Dollar Weakens, China Data Surprises

  • The dollar has given up what little traction it got from the firm US data yesterday; the yen is not participating at all
  • China reported strong March exports and money and loan data
  • Press reports that four Republican Senators will oppose Herman Cain’s Fed nomination
  • UK Prime Minister hinted at some sort of compromise on a post-Brexit customs union
  • MAS kept policy steady at its semiannual policy meeting, as expected
  • India reports March CPI and February IP; Colombia reports February IP and retail sales

The dollar is mostly weaker against the majors as the week winds down. Aussie and euro are outperforming, while yen and sterling are underperforming. EM currencies are mostly firmer. The CEE currencies are outperforming, while INR and TRY are underperforming. MSCI Asia Pacific was up 0.1%, with the Nikkei rising 0.7%. MSCI EM is up 0.2% so far today, with the Shanghai Composite flat. Euro Stoxx 600 is up 0.1% near midday, while US futures are pointing to a higher open. 10-year UST yields are up 4 bp at 2.54%, while the 3-month to 10-year spread steepened 5 bp to stand at 13 bp. Commodity prices are mostly higher, with Brent oil up 1.1%, copper up 2%, and gold up 0.1%.

The dollar has given up what little traction it got from the firm US data yesterday. It’s mostly a euro move, which has proven to be very resilient despite the dovish efforts by Draghi and the ECB. The single currency has clawed back nearly half of the March-April drop to trade at its highest level since March 26. A break of the $1.1350 area would set up a test of the March 20 high near $1.1450.

The yen is not participating at all. USD/JPY is making new highs for this move just below 112 while EUR/JPY doing the same near 127. Sterling remains pinned near the $1.30 level. Besides the euro, it’s the Scandies and dollar bloc that are doing the best and add EM FX to that group as well. Much of this can be traced to the firm Chinese data released overnight.

China reported strong March exports and money and loan data. Exports were expected to rise 6.5% y/y and instead jumped 14.2% y/y. New yuan loans jumped CNY1.69 trln, while aggregate financing jumped CNY2.9 trln. Bottom line is that previous stimulus measures are working their way into the economy. The only caveat to the data is that imports were expected to rise 0.2% y/y and instead contracted -7.6% y/y, which suggests consumption has yet to respond.

The dollar’s inability to get more traction is disappointing, as the US data yesterday was quite supportive. The higher than expected 2.2% y/y rise in headline PPI can be pinned on higher oil prices. With retail gasoline prices rising, this should soon filter through to the CPI. Elsewhere, the US labor market remains strong, with weekly initial jobless claims of 196k making another 50-year low. This was not the survey week for April (that’s next week), but clearly there is some momentum there.

There are no Fed speakers today. US data releases are limited, with only March import/export prices and preliminary April Michigan consumer sentiment due out. It’s worth noting that US rates have risen today, while the 3-month to 10-year curve has steepened to 13 bp. This is the highest since March 19. This suggests receding recession risks, yet the Fed Funds futures strip is still pricing in rate cuts.

Press reports that four Republican Senators will oppose Herman Cain’s nomination to the Fed’s Board of Governors. Neither he nor Stephen Moore have been formally nominated. If the Democrats are united in opposing Cain and are joined by these four Republicans, then Cain would not be confirmed. No word on whether these four would support Moore’s nomination.

UK Prime Minister hinted at some sort of compromise on a post-Brexit customs union with the EU. Now that a delay to October 31 was secured, it appears that May is speaking with opposition Labour again about a compromise. Corbyn wants a permanent customs union with the EU, while May wants the UK to have the freedom to strike its own trade deals with non-EU countries. Under a customs union, the members drop all tariffs between members and maintain common tariffs with non-members.

The financial sector outlook remains grim. After large-scale job cuts were announced recently by Japanese and French banks, the Aussies are taking their turn. Local press is reporting that the largest Australian bank is working on a plan to cut more than 10,000 jobs, or roughly one quarter of its workforce. The plan was apparently supposed to be kept secret until after the May 18 national elections.

Such job losses would be yet another major headwind to household consumption, to state the obvious. It would fit the narrative that the RBA will need to cut rates sooner rather than later to offset this. Yet AUD rallied and is the best performing major today. Next RBA meeting is May 7, right before the elections. While this is too soon to cut rates, many will be looking for a possible change in bias from neutral to easing.

Two major US banks are due to report Q1 earnings today before the opening bell. Others will report next week. All the upcoming earnings reports will be parsed carefully for signs of trouble, as many financial institutions have warned of weak trading revenue in Q1.

MAS kept policy steady at its semiannual policy meeting, as expected. It noted that “Growth in the Singapore economy has eased” and that “Despite some pickup in labor costs, inflationary pressures are mild and should remain contained.” The MAS also cut its core inflation forecast for this year to 1-2% from 1.5-2.5% previously. Singapore also reported that Q1 GDP grew 1.3% y/y vs. 1.4% expected and down from 1.9% in Q4. It was the weakest rate since Q4 2015.

India reports March CPI and February IP. The former is expected to rise 2.8% y/y and the latter by 2.0% y/y. The RBI just cut rates 25 bp but maintained its neutral bias. Next RBI policy meeting is June 6 and if price pressures remain low, the bank may deliver its third cut in a row then.

Colombia reports February IP and retail sales. The former is expected to rise 2.4% y/y and the latter by 4.2% y/y. The economy is facing some headwinds, while price pressures are restrained. CPI rose 3.21% in March, up from 3.01% in February but still well within the 2-4% target range. Next policy meeting is April 26 and no change is expected then.