Richmond Fed will be reported today and is expected at -7 vs. -9 in September.  Kansas City is next on Thursday and is expected at -4 vs. -2 in September.  Thursday also sees preliminary Markit PMI readings, with manufacturing expected to fall several ticks to 50.8 and services expected to rise a tick to 51.0.  Last week, Empire survey came in at 4 vs. 1 expected and Philly Fed survey came in at 5.6 vs. 7.6 expected.

The media embargo ahead of the October 30 FOMC has gone into effect and so there are no Fed speakers this week.  WIRP suggests 90% odds of a cut then, the high for the cycle.  We are not entirely convinced it will cut again but if it does, the Fed will then likely remain on hold until stronger evidence of a significant slowdown emerges.

The US 3-month to 10-year curve now at +17 bp.  This is the highest since April 22.  If sustained, this move to positive slope will significantly push down perceived recession risk.  It’s worth noting that the rise in bond yields is a global phenomenon in recent weeks.  We remain constructive on the US economy but acknowledge that some slowing is likely in Q4.

Canadian Prime Minister Trudeau won a second term but will lead a minority government.  This was in line with recent polls.  The Liberals won an estimated 157 seats in the 338-seat parliament, down from 184 in 2015.  Its 33% share of the popular vote was the lowest for any governing party in Canada’s history, and even trailed the 34.4% share for the Conservatives, who won 121 seats.  Bloc Quebecois won 32 seats, NDP won 24, and the Greens won 3.  There was one independent.  With political uncertainty out of the way, firmer oil prices and firm data should keep CAD as an outperformer.  For USD/CAD, the July low near 1.3015 is the next big target, followed by the October 2018 low near 1.2785.

Brazil mid-October IPCA inflation is expected to ease to 2.67% y/y from 3.22% in mid-September.  If so, inflation would move below the 2.75-5.75% target range.  Next COPOM meeting is October 30 and another 50 bp cut to 5.0% is expected.  Indeed, the CDI market is starting to price in a 75 bp cut.  Lower rates is one of the headwinds for BRL and has kept it underperforming despite good news on the pension reforms.

 

EUROPE/MIDDLE EAST/AFRICA

National Bank of Hungary is expected to keep rates steady.  However, it is likely to add back some of the excess liquidity that was withdraw earlier this year.  Deputy Governor Nagy said that inflation has “basically disappeared” and that low interest rates are the new norm.

Israel Prime Minister Netanyahu was unable to form a government in his allotted time.  The task now goes to rival Benny Gantz and his Blue and White party.  Of note, this will be the first time since 2006 that someone other than Netanyahu is tasked with forming a government.  Given how polarized politics are in Israel, Gantz too will have trouble.  That said, a center-left government would likely be taken well by markets.  Stay tuned.

 

ASIA

PBOC used open market operations to inject CNY250 bln into the system.  It was the biggest liquidity add since May and comes ahead of upcoming corporate tax payments that will drain liquidity.  It just kept its benchmark loan rates steady and so there are no policy implications to today’s move.