Dollar Rally Stalls as Fresh Drivers Awaited

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Win Thin
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• US-China relations continue to improve with news of cooperation in a major fentanyl case
• Eurozone final services and composite PMIs surprised on the upside; UK Parliament will be dissolved today
• Poland is expected to keep rates steady at 1.5%; Russia October CPI is expected to rise 3.8% y/y
• China sold €4 bn in its first euro-denominated bond since 2004; Thailand cut rates 25 bp to 1.25%, as expected

The dollar is mostly softer against the majors as its recent rally stalls out. The Scandies are outperforming, while Swissie and Loonie are underperforming. EM currencies are mostly weaker. CZK and CNY are outperforming, while INR and PHP are underperforming. MSCI Asia Pacific was down 0.1% on the day, with the Nikkei rising 0.2%.  MSCI EM is down 0.1% so far today, with the Shanghai Composite falling 0.4%. 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 1.85%, while the 3-month to 10-year spread has fallen 1 bp to +31 bp. Commodity prices are mostly lower, with Brent oil down 0.3%%, copper down 0.4%, and gold up 0.1%.

The dollar has had a nice run this week but the move is stalling out a bit today. DXY traded yesterday at the highest level since October 17 but couldn’t make a clean break above the 98 area. The major retracement objectives from the October-November drop come in near 98.085, 98.387, and 98.689. We retain our strong dollar call whilst acknowledging that we probably need to see some stronger US data to get the next leg higher. That said, the euro and sterling remain heavy as Brexit uncertainty stretches on.

US-China relations continue to improve with news of cooperation in a major fentanyl case. China’s National Narcotics Control Commission will reportedly hold a press conference Thursday about a fentanyl smuggling case that was investigated jointly with US law enforcement. Officials from both nations will give a briefing then on the case. Fentanyl from China is one of the hot button issues for the US and so this could shape up as another factor in getting the Phase One deal in place.

AMERICAS

During the North American session, the US reports Q3 nonfarm productivity and unit labor costs. Fed officials Evans, Williams, and Harker speak.  Next FOMC meeting is December 11 and WIRP suggests only 10% odds of another cut then. US rates continue to rise and that’s going to be dollar-supportive. Elsewhere, Canada reports October Ivey PMI.

EUROPE/MIDDLE EAST/AFRICA

Eurozone final services and composite PMIs surprised on the upside at 52.2 and 50.6, respectively. The notable gap between the services and manufacturing PMI remains near the highs. That said, factory orders in Germany today provided a rare respite for the usual downbeat data coming from the region. Orders bounced back 1.3% m/m, well above expectations for a 0.1% gain and last month’s revised reading of -0.4% (was -0.6%). The y/y rate came in at -5.4% vs. a revised -6.5% (was -6.7%) in August. IP data tomorrow (-0.4% m/m expected) may provide more clues to whether the worst is over for the German industrial sector. Eurozone retail sales also rose 0.1% m/m in September vs. flat reading expected, while August was revised up to 0.6% from 0.3% previously.

The current UK Parliament will be dissolved today, meaning five weeks of campaigning and no legislative work whatsoever. Brexit Party leader Farage is reportedly in talks with Eurosceptic Tory and Labour MPs about not standing for their seats in exchange for pledges not to support Johnson’s withdrawal agreement. Another hung parliament after the December 12 election would be disastrous and would call into question the likelihood of getting this Brexit deal passed.

National Bank of Poland is expected to keep rates steady at 1.5%. CPI rose 2.5% y/y in October, right at the bank’s target. As such, we see no need to change rates for the foreseeable future. The bank has signaled steady rates well into 2021.

Russia October CPI is expected to rise 3.8% y/y vs. 4.0% in September. If so, inflation would move below the 4% target for the first time since last November. The bank just delivered a bigger than expected 50 bp cut to 6.5%. Next policy meeting is December 13 and another cut is expected then.

ASIA

Final Japan October PMI readings came out. Services fell to 49.7 from 50.3 flash, while the composite fell to 49.1 from 49.8 flash. This is the low for this cycle and does not bode well for the economy as it copes with the October 1 consumption tax hike. WIRP suggests nearly 40% odds of a cut December 19. USD/JPY continues to have trouble making a clean break above the 109 area. We look for an eventual upside breakout above the recent 109.30 high that matches the August 1 high. That would set up a test of the May 30 high near 110 and then the May 21 high near 110.65.

China sold €4 bn in its first euro-denominated bond since 2004. The notes mature in 7, 12 and 20 years, with yields of 0.197%, 0.618%, and 1.078%, respectively. It was oversubscribed to the tune of €20 in orders. On the currency side, the yuan has appreciated for seven consecutive sessions now, about 0.6% stronger against the dollar this month.

Bank of Thailand cut rates 25 bp to 1.25%, as expected. This is the second cut this year and brings the policy rate to a record low. Of note, 2 of 5 committee members voted against the move. The bank also eased some regulations on capital outflows to help offset baht strength. These include a change in rules for repatriation of export proceeds, investment in foreign assets, and gold. Policymakers remain very focused on the baht’s multi-year appreciation. The BIS’s REER measure, for example, has appreciated about 15% since the end of 2016, and has greatly outperformed its EM Asian peers this year against the dollar (+7.5%).