Dollar Builds on Recent Gains

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Win Thin
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• The dollar remains resilient; optimism towards a Phase One deal continues to support risk appetite
• There was also optimism from Fed Chairman Powell yesterday; the US economy is not out of the woods yet
• Turkish President Erdogan started deploying Russia’s S-400 missile system, raising the specter of sanctions
• Hong Kong reported weak October trade data; Philippine central bank Governor Diokno said a December cut was possible

The dollar is mostly firmer against the majors. The Scandies are outperforming, while sterling and Loonie are underperforming. EM currencies are mostly weaker. CLP and INR are outperforming, while PHP and ZAR are underperforming. MSCI Asia Pacific was up 0.1% on the day, with the Nikkei rising 0.4%. MSCI EM is down 0.3% so far today, with the Shanghai Composite flat. Euro Stoxx 600 is flat near midday, while US futures are pointing to a lower open. 10-year UST yields are down 1 bp at 1.75%, while the 3-month to 10-year spread has risen 2 bp to +19 bp. Commodity prices are mixed, with Brent oil up 0.1%, copper down 0.2%, and gold up 0.2%.

The dollar remains resilient. Despite the lack of any supportive top-tier US data, DXY is up six straight days now and is on track to test the November 13 high near 98.447. Break above that would set up a test of the October 8 high near 99.249. The euro remains pinned near the $1.10 level, while sterling remains in its familiar $1.28-1.30 range. The yen is the big mover today, with USD/JPY trading near 109.20 before falling back slightly. While it’s been a long slog, we see this pair staging an upside breakout soon.

Optimism towards a Phase One deal continues to support risk appetite. This time it was a phone call between the US and China during which the two sides “reached a consensus” on resolving the issues, according to China’s Ministry of Commerce. Most Asian bourses were up slightly, and US futures are up a bit after yesterday’s 0.75% gain. Perhaps more tellingly, implied volatility measures continue to grind lower with the VIX back to levels not seen since October 2018.

AMERICAS

There was also optimism from Fed Chairman Powell yesterday. He sounded hopeful about the continued expansion of the current economic cycle, seeing the proverbial glass as “much more than half full.” Quite an endorsement coming from central bank that delivered a third insurance cut just last month. Rates in the US (and in DM more broadly) have been in a range since the start of the month but are uniformly higher than where they were in the summer. 

The US economy is not out of the woods yet. The Chicago Fed National Activity Index came in at -0.71 for October vs. -0.20 expected. This is the worst reading since April and the 3-month moving average fell to -0.31 from a revised -0.21 in September. The readings are consistent with an economy growing below trend but is still fairly far from the -0.7 recession-signaling threshold. This bears watching.  For now, markets are viewing the Q4 slowdown as temporary. A value of zero shows an economy growing at trend. Positive values represent above trend growth, while negative values represent below trend growth.

During the North American session, the US reports a fair amount of data. Richmond Fed manufacturing survey for November will come out (5 expected). October retail and wholesale inventories will also be reported, along with advance goods trade (-$71 bln expected), new home sales (0.9% m/m expected), September S&P CoreLogic house price index, and November Conference Board consumer confidence (127.0 expected).

Fed Governor Brainard speaks today. Elsewhere, the NY Fed is reportedly close to filling the two top positions in its markets group. Candidates include current interim manager Lorie Logan as well as private-sector economists Daleep Singh and Charles Himmelberg (both ex-Goldman Sachs). The two posts were created when NY Fed President Williams decided to split the markets chief role of Simon Potter, who departed this year. With the year-end turn fast approaching, markets would be happy to have these key posts filled as soon as possible.

USD/BRL traded at a new cycle high Monday near 4.2245. The all-time high near 4.2480 from September 2015 lies near. Think a lot of factors are behind BRL weakness, including general EM weakness, regional political tensions, and weak fundamentals (wider current account deficit despite slow growth).

EUROPE/MIDDLE EAST/AFRICA

GfK German consumer confidence was reported at 9.7, a tick higher than expected. Data from the eurozone’s largest economy has been stabilizing, but we’re a long way from seeing stronger growth. Yet it is enough to remove any sense of urgency to act on the part of policymakers. The ECB just eased in September and it seems Madame Lagarde will have a tough time pushing any more monetary stimulus through. She is correct that fiscal policy must do more, but again, policymakers (particularly in Germany) are unlikely to comply, at least for now.

Turkish President Erdogan started deploying Russia’s S-400 missile system, in defiance of US legislators and raising the specter of sanctions. The ball is in the Senate’s court after the House passed a strong bill against Turkey by an overwhelming majority last month. We stick to our premise that Trump is occupying a buffering role of protecting Turkey (and China) from legislative offensives, but the risk here is that bill will be passed with a veto-proof majority. Indeed, US lawmakers have been able to forge wide cross-party agreements on several foreign policy issues, as seen by the Hong Kong bill. The actions being discussed against Turkey are far more punitive than the one passed in October. We already held a negative medium-term view towards Turkish asset and this has only worsened after yesterday’s events. The lira depreciated 0.8% against the dollar over the last two sessions.

ASIA

Hong Kong reported weak October trade data. Exports contracted -9.2% y/y and imports contracted -11.5% y/y, both weaker than expected. Hong Kong is getting hit by a double whammy from the US-China trade war as well as the ongoing local protests. The economy is in recession and this is likely to stretch into 2020. Chief Executive Carrie Lam made no new concessions after the weekend elections, but instead just reiterated her September proposals that protestors have already deemed insufficient. This confirms our belief that protests will soon resume with perhaps even greater intensity.

Philippine central bank Governor Diokno changed his tune and said a December cut was possible. Previously, he said that the bank was done easing this year whilst leaving next year open. CPI rose a mere 0.8% y/y in October and the bank is looking for an uptick. If that fails to materialize, Diokno said the bank could act. It kept rates steady at the November 14 meeting and next meets December 12. November CPI will be reported December 5.