Trump-Inspired Dollar Short Squeeze Fades Quickly

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  • The market took advantage of the dollar’s recovery to sell it at better levels
  • The UK reported its first look at Q4 GDP
  • The North American session features Canada CPI and US Q4 GDP.
  • Mexico reports December trade, where a $202 mln surplus is expected

The dollar remains broadly weaker against the majors despite Trump’s comments late yesterday.  Aussie and sterling are outperforming, while the euro and yen are underperforming.  EM currencies are broadly firmer.  MXN and MYR are outperforming, while KRW and IDR are underperforming.  MSCI Asia Pacific was flat, with the Nikkei falling 0.2%.  MSCI EM is up 0.4% on the day, with the Shanghai Composite rising 0.3%.  Euro Stoxx 600 is up 0.4% near midday, while S&P futures are pointing to a higher open.  The 10-year US yield is up 2 bp at 2.64%.  Commodity prices are mostly higher, with oil up 0.3%, copper up 0.1%, and gold up 0.5%.

It was dramatic.  Following the BOJ and ECB’s rather mild rebuke of dollar’s depreciation, US President Trump cautioned that his Treasury Secretary comments were taken out of context.  Trump added that, in any event, he, the President. ultimately favored a strong dollar.  The dollar, which had continued fall after Draghi’s post-ECB meeting comments, shot higher in the US afternoon in response to Trump’s comments.  Note that Trump will speak in Davos today.

The market took advantage of the dollar’s recovery to sell it at better levels.  The dollar has surrendered more than 61.8% of yesterday’s recovery.  Ultimately, market participants realized that policymakers’ wishes are hardly the stuff that makes for the durable trends that are often apparent in the foreign exchange market.  Whether or not US officials want or like a weak dollar in the short-term, that is what they have.  That said, we look for a consolidative tone to emerge as the market digest the combination of the explosive news stream and the extended positioning.

Fresh developments have been light.  The main economic data was Japan’s December CPI.  The headline rose from 0.6% to 1.0%.  However, this was a function of fresh food and energy.  When these items, which may not be sensitive to monetary policy, are excluded, the pace was unchanged.  The core rate (ex-fresh food which the BOJ targets at 2%) remained at steady at 0.9% y/y.  Excluding fresh food and energy, more like the US core rate, inflation was unchanged at 0.3% y/y.

The UK reported its first look at Q4 GDP.  It rose slightly more than expected at 0.5% q/q.  The y/y rate slipped to 1.5% from 1.7%.  The last time the y/y print was this low was in Q1 13.  Details are not provided with the initial estimate, but it does appear that a pick-up in services may have been the key to the upside surprise.  Sterling, which like the other major currencies, was already moving higher extended its gains.

The North American session features Canada CPI and US Q4 GDP.  Canada’s CPI is expected to have softened in December.  A 0.3% decline would offset a rise of a similar magnitude in November and pull the y/y rate back below 2%.   Bank of Canada Governor Poloz did not seem particularly hawkish in comments from Davos.  Poloz noted that while the exchange rate is important for exporters, the key is the strength of its main export market, the United States.

The US reports Q4 GDP.  In doing so, it renders the other reports today, including the advance merchandise trade balance and durable goods orders, less interesting.  The Bloomberg survey found a median expectation of 3.0% SAAR, but the median has been underestimating the strength of the US economy.  This is what the data surprise models show.  The Atlanta Fed’s GDPNow sees 3.4% growth and the NY Fed’s tracker puts it at 3.9%.  Consumption is expected to have recovered smartly in Q4 after a disappointing 2.2% annualized pace was recorded in Q3.  Also, quarterly deflator used for consumption is GDP is expected to rise to 1.9%, which would be the strongest pace in 2017.

The MSCI Asia Pacific Index gave back early gains to finish a hair lower for the second consecutive session.  Nevertheless, it extended its advancing streak for a seventh week.  Foreigners returned to the Korean market after having been spooked by the MSCI warning against the new capital gains levy that is under consideration.  Korea’s KOSDAQ, which has an aggressive agenda of IPOs, gained 1.6% today and caps a 3.75% gain this week.  Led by mainland banks and insurance companies, Hong Kong’s Enterprise Index also remains hot.  Today’s 2.5% rally brings the weekly advance a little above 4%.   Japanese and Taiwanese shares are the only equity markets in Asia to fall this week.

European shares are higher in the early going.  The Dow Jones Stoxx 600 is up about 0.45%, led by health care and consumer discretionary sectors.  It needs to rise by a bit more to extend its advancing streak for a fourth week. If not, it will be the first losing week of the year.

Bond yields are narrowly mixed.  Peripheral European bonds are still very much in play.  Spain has emerged as the clear favorite.  Not that it will go there again, but before the crisis, Spain’s 10-year yield had traded briefly through Germany’s 10-year yield.  Italian bonds will likely offer a better opportunity later after elections and the challenge it may have in putting a new government in place.

Mexico reports December trade, where a $202 mln surplus is expected.  Petroleum exports have been very strong, while manufacturing exports are also growing quite nicely.  President Trump sounded an upbeat tone, saying that there is a “good chance” that it will be renegotiated.  NAFTA talks are ongoing in Montreal and end Monday.