Dollar Mixed as Risk-Off Impulses Spread from Virus

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Win Thin
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• Reports that Wuhan coronavirus continues to spread hurt risk appetite overnight
• US President Trump and French president Macron agreed to take a step back from the digital tax dispute
• The dollar is taking a breather today; after last week’s huge US data dump, releases this week are fairly light
• The UK reported firm jobs data for November; BOJ kept policy steady, as expected
•  Moody’s downgraded Hong Kong by a notch to Aa3 with stable outlook; data out of Asia suggest regional trade is starting to recover

The dollar is mixed against the majors as the US returns from holiday.  Sterling and Stockie are outperforming, while Nokkie and Aussie are underperforming.  EM currencies are mostly weaker.  CZK and ZAR are outperforming, while KRW and CNY are underperforming.  MSCI Asia Pacific was down 1.1% on the day, with the Nikkei falling 0.9%.  MSCI EM is down 1.3% so far today, with the Shanghai Composite falling 1.4%.  Euro Stoxx 600 is down 0.7% near midday, while US futures are pointing to a lower open.  10-year UST yields are down 2 bp at 1.81%, while the 3-month to 10-year spread is down 1 bp at +26 bp.  Commodity prices are mostly lower, with Brent oil down 1.5%, copper down 1.6%, and gold down 0.3%.

Reports that Wuhan coronavirus continues to spread hurt risk appetite overnight. What we know so far is that – like SARS, which killed some 800 people – the illness can be transmitted people-to-people, and that four people have been killed with many more infected.  The entire region is on alert after cases were found in Japan, Thailand, and South Korea.  Furthermore, the outbreak comes just as China mobilizes for the upcoming Lunar New Year holiday, when hundreds of millions of workers will travel back to there homes and thereby increase the chances of a further spread in the virus.

US President Trump and French president Macron agreed to take a step back from the digital tax dispute. This means no tariffs on French goods or on big tech companies. Now they intend to work together towards a solution through the ear to avoid re-escalation. On the other hand, negotiations about the future relationship of the EU and UK are becoming thornier. The EU is looking to pre-empt infringements by embedding fines into the agreement, as well as an arbitration-based dispute mechanism. The UK, meanwhile, is looking to secure it’s “right to diverge” from EU rules.

The dollar is taking a breather today. DXY traded yesterday at the highest level since December 24 but ran into resistance at the 200-day moving average near 97.72. It is likely to test the December 23 high near 97.817. The 97.71 area is key as a clean break above would set up a test of the November 29 high near 98.544. The euro remains heavy though support held near the $1.1080 area. That level is key, as a break below would set up a test of the November 29 low near $1.0980.  We remain bullish on the dollar and look for further gains.

AMERICAS                   

After last week’s huge US data dump, releases this week are fairly light.  The most important one is the Chicago Fed National Activity Index for December that will be reported Wednesday.  It remains the best indicator of US recession risk and it rose to 0.56 in November from -0.76 in October.  It is expected at 0.15 in December.  If so, the 3-month average would fall to -0.02 from -0.25 in November and would be the best reading since August.  It remains far from the -0.7 recession threshold.

Clearly, the US economy is still doing well.  The Atlanta Fed’s GDPNow model estimates Q4 GDP growth at 1.8% SAAR, steady from the previous reading.  Elsewhere, the NY Fed’s Nowcast model has Q4 growth at 1.2% SAAR, up from 1.1% previously, while its estimate for Q1 growth rose to 1.7% SAAR from 1.2% previously.  We are clearly far from recession and the Fed is right to pause for now to assess the landscape.

EUROPE/MIDDLE EAST/AFRICA

The UK reported firm jobs data for November.  Average weekly earnings rose 3.2% y/y vs. 3.1% expected, while employment rose 208k vs. 110k expected. Data recently have come in much weaker than expected and so this is a welcome relief.  Still, markets are looking for a BOE cut next week. WIRP suggests 63% odds of a cut January 30, down from 70% Friday but well above the 5% odds two weeks ago. Sterling is seeing a small bounce today but we see little sustainable relief for the economy as Brexit uncertainty continues this year.  Cable should test the downside, though the $1.30 area is providing some near-term support.

ASIA

Bank of Japan kept policy steady, as expected. The bank upgraded its economic forecasts by a couple of ticks to 0.8% in FY2019 and 0.9% for FY2020. However, it cut its inflation forecasts by a tick to 0.6% and 1.0%, respectively. With fiscal stimulus boosting near-term growth prospects, it’s clear that further monetary stimulus is unlikely this year. However, Governor Kuroda made it clear that risks are still skewed to the downside. He warned that trade tensions are still a concern despite the Phase One deal, and said that the BOJ would ease policy if needed. USD/JPY touched a new cycle high near 110.30 last Friday but has since edged lower. Support near 110 is holding but the pair is subject to periodic risk-off impulses.

Data out of Asia suggest regional trade is starting to recover. Taiwan reported December export orders up 0.9% y/y vs. 0.4% expected and -6.6% in November. This was the first positive reading since October 2018.  Q4 GDP rose 3.38% y/y vs. 2.78% expected and 2.99% in Q3. Elsewhere, Korea reported trade data for the first 20 days of January.  Exports contracted -0.2% y/y while imports rose 3.0% y/y. Korea reports its Q4 GDP data tomorrow.

Moody’s downgraded Hong Kong by a notch to Aa3 with stable outlook. The agency cited “inertia” on the part of policymakers in dealing with the political and economic risks that Hong Kong faces, which “may reflect weaker inherent institutional capacity than Moody’s had previously assessed.” Moody’s is now the most negative on Hong Kong, as Fitch downgraded it by a notch to AA back in September.  S&P is the most positive and has kept it at AA+ so far. The longer the protests and resulting recession continue, the worse Hong Kong’s credit metrics will get.