Dollar Stabilizes, Markets Calm on Positive Trade Headlines

  • Sanguine headlines about progress in Phase One has given risk appetite a boost today
  • ADP reports private sector jobs and consensus sees 135k; BOC is expected to keep rates steady at 1.75%
  • Chile central bank is expected to cut rates 25 bp to 1.5%; Poland is expected to keep rates steady at 1.5%
  • Sterling broke out on the upside of its trading range; final November PMIs in Europe and the UK were largely positive
  • Japan’s parliament passed the trade deal with the US; Hong Kong announced another round of stimulus

The dollar is mostly firmer against the majors as some positive trade headlines boost risk appetite.  Loonie and sterling are outperforming, while Aussie and Swissie are underperforming.  EM currencies are mixed.  ZAR and CLP are outperforming, while PHP and KRW are underperforming.  MSCI Asia Pacific was down 0.6% on the day, with the Nikkei falling 1.1%.  MSCI EM is down 0.2% so far today, with the Shanghai Composite falling 0.2%.  Euro Stoxx 600 is up 1.0% near midday, while US futures are pointing to a higher open.  10-year UST yields are up 2 bp at 1.73%, while the 3-month to 10-year spread has risen 3 bp to +18 bp.  Commodity prices are mostly higher, with Brent oil up 1.8%, copper up 0.3%, and gold down 0.1%.

The dollar is stabilizing after two days of selling off.  DXY is holding just above its 200-day moving average near 97.655.  We can understand why the dollar is losing ground against the majors due to soft US data.  However, recent trade developments are very negative for EM and so we don’t think this EM FX bounce will be sustained.

Sanguine headlines about progress in Phase One has given risk appetite a boost today.  The report (with undisclosed sources) claimed that the two sides are moving closer to a deal despite the human rights issues.  According to these sources, the main sticking points are how to guarantee Chinese purchases of US agricultural goods and which tariffs will be rolled back.  Officials from both sides would not confirm the story.

Trade talks are being complicated by the US Congress. The House passed legislation requiring the administration to sanction Chinese government officials involved in human rights abuses against the country’s Muslim minority. Unsurprisingly, China threatened to retaliate. Indeed, the PBOC’s last yuan fixing was the largest 1-day depreciation since August and spot continues to depreciate, now well off the sub-7.0 levels seen last month against the dollar.

Equity markets were priced for perfection in terms of trade talks and now things appear much less certain now with multiple fronts opening up in the trade war.  If we get a few more 300-400 point days in the DJIA, we think Trump will be forced to walk things back a bit.  Does he really want to risk recession and equity market meltdown with less than a year to elections?  This may only be brinksmanship but markets are too jittery to give him the benefit of the doubt right now.



During the North American session, ADP reports private sector jobs and consensus sees 135k.  If so, this would be the third clue that suggests a weaker than expected jobs number this Friday.   ISM non-manufacturing PMI will also be reported Wednesday and is expected at 54.5 vs. 54.7 in October.  Keep an eye on the employment component here, since ISM manufacturing employment softened last month.  November auto sales came in at 17.09 mln annualized pace vs. 16.90 mln expected.  This supports our view that the labor market is in solid enough shape to continue supporting consumption.

Ahead of the upcoming December 11 FOMC meeting, the media embargo has gone into effect.  Governor Quarles testifies to Congress today and tomorrow on banking supervision and regulation but will not comment on the economy or monetary policy.  There are no Fed speakers until Powell’s post-decision press conference next Wednesday.

Bank of Canada is expected to keep rates steady at 1.75%.  Data have been coming in on the soft side but messaging from the BOC has been inconsistent.  The economy is clearly slowing, however, and so the market bias for interest rates is to the downside.  Recall at the last meeting October 30, the BOC delivered a dovish hold and CAD sold off.  Subsequent Poloz comments were less dovish and so today’s statement will be closely watched.  USD/CAD has been trading on both sides of 1.33 in recent weeks but we look for an eventual upside breakout to test the September high near 1.3385.

Chile central bank is expected to cut rates 25 bp to 1.5%.  The market is split, however.  Of the 16 analysts polled by Bloomberg, 10 see a cut and 6 see steady rates.  The economy has collapsed in Q4 due the protest.  Yet the peso remains vulnerable and this complicates matters.  As such, we see some scope for steady rates.  November CPI and trade will be reported Friday.  Inflation is expected at 2.7% y/y vs. 2.5% in October, which would keep it in the bottom half of the 2-4% target range.



Sterling broke out on the upside of its trading range as relatively stable polls firm up expectations for a Conservative majority.  After a little dip earlier in the week, polls continue to show the party with a solid advantage over Labour of around 10-11 ppts. Also, there was little news so far from Trump regarding the elections during his visit the UK, which was seen as good news for the Conservatives. Sterling traded at the highest level since May 7 near $1.3065 today and is on track to test the May 6 high near $1.3185. Despite sterling’s breakout, the euro remains stuck below the $1.11 area.  This has pushed the EUR/GBP cross lower to levels not seen since March.  Break below the March 13 low near .84725 would open up a test of the May 2017 low near .83838 and then the April 2017 low near .83140.

Final November PMIs in Europe and the UK were largely positive. The eurozone’s composite PMI came in at 50.6 compared to a 50.3 flash reading, while the services component was 0.4 points higher at 51.9.  Germany improved and France worsened in terms of final vs. flash composite, while the improvement was even more impressive in the UK (49.3 vs. 48.5 flash).

National Bank of Poland is expected to keep rates steady at 1.5%.  CPI rose 2.6% y/y in November, near the center of the 1.5-3.5% target range.  The economy is slowing, which will likely underscore the bank’s intent to keep rates steady into 2021.



Japan’s parliament passed the trade deal with the US.  The ruling LDP holds majorities in both houses and so passage was widely expected.  The US had been pushing for the agreement to go into effect by January 1.  Since it calls for Japan to open up its markets to US beef and agricultural goods, President Trump can claim to have secured a win as he heads into an election year.  Yet the contentious area of Japan auto exports was not addressed, leading the opposition to criticize the deal.  That will be covered in the next round of talks that are expected to start next year.

Hong Kong announced another round of stimulus.  Nine measures worth an estimated HKD4 bln ($511 mln) include subsidies for utility bills as well as property tax waivers for businesses.  This follows stimulus announced over the summer of around HKD25 bln.  All told, the measures should be considered small change.  Earlier today, the IMF said Hong Kong should consider fiscal stimulus equal to 2.5% of GDP.  By our back of the envelope calculations, this would amount to HKD71 bln.