Dollar Broadly Weaker as Brexit Deal Takes Shape

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Win Thin
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• The dollar remains under pressure due to weak US retail sales and rising optimism on Brexit and the trade war
• Brexit negotiations remain tense and we should expect a higher than usual noise-to-signal ratio at this stage
• China said its goal is to stop the trade war and remove all tariffs
• US has a full data schedule; we remain constructive on the US economic outlook
• UK reported September retail sales; Sweden’s unemployment rate hit a 4-year high of 7.4%
• Australia reported solid September jobs; Singapore reported weak September trade

The dollar is broadly weaker against the majors on market optimism regarding Brexit and the trade war.  Sterling and Aussie are outperforming, while yen and Swissie are underperforming.  EM currencies are broadly firmer.  ZAR and CZK are outperforming, while TRY and KRW are underperforming.  MSCI Asia Pacific was up 0.2% on the day, with the Nikkei falling 0.1%.  MSCI EM is up 0.6% so far today, with the Shanghai Composite falling 0.1%.  Euro Stoxx 600 is up 0.7% near midday, while US futures are pointing to a higher open.  10-year UST yields are up 5 bp at 1.79%, while the 3-month to 10-year spread has risen 7 bp and stands at +16 bp.  Commodity prices are mostly lower, with Brent oil down 0.1%, copper up 0.6%, and gold down 0.3%.

After a strong start yesterday, the dollar came under pressure due to weak US retail sales and rising Brexit optimism.  It remains under pressure today.  DXY is trading at its lowest level since August 26 and is on track to test the August 23 low near 97.169 and then the August 9 low near 97.033.  Break of those levels would set up an even deeper correction towards the June 25 low near 95.843.  The 200-day moving average near 97.377 is fast approaching.

Brexit negotiations remain tense and we should expect a higher than usual noise-to-signal ratio at this stage. Sterling has surged after EC President Juncker tweeted: “Where there is a will, there is a #deal.”  This was followed by comments from the DUP saying there is no change in their position, which tempered some of the optimism. The DUP is objecting on the basis the proposed customs arrangement across the Irish Sea, the mechanics of Stormont’s consent, and now the lack of clarity over VAT.  Although the math gets very complicated without the support of the DUP, it seems we are closer than ever to the end of this saga.  Sterling is trading at the highest level since May 13 and is on track to test the May 6 high near $1.3185.  After that is the March 13 high near $1.3380.

China said its goal is to stop the trade war and remove all tariffs.  According to the Ministry of Commerce, China is working on the text of the phase 1 deal and discussing the next phase of talks.  It added that trade teams remain in close communication and made substantial progress at the last round of talks.  Elsewhere, local press reported that regulators are looking to enact more measures towards liberalizing inbound foreign investment, including removing restrictions on businesses. The new measures should impact the financial sector and the automobile industry, while also urging the protection of overseas investors and prohibiting forced technology transfers.

AMERICAS

US has a full data schedule.  September housing starts and building permits will be reported, which are expected fall -3.2% m/m and -5.3% m/m, respectively.  Weekly jobless claims will be reported for the BLS survey week that includes the twelfth of the month and are expected at 215k.  Philly Fed manufacturing survey for October will be reported and is expected at 7.6 vs. 12.0 in September.  Lastly, September IP is expected to fall -0.2% m/m vs. +0.6% in August.

We remain constructive on the US economic outlook.  Please see our piece “What is the US Yield Curve Telling Us?” for an in-depth look at the US.  We have one last thought on yesterday’s retail sales data.  Yes, the m/m readings don’t look so good, but the y/y readings tell a better story.  Headline sales rose 4.1% y/y, down slightly from this year’s peak of 4.4% in August.  Ex-autos rose 3.7% y/y, steady from August and the highest since April. Lastly, the control group rose 4.8% y/y, down slightly from this year’s peak of 5.2% in August. Bottom line: consumption is still growing solidly.

Canada reports August manufacturing sales.  Yesterday, headline CPI came in a couple ticks lower than expected at 1.9% y/y, while common core came in a tick higher than expected at 1.9% y/y.  Data have been coming in firm, leading markets to push out BOC easing expectations.  WIRP suggests only 3% odds of a cut October 30 and 9% for December 4, rising to only 17% in Q1 2020.  Relatively high carry has helped CAD to outperform during this recent bout of USD weakness, with USD/CAD breaking below support near 1.32 yesterday.  The next key level is 1.3155 and a break below that would set up a test of the July low near 1.3015.

EUROPE/MIDDLE EAST/AFRICA

UK reported September retail sales.  Headline sales were flat mm vs. -0.2% expected while ex-auto fuel rose 0.2% m/m vs. -0.1% expected.  Up until now, September data so far had been coming on the soft side as Brexit uncertainty continues to take a toll on the economy.  WIRP suggests 9% odds of a cut November 7 and 18% for December 19, both down from earlier this week.  If our base case of another delay until early 2020 comes true, then the BOE is likely to remain on hold for the rest of this year.  Odds of a cut rise as we move through H1 2020, with WIRP putting the odds of a cut by mid-year around 40%.  That still seems reasonable to us.

The situation in Turkey continues to develop negatively. There seems to be bi-partisan support in the US for enacting harsher measures against Turkey, despite sanctions already imposed by President Trump. Meanwhile, Vice President Pence and Secretary of State Pompeo are heading to Ankara on a mission to get Erdogan to back down from the military incursion in Syria. Despite all the bad news, the lira has been stable over the last three sessions as regulators step up efforts to constrain trading and state banks continue to support the currency by selling dollars.

Sweden’s unemployment rate hit a 4-year high of 7.4%, which may very well be the final nail in the coffin of the Riksbank’s plan to hike rates again. While markets have already been moving in this direction, the bank’s official communication remains far too hawkish given the state of the Swedish economy.  From the September meeting statement: “the interest rate is expected to be raised towards the end of the year or at the beginning of next year.” Tellingly, WIRP suggests no hike at all, with 5% odds of a cut October 24 and 19% for December 19.

ASIA

Australia reported solid September jobs data. Total jobs rose 14.7k vs. 15.0k expected, and the breakdown was favorable as full-time jobs rose 26.2k while part-time jobs fell -11.4k.  Unemployment fell a tick to 5.2%. We know the RBA puts a lot of weight on labor market conditions in its reaction function.  It just cut rates 25 bp to 0.75% this month and so it is likely to stand pat at its November 5 meeting. WIRP suggests 20% odds of a cut then, rising to 51% December 3 and nearly 70% February 4.

Singapore reported September trade data. NODX contracted -8.1% y/y vs. -7.2% expected, while electronics exports contracted -24.8% y/y vs. -23.0% expected. The MAS just eased policy this week by adjusting the slope of its S$NEER trading band and left the door open for further easing. Next policy meeting is in April, but the MAS has eased intra-meeting in the past if conditions warrant.