Dollar Stalls as Market Sentiment Improves

by
Win Thin
My articles About meMy booksMy videos
Follow on:LinkedIN
Seeking Alpha

• The virus news stream remains mixed; oil remains at center stage with still extreme volatility.
• The White House and House Democrats struck a deal on a new aid package worth $484 bln
• Canada reports March CPI; Mexico delivered a surprise 50 bp cut to 6.0% yesterday afternoon
• ECB will consider accepting sub-investment grade bonds as collateral in its operations; reports suggest Italy will boost its fiscal stimulus efforts
• UK reported March CPI data; Turkey is expected to cut rates 50 bp to 9.25%; South Africa March CPI rose 4.1% y/y
• Australia reported better-than-expected preliminary March retail sales

The dollar is broadly weaker against the majors as market sentiment improves.  The dollar bloc is outperforming, while Nokkie and euro are underperforming.  EM currencies are mostly firmer.  ZAR and MYR are outperforming, while HUF and KRW are underperforming.  MSCI Asia Pacific was up 0.3% on the day, with the Nikkei falling 0.7%.  MSCI EM is up 0.9% so far today, with the Shanghai Composite rising 0.6%.  Euro Stoxx 600 is up 1.1% near midday, while US futures are pointing to a higher open. 10-year UST yields are up 2 bp at 0.59%, while the 3-month to 10-year spread is up 2 bp to stand at +50 bp. Commodity prices are mostly higher, with Brent oil up 0.1%, WTI oil down 1%, copper up 1.1%%, and gold up 0.9%.

The virus news stream remains mixed. There was a considerable spike in new infection in the US yesterday, even as metropolitan areas are seeing some improvement. Infection rates in Germany and Singapore have accelerated a bit. In France, however, the number of patients admitted to ICU declined to the lowest in three weeks. The number in Italy and Spain have also continued to improve.

Oil remains at center stage with still extreme volatility.  While the extreme price action this week has been in WTI, Brent is also getting dragged down as oversupply remains in place.  OPEC+ representatives are saying they are open to further output cuts, but markets need to see concrete actions before any bounce can be seen. WTI has normalized somewhat but remains at extremely depressed levels. Trump mention fiscal aid to the sector but if it happens, we doubt  this will be meaningful enough to make a difference. The oil sectors in the US and Canada are due for a major adjustment and we doubt there is any way to avoid it.

The dollar is trying to build on its recent gains. DXY could not sustain its break yesterday above the 100.30 area but for now has gained a toehold above 100.  A clean break would target the April 6 high near 100.931. The euro remains heavy just below $1.09 while sterling is trading modestly higher after seeing support near the $1.2250 area yesterday.  Lastly, USD/JPY remains stuck in narrow ranges just below the 108 area. We remain constructive on the dollar.

AMERICAS

The White House and House Democrats struck a deal on a new aid package worth $484 bln. The Senate convened yesterday afternoon and approved it by unanimous consent.  This opens the door for the House to vote on it as soon as Thursday. The Paycheck Protection Program will be topped off with another $320 bln, with a separate $60 bln earmarked for the Economic Injury Disaster Loan program. Another $100 bln will go to hospital funding and $25 bln for virus testing, which were the major demands made by the Democrats. Aid for state and local governments will reportedly be addressed in future measures.

There is no US data of note today, only weekly mortgage applications. New York Fed officials Singh and Stiroh will address covid-19 and climate change, respectively.

Canada reports March CPI data. Headline inflation is expected to plunge more than a full percentage point to 1.1% y/y, while common core is expected to remain steady at 1.8% y/y.  Last week, the Bank of Canada kept rates at the 0.25% lower bound but expanded its asset purchases to include provincial and corporate debt.  Next policy meeting is June 3, and further tweaks to its QE program may be seen then.

Banco de Mexico delivered a surprise 50 bp cut to 6.0% yesterday afternoon. This was the second emergency cut in this cycle and takes the policy rate to a three-year low. The bank also announced a series of moves to improve market liquidity, including new repo windows for government and corporate debt as well as allowing FX hedge sales after market close.  Measures to boost funding for banks in order to support small businesses were also introduced. Next scheduled policy meeting is May 14 and another cut then is likely, if not sooner. Yet so far, Mexico has not complemented monetary policy with fiscal measures.

EUROPE/MIDDLE EAST/AFRICA

Reports suggest the ECB will consider accepting sub-investment grade bonds as collateral in its operations. This seems to be a pre-emptive move ahead of likely downgrades of EU sovereigns (Italy, for example) as they expand fiscal efforts to fight the fallout from the pandemic. Indeed, our own ratings model has Italy at BB+, compared to a BBB by S&P and Fitch. Recall that the ECB allows Greek bonds as part of its emergency QE program and it has extended the concession to accepting it as collateral. In other words, the precedent is there. Officials will reportedly hold a call today to discuss the matter.

