Dollar Takes a Breather as Risk Appetite Recovers

  • The dollar rally is taking a breather; Fed Chair Powell’s first day of testimony was a largely subdued affair
  • Bernie Sanders won the New Hampshire Democratic primary with 26% of the vote
  • Eurozone industrial production fell sharply to -4.1% y/y; Riksbank kept rates steady at 0.0%, as expected
  • Geopolitical tensions in Syria are rising
  • New Zealand kept rates steady at 1.0%, as expected; India reports January CPI and December IP

The dollar is mostly weaker against the majors as risk appetite recovers.  The Antipodeans are outperforming, while the yen and euro are underperforming.  EM currencies are mixed.  RUB and THB are outperforming, while TRY and PLN are underperforming.  MSCI Asia Pacific was up 0.5% on the day, with the Nikkei rising 0.7% after Japan returned from holiday.  MSCI EM is up 0.6% so far today, with the Shanghai Composite rising 0.9%.  Euro Stoxx 600 is up 0.4% near midday, while US futures are pointing to a higher open.  10-year UST yields are up 2 bp at 1.62%, while the 3-month to 10-year spread is up 1 bp to stand at +5 bp.  Commodity prices are mostly higher, with Brent oil up 2.1%, copper up 0.9%, and gold down 0.1%.

The coronavirus has been renamed Covid-19 and has claimed 1,115 lives and some 44,500 confirmed cases. The good news is that China’s Hubei province reported the lowest number of new virus cases this month. For what it’s worth, President Xi said China will meet its economic goals while overcoming the effects of the coronavirus. This just seems to confirm that they will deliver as much stimulus as needed, going beyond the initial liquidity provisions.

The dollar rally is taking a breather.  After making a marginal new high near 98.952, DXY ended the day lower and broke a streak of six straight up days.  It is flat today and remains on track to test the October 1 cycle high near 99.667.  Elsewhere, the euro remains heavy after trading at a new low for this move near $1.0890 yesterday, just above the October 1 low near $1.0880.  Below that, there is a gap from April 2017 on the weekly charts between $1.0780-1.0820 that needs to be filled.



Fed Chair Powell’s first day of testimony was a largely subdued affair. He confirmed the Fed is on ‘high alert’ for coronavirus risks to the economic outlook, and it “could lead to disruptions in China that spill over to the rest of the global economy.”  He stressed that the Fed is watching to see if the impact is “persistent” or “material” while admitting that it’s too early to judge the economic impact yet.   This cautious outlook is in line with our view.  We continue to think that markets are overestimating the odds of cuts by the Fed this year. Using Bloomberg’s model, there is almost one and a half cuts priced in this year. This is down from two full cuts priced a couple of weeks ago, but still too high for an economy that is doing relatively well and likely to be less impacted by the virus than many other nations.

Fed Chair Powell testifies before the Senate today.  He is expected to hew closely to the balanced message he gave to the House yesterday.  The Fed’s Harker also speaks today while the US reports weekly mortgage applications and the January budget statement.  A deficit of -$10.0 bln is expected.  If so, the 12-month total would rise to -$1.041 trln, the highest since December 2012.  For now, markets seem comfortable with the US fiscal trajectory.  That patience may be tested in the coming months, as President Trump’s budget proposal for FY2021 shows little effort to get the deficit under control quickly.


Bernie Sanders won the New Hampshire Democratic primary with 26% of the vote. Buttigieg was a close second with 24%, followed by Klobuchar at 20%. The result consolidates the positive trend for Sanders, now commanding nearly 50% odds according to PredictIt betting markets. The next step is the Democratic debate in Nevada on February 19 then that state’s caucus on February 22.  Bloomberg remains the wild card as he is not competing in the early contests and is instead hoping for a strong showing in Super Tuesday March 3.  Polls show Bloomberg climbing steadily, with some putting him in third place nationally behind Sanders and Biden.



EU Brexit negotiator Michel Barnier warned UK Chancellor Sajid Javid that the EU will not give a special deal to the City of London over access to EU financial markets post-Brexit. Javid has demanded this so-called equivalence be made permanent, which is key for both sides and likely to remain contentious.  Still, we are in the very early stages of this game so it’s best to fade the rhetoric from both sides. The base case is still that some deal on goods this year is the most likely outcome, but one on services should take longer to iron out.  For now, markets are largely pricing in a cooperative solution and this is reflected in a relatively stable sterling.  It is up three straight days now but we suspect it will have trouble with the $1.30 area.

Eurozone industrial production fell sharply to -4.1% y/y in December vs. -2.5% expected. This is just more evidence of the region’s struggle to rekindle its industrial base. Despite some improved surveys, hard data is yet to support a convincing argument for green shoots.

Swedish Riksbank kept rates steady at 0.0%, as expected.  At its last meeting in December, it hiked rates by 25 bp.  That move ended nearly five years of negative rates, and it said then that rates would remain at the current level “in the coming years.”  That message was confirmed today, with an unchanged rate path showing steady policy through most of 2022, with some potential tightening seen by early 2023.  There were no dissents compared to two last meeting in favor of steady rates.  The bank also cut its headline inflation forecasts to 1.4% this year and 1.8% next year, with underlying inflation seen remaining below the 2% target through 2022.

Geopolitical tensions in Syria are rising with Turkish-backed rebel forces in direct confrontation with Russian-backed government forces. The fighting is taking place in Idlib, Syria’s last major rebel stronghold and a territory that President al-Assad is keen to retake. Turkish President Erdogan said he will do “whatever is necessary” to defend the position in Idlib. The lira remains under modest pressure but hasn’t moved much. This is due in part to lack of participations of foreign investors and now prohibitively high negative carry to short the currency. The local 3-month implied yield has come down to around 14% from over 20% on Monday.



Reserve Bank of New Zealand kept rates steady at 1.0%, as expected.  However, it was a hawkish hold as the bank now sees no more cuts this year, assuming the impact of the coronavirus is contained.  At the last policy meeting November 13, the bank unexpectedly kept rates steady.  NZD surged more than 1% as the odds of a cut by May fell to around 25% from almost 50% pre-decision.  The bank forecasts inflation running close to 2.0%, growth running near 2.4%, and the labor market in a long tightening trend leading to the current unemployment rate of 4.0%.

India reports January CPI and December IP.  Inflation is expected at 7.40% y/y vs. 7.35% in December, while IP is expected to rise 1.7% y/y vs. 1.8% in November.  The RBI just left rates steady last week.  However, it took some steps to boost liquidity in the system by offering up to $14 bln of 1- and 3-year funding operations and by easing some reserve requirements.