Dollar Firm as Risk-Off Impulses Return

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Win Thin
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• Markets have moved into risk-off mode from a confluence of events emanating from the US
• Speaker of the House Pelosi formally launched a formal impeachment inquiry; DOJ inserted itself into Trump’s fight with New York state
• Trump’s speech to the UN General Assembly yesterday was noteworthy for its belligerence
• RBNZ and BOT kept rates steady, as expected; Czech is expected to follow suit

The dollar is broadly firmer against the majors as risk-off impulses return to the markets await fresh drivers. Swissie and Loonie are outperforming, while Stockie and sterling are underperforming. EM currencies are broadly weaker. TRY and THB are outperforming, while ZAR and MXN are underperforming. MSCI Asia Pacific was down 0.6% on the day, with the Nikkei falling 0.4%. MSCI EM is down 0.8% so far today, with the Shanghai Composite falling 1%. Euro Stoxx 600 is down 1.3% near midday, while US futures are pointing to a lower open. 10-year UST yields are flat at 1.64%, while the 3-month to 10-year spread is unchanged and stands at -26 bp. Commodity prices are mostly lower, with Brent oil down 1.6%, copper flat, and gold down 0.2%.

Markets have moved into risk-off mode from a confluence of events emanating from the US. Political uncertainty has picked up as the conflict between Congress and President Trump escalated and entered a new phase.  Elsewhere, Trump took a very belligerent tone against China in his speech to the UN General Assembly and so we see no quick and easy end to the trade war.  Global equity markets are in the red, core bond yields are down, and the haven currencies (USD and CHF) are up.

Speaker of the House Pelosi formally launched a formal impeachment inquiry.  We are hesitant to make any market calls based on what has happened in past impeachment situations, since we are dealing with a sample size of one (Clinton) for the modern era.  Andrew Johnson was impeached in 1868, while Nixon resigned in 1974 before he was impeached.  Furthermore, the alleged crimes and underlying political situation are very, very different.

At this point, the consensus view is that if the motion is passed by the House, it would be rejected by the Senate.  Yet the situation is fluid and political uncertainty is clearly rising.  It is noteworthy that the Senate unanimously passed a resolution 100-0 pressing for the original whistleblower complaint to be released to both the House and Senate Intelligence Committees.

In related news, the Justice Department has inserted itself into Trump’s fight with New York state.  The DOJ has asked a Federal Judge in Manhattan to temporarily halt the New York state subpoena for Trump’s financial records.  We are not legal experts by any stretch, but this seems to be an unprecedented move by the DOJ.  In a nutshell, it appears that the DOJ is trying to extend its policy of not charging sitting presidents with federal crimes down to the state level.  A ruling on the DOJ request is expected today.

Will all these proceedings distract Trump?  Yes, but he is already in reelection mode and we just don’t think this really changes that much in terms of policy.  The trade talks with China continue but both sides remain far apart.  There is not much on tap in terms of major legislation pending before Congress.  The exception is the USMCA, so perhaps this is negative at the margin for Mexico and Canada.

President Trump’s speech to the United Nations General Assembly yesterday was noteworthy for its belligerence.  Most importantly, he doubled down on the mercantilist worldview that has shaped US trade policies in his administration, claiming that “globalists” are not the future.  He also criticized China for heavy state subsidies and theft of intellectual property.  Bottom line:  we do not expect any easing of trade tensions for the time being.  Recent moves by China to buy more US farm products are merely window-dressing.

During the North American session, the US reports August new home sales (3.5% m/m expected).  Fed speakers scheduled to speak today are Evans (voter), George (voter), Brainard (voter), and Kaplan (non-voter).  It’s worth noting that WIRP now shows odds of a cut October 30 at 62%, while the CME model has the odds at 60%.  Both remain way too high.

RBNZ kept rates steady at 1.0%, as expected.  It said there was scope to ease further if needed.  The bank said that new information since the August meeting “did not warrant a significant change to the monetary policy outlook,” which markets took as being slightly less dovish than expected.  The economic outlook remains soft and so further easing is likely.  WIRP suggests 78% odds of a cut November 13.  NZD remains heavy and is on track to test the August 2015 low near .6130.

Bank of Thailand kept rates steady at 1.50%, as expected.  It was a dovish hold, as the bank cut its growth forecasts for this year from 3.3% to 2.8% and next year from 3.7% to 3.3%.  Low inflation and sluggish growth should allow the bank to continue cutting rates.  Next meetings are November 6 and December 18 and another cut appears likely.  BOT also expressed concern about the strong baht and its impact on the economy.

Czech National Bank is expected to keep rates steady at 2.0%.  CPI rose 2.9% y/y in August, near the top of the 1-3% target range.  Sluggish growth should keep the bank on hold well into 2020.