Dollar Builds on Gains as Iran Tensions Ease

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Win Thin
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• Markets have reacted positively to President Trump’s press conference yesterday, while the dollar continues to gain traction
• The North American session is quiet in terms of US data
• Mexico reports December CPI; Peru is expected to keep rates steady at 2.25%
• German November IP was slightly better than expected but still tepid; sterling took a hit on dovish comments by outgoing BOE Governor Carney
• Israel is expected to keep rates steady at 0.25%
• China reported December CPI and PPI; Thailand announced new measures to lean against currency strength

The dollar is mostly firmer against the majors.  Euro and Swissie are outperforming, while Kiwi and sterling are underperforming.  EM currencies are mostly firmer.  KRW and INR are outperforming, while the CEE currencies are underperforming.  MSCI Asia Pacific was up 1.3% on the day, with the Nikkei rising 2.3%.  MSCI EM is up 1.5% so far today, with the Shanghai Composite rising 0.9%.  Euro Stoxx 600 is up 0.4% near midday, while US futures are pointing to a higher open.  10-year UST yields are down 1 bp at 1.87%, while the 3-month to 10-year spread is flat at +35 bp.  Commodity prices are mixed, with Brent oil up 0.1%, copper flat, and gold down 0.6%.

Markets have reacted positively to President Trump’s press conference yesterday.  His tone was calm and measured, and he seemed to downplay the notion of further escalation by pointing out that no one was killed in the Iranian attack.  He left the door open for future talks, saying that any new deal must allow “Iran to thrive and prosper, and take advantage of its enormous untapped potential. Iran can be a great country.”  There was a small scare overnight with headlines of attacks Baghdad’s Green Zone but was duly ignored since there were no casualties.  We still find it hard to believe that this story has ended but for now, risk assets remain bid after the S&P 500 hit another record high yesterday.

The dollar continues to gain traction. DXY is trading at its highest level since December 27 and is on track to test the December 23 high near 97.817. Break above the 97.71 area (retracement objective and 200-day moving average) would set up a test of the November 29 high near 98.544.  The euro is on track to test the December 20 low near $1.1065, while sterling looks likely to break below $1.30. USD/JPY is the big mover, trading at highs not seen since December 30 and on track to test the December 16 high near 109.70.  After that lies the May 2019 high near 110.65

AMERICAS

Strong ADP reading of 202k private sector jobs yesterday was the final clue for Friday NFP.  Weekly jobless claims for the BLS survey week rose to 235k, the highest for a survey week since December 2017 (244k), whilst the employment component for ISM manufacturing PMI fell to 45.1 from 46.6 in November.  Employment component fell by a smaller amount in the ISM non-manufacturing report, to 55.2 from 55.5 in November.  After last month’s huge 266k jobs gain, we lean the other way and look for a weak number but really, it’s anybody’s guess.

The North American session is quiet in terms of US data.  Only weekly jobless claims (220k expected) will be reported.  In terms of the Fed, Clarida, Williams, Evans, and Bullard all speak.  Canada reports December housing starts (210.5k expected) and November building permits (1.0% m/m expected).  Next Bank of Canada meeting is January 22 and rates are expected to remain steady at 1.75%.  However, odds of a cut increase as the year progresses and a 25 bp move is nearly priced in by year-end.

Mexico reports December CPI.  Inflation is expected to ease to 2.78% y/y from 2.97% in November.  If so, it would be the lowest since August 2016 and moves further below the 3% target.  Next policy meeting is February 13 and a 25 bp cut to 7.0% is expected then.  November IP will be reported Friday, which is expected to contract -1.6% y/y vs. -3.0% in October.

Peru central bank is expected to keep rates steady at 2.25%.  CPI rose 1.90% y/y in December, remaining in the bottom half of the 1-3% target range.  The bank just cut rates 25 bp at the November meeting and so another cut this month seems too soon.  The economy remains sluggish and so we believe the bank will leave the door open to further easing this year if needed.

EUROPE/MIDDLE EAST/AFRICA

German November IP was slightly better than expected but still tepid. IP rose 1.1% m/m and -2.6% y/y in November. This follows yesterday’s disappointing factory orders data. We still should get a bounce in economic activity driven by the better outlook for international trade, but it’s still had to get excited about a recovery in the German industrial sector.  Also of note, exports dropped 2.3% m/m in November, well below decline of 0.9% expected, painting an even gloomier picture for Q4.

Sterling took a hit on dovish comments by outgoing BOE Governor Carney. He said that a rebound from Brexit uncertainty is not assured, and that “persistent weakness could require prompt response.” A discussion about near-term stimulus in the UK sounds premature at this stage, especially with the government planning to increase spending. Still, it seems to have caught markets off guard. Sterling depreciated 0.5% against the dollar on the headlines and shorter-dated yields are down around 4 bp. There is about a half a cut priced in for 2020, according to the Bloomberg model.

Bank of Israel is expected to keep rates steady at 0.25%.  CPI rose only 0.3% y/y in November, well below the 1-3% target range.  The economy has taken a back seat to politics ahead of the March 2 election, as Prime Minister Netanyahu just asked the Knesset for immunity from prosecution.  Essentially, he is banking on winning a majority that will grant his request.

ASIA

China reported December CPI and PPI.  The two came in at 4.5% y/y and -0.5% y/y vs. 4.7% y/y and -0.4% y/y, respectively.  The focus is clearly on growth after the PBOC cut reserve requirements 50 bp last week and an official said it has room to cut further.  Monetary policy will clearly remain accommodative this year.  Elsewhere, China confirmed that Vice Premier Liu He will travel to Washington next to sign the Phase One trade deal.  Liu will head the delegation that also includes PBOC Governor Yi Gang, Commerce Minister Zhong Shan, Vice Minister of Finance Liao Min, and many other senior officials.

Thailand announced new measures to lean against currency strength. This time around, the central bank will relax the limits on how much exporters can hold overseas, liberalize foreign currency deposits to allow corporates and individuals to hold FX onshore, and soften restrictions on foreign investment by insurance companies. This follows a series of measures taken last year. The baht has appreciated around 5.5% over the last 12 months, outperforming just about every major EM currency.  The EM Currency Index (FXJPMECS), for example, is down 3% over the same period.