Dollar Treads Water Ahead of Powell’s Humphrey-Hawkins Testimony

  • The dollar’s gains have been broad-based
  • During the North American session, the US reports January CPI; Fed Chair Powell delivers his semiannual Humphrey-Hawkins testimony to the House
  • UK reported mixed data today
  • Philippine exports surged 21.4% y/y in December while Fitch moved the outlook on its BBB rating from stable to positive
  • Reserve Bank of New Zealand decision comes out tonight after US markets have closed

The dollar is mostly against the majors ahead of Powell’s Humphrey-Hawkins testimony.  Nokkie and Aussie are outperforming, while the yen and Swissie are underperforming.  EM currencies are mostly firmer.  RUB and ZAR are outperforming, while TRY and RON are underperforming.  MSCI Asia Pacific ex-Japan was up 0.9% on the day, with Japan markets closed for holiday.  MSCI EM is up 0.7% so far today, with the Shanghai Composite rising 0.4%.  Euro Stoxx 600 is up 0.7% near midday, while US futures are pointing to a higher open.  10-year UST yields are up 1 bp at 1.58%, while the 3-month to 10-year spread is up 1 bp to stand at +4 bp.  Commodity prices are mostly higher, with Brent oil up 2.0%, copper up 1.2%, and gold down 0.2%.

The coronavirus death toll rose above 1,000 overnight, but the number of confirmed continues to decelerate.  In addition, markets were relieved by a report claiming that the mortality rate from the virus is estimated at just 1%.  This has helped risk sentiment recover today, though we believe this optimism remains fragile.

The dollar’s gains have been broad-based.  DXY is up 2.5% year-to-date, trading at a marginal new high for this move today near 98.914 and is on track to test the October 1 cycle high near 99.667.  There is cocktail of factors supporting the dollar at the moment including, positive sentiment towards US equity markets, the notion that the impact of the virus will be relatively smaller here, confidence that Trump will win the elections, and some pricing out cuts by the Fed. Of note, the euro is down for the seventh consecutive session.  It traded at a new low for this move near $1.0905 and is on track to test the October 1 low near $1.0880.  After that, there is a gap from April 2017 on the weekly charts between $1.0780-1.0820 that needs to be filled.

 

AMERICAS

During the North American session, the US reports January CPI.  Headline inflation is expected at 2.4% y/y vs. 2.3% in December, while core inflation is expected at 2.2% y/y vs. 2.3% in December.  PPI will be reported next week, yet we feel that the inflation data is pretty much inconsequential as policymakers worldwide face deflationary risks from the coronavirus.  December JOLTS job openings will also be reported today (6850 expected).

Fed Chair Powell delivers his semiannual Humphrey-Hawkins testimony to the House today and the Senate tomorrow.  Ahead of this, the Fed submitted its Monetary Policy Report to Congress last Friday.  In it, the Fed warned that the coronavirus poses “new risks” to global growth and markets.  We’re sure Powell will be asked to clarify the Fed’s thoughts on these risks.  Despite the Fed being on hold, we suspect Powell will deliver a dovish message that falls short of flagging a “material reassessment” that justifies cutting rates again.  Bowman, Daly, Quarles, Bullard, and Kashkari also speak today.

Mexico December IP is expected to contract -0.6% y/y vs. -2.1% in November.  Banco de Mexico then meets Thursday and is expected to cut rates 25 bp to 7.0%.  CPI rose 3.24% y/y in January, slightly lower than expected but still the highest since July.  Regardless of inflation growth concerns are likely to drive the policy rate lower this year.

 

EUROPE/MIDDLE EAST/AFRICA

UK reported mixed data today.  GDP was flat q/q in Q4 but growth remained steady at 1.1% y/y, better than the expected 0.8% y/y.  Strong government spending and exports offset weak investment.  Elsewhere, IP surprised on the downside and contracted -1.8% y/y in December vs. -0.8% expected, while November was revised down to -2.5% y/y from -1.6% previously.  Weakness here was driven by manufacturing production, which contracted -2.5% y/y vs. -1.0% expected.  The trade balance, however, surprised on the upside with a surplus of £7.7 bln in the trade balance vs. -£350 mln expected.  WIRP suggests 15% odds of a cut at the next BOE meeting March 26, but rising steadily over time to around 90% by year-end.

 

ASIA

Philippine exports surged 21.4% y/y in December while imports collapsed by -7.6%. The spike in exports was due in part to base effects and the improved sentiment from the US-China trade deal. This strength won’t last as forthcoming trade numbers will begin to reflect the virus-induced slowdown in China. In addition, Fitch ratings just revised the outlook on its BBB rating to positive from stable. The agency praised the government’s sound macroeconomic policy framework that has led to an environment of high growth and moderate inflation.  Our own sovereign ratings model has the Philippines at BBB+ and so an upgrade is warranted.

Reserve Bank of New Zealand decision comes out tonight after US markets have closed.  It is expected to keep rates steady at 1.0%.  At the last policy meeting November 13, the bank unexpectedly kept rates steady.  Most were looking for a 25 bp cut to 0.75%.  It wrote that “Economic developments since the August Statement do not warrant a change to the already stimulatory monetary setting at this time,” adding that “We will add further monetary stimulus if needed.”  Since that meeting, both growth and inflation have picked up slightly, while the labor market has been mixed.