US Reopens to Find Risk-off Sentiment Boosting the Dollar

  • Risk-off sentiment is creeping back into markets and boosting the dollar
  • US reports December existing home sales; Canada reports November wholesale trade and manufacturing sales
  • The IMF released its quarterly update to its World Economic Outlook yesterday
  • UK reported strong labor market data for November; Bank of Japan meets tonight
  • President Xi issued a stark warning to China’s top leaders, underscoring the growing economic and political risks
  • Data out yesterday underscore why we remain negative on EM

The dollar is mostly firmer against the majors as the US reopens to face growing risk-off sentiment.  The yen and sterling are outperforming, while Aussie and Nokkie are underperforming.  EM currencies are mostly weaker.  IDR and BRL are outperforming, while TRY and ZAR are underperforming.  MSCI Asia Pacific was down 0.6%, with the Nikkei falling 0.5%.  MSCI EM is down 0.5% so far today, with the Shanghai Composite falling 1.2%.  Euro Stoxx 600 is down 0.4% near midday, while US equity futures are pointing to a lower open when they reopen after the holiday.  10-year UST yields are down 4 bp at 2.75%.  Commodity prices are mostly lower, with Brent oil down 2%, copper down 1.8%, and gold up 0.2%.

Risk-off sentiment is creeping back into markets and boosting the dollar.  There is no single trigger for this, but there are the usual, familiar elements.  Pessimism over US-China trade relations has risen, while the IMF cut its global growth forecasts (see below) and warned that a no-deal Brexit a harder than expected landing in China both threaten the global outlook.  The partial US shutdown shows no sign of ending, and we think that is also unnerving markets.

Whatever the reason, the dollar is up broadly against both the majors and EM.  The yen and Swissie are outperforming, as the havens benefit.  Gold is up slightly, while industrial commodities are mostly lower.  Equities are down, and bonds are up.

The US Senate may vote on a package today that contains President Trump’s latest proposals.  Some Democratic support is needed to muster the 60 votes needed to pass, and that isn’t happening.  And so, the shutdown enters day 32 despite some glimmers of hope over the weekend.

During the North American session, the US reports December existing home sales.  The data is published by the National Association of Realtors and so is unaffected by the shutdown.  Due to the media embargo ahead of the January 30 FOMC meeting, there will be no Fed speakers this week.

Canada reports November wholesale trade and manufacturing sales today.  Last Friday, December headline CPI came in higher than expected at 2.0% y/y.  Retail sales will be reported Wednesday.  If the data remain firm, then expectations of the next 25 bp hike at the next meeting March 6 will start to crystallize.  Lower oil prices are taking a toll on the Loonie, with USD/CAD trading at its highest level since January 7.

The IMF released its quarterly update to its World Economic Outlook yesterday.  It cut its 2019 global growth forecast to 3.5%, the slowest in three years.  The culprit?  Not the US or China, whose forecasts were kept steady at 2.5% and 6.2%, respectively.  Nor was it Japan, whose forecast was upgraded (from 0.9% to 1.1%).  No, it was Germany (from 1.9% to 1.3%) and Italy (from 1.0% to 0.6%) that dragged down the eurozone (from 1.9% to 1.6%).  Simply put, the IMF is just acknowledging the growing downside risks to the global economy since its last update back in October.

UK reported strong labor market data for November.  The unemployment rate dropped a tick to 4.0%, while employment rose 141k vs. 87k expected.  The data should have no impact on BOE policy, which remains on hold due to Brexit.  Yet sterling has rallied the last two days after being turned back quite sharply from the $1.30 area Friday.  We think $1.30 will be tough to break if Brexit uncertainty remains.

The euro remains heavy and we do not think the ECB will want to say or do anything tomorrow that would change this.  It recorded an outside down day Friday and has made new lows for this move near $1.1345.  The euro is on track to test the January 3 low near $1.1310 and then the November/December lows near $1.1270.  A clean break of the $1.1350 area is needed to set up a test of the November 12 cycle low near $1.1215.

Bank of Japan meets tonight.  Japan data has been disappointing of late.  It just reported December supermarket sales at -0.7% y/y.  December trade will be reported tonight, and exports are expected to contract -1.8% y/y.  Headline December national CPI rose 0.3% vs. 0.8% in November and was the lowest since October 2017.  As such, we expect the BOJ to commit to stimulus pretty much as far as the eye can see.

Policymakers in Japan should be very happy with recent yen weakness.  USD/JPY has recouped the entire January 3 flash crash.  However, the 110 area will likely prove tough to break if risk-off sentiment prevails.

President Xi issued a stark warning to China’s top leaders, underscoring growing economic and political risks.  In his own words, “The party is facing long-term and complex tests in terms of maintaining long-term rule, reform and opening-up, a market-driven economy, and within the external environment.  The party is facing sharp and serious dangers of a slackness in spirit, lack of ability, distance from the people, and being passive and corrupt.”  Sobering stuff indeed.

Data out yesterday underscore why we remain negative on EM.  Forget about the Chinese data and focus instead on reports from Korea and Taiwan.  Korea reported trade data for the first 20 days of January, with exports -14.6% y/y and imports -9.5% y/y.  Taiwan reported December export orders at -10.5% y/y, much worse than expected.  Slowing global growth and ongoing trade tensions just aren’t supportive for EM.