Reports suggest Italy will boost its fiscal stimulus efforts. Prime Minister Conte will reportedly seek parliamentary approval to boost the budget deficit by around EUR55 bln ($60 bln).  Conte’s initial plan last month was worth around EUR25 bln, but the latest moves will push the deficit higher than the IMF’s estimate for -8.3% of GDP this year.  This supports our view that the nation will be downgraded as a result of the deteriorating fiscal outlook.

Italy BTP spreads to German bunds have come under increasing pressure since mid-March. Besides the fiscal deterioration, the widening is also due to the dashed hopes for joint debt issuance by the EU, along with worsening economic prospects for the county. Note, however, that the 10-year spread (260 bp) is still not at the high for the cycle, which was still below the 2019 highs. Spreads in Spain and Portugal have widened in sync with that of Italy, albeit by a smaller magnitude.

UK reported March CPI data. Headline inflation fell a couple ticks to 1.5%, as expected, while CPIH fell a tick more than expected to 1.5% y/y. BOE MPC member Tenreyro warned last week that it will get more difficult to interpret inflation readings as data collection becomes harder and spending patterns shift. Even then, she predicted that inflation will probably fall below 1% in the coming months. Like other central banks, we suspect the BOE will eventually expand its QE program as the impact of the virus worsens. Next BOE policy meeting is May 7.

Turkey central bank is expected to cut rates 50 bp to 9.25%. As usual, expectations are all over the place and range from no cut to cuts of 25, 50, 75, and 100 bp. CPI rose 11.9% y/y in March. While still well above the 3-7% target range, the direction is downward and so the bank is likely to continue pushing real rates further into negative territory. At this point, it seems the lira is less of a priority than boosting the economy. USD/TRY is edging towards the psychological 7 level and after that is the all-time high near 7.2360 from August 2018.

South Africa March CPI rose 4.1% y/y vs. 4.2% expected and 4.6% in February. Inflation is now in the bottom half of the 3-6% target range. Given the dire outlook for the economy, the SARB just delivered an emergency 100 bp cut to 4.25% last week. Next policy meeting is May 21 and if inflation remains well-behaved, another cut then seems likely. Fiscal stimulus will be seen too, as the government just unveiled a ZAR500 bln ($26 bln) package to boost the economy. ZAR130 bln will come from the existing budget, with the rest of it will be funded by both domestic and international borrowing.

ASIA

Australia reported better-than-expected preliminary March retail sales. Retail sales rose 8.2% m/m, the most on record but largely related to hoarding of food and essential products. In other words, this doesn’t seem especially meaningful for assessing the health of the Australian economy. April PMI data out tomorrow should give markets a better look at the economy. Still, AUD is benefitting from improved market sentiment today and is up 0.8%, the best performing major on the day.

You Might Also Like

Dollar Firm in Thin Holiday Trading

The virus news stream is mostly positive today; yet risk assets are starting the week under some modest pressure. The dollar took a hit last week but we think it will recover; some US data releases from Good Friday are worth repeating. With most of Europe closed today, the news stream from the region is very light; oil prices could not extend their gains today after OPEC+ finalized output cuts over the weekend.

Dollar Under Modest Pressure as Europe Returns from Holiday

The tug of war between extending vs. softening lockdowns continues. The dollar remains under modest pressure but we think it will eventually recover; Bernie Sanders has endorsed Joe Biden. Europe reopens from holiday today but the news stream remains light; South Africa surprised with an emergency 100 bp rate cut.

Dollar Firm as Equities and Oil Start the Week Under Pressure

The lockdown vs. opening debate continues in just about every country; the dollar is consolidating recent gains. Reports suggest the White House and House Democrats are nearing a deal on another aid package worth nearly $500 bln; the extra fiscal stimulus will add to downward ratings pressure on the US.

Dollar Stabilizes as Markets Await Fresh Drivers

Press reports suggest that the mood in Beijing is pessimistic after President Trump pushed back against tariff rollbacks. Fed Chair Powell met with President Trump and Treasury Secretary Mnuchin yesterday. Hungary is expected to keep rates steady; the deadline to form a government in Israel is fast approaching. RBA released dovish minutes from its November policy meeting.

Dollar Builds on Recent Gains

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.

Dollar Builds on Gains as Iran Tensions Ease

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.

Virus and Trade Tensions

Asian markets hit by a further outbreak of the coronavirus. US steps up trade rhetoric against EU and pushes back against UK digital tax plan. AUD stronger on solid Australian jobs report and pricing out of RBA easing. CAD weaker on dovish BOC communication yesterday.

Sharp Sell-Off on Virus Concerns

Global stocks lower on virus fears, yen appreciates, and yield curves flatten. Oil prices continue to fall while gold rises. Italian assets outperform on favorable election results for ruling coalition. German IFO survey disappoints, trimming nascent green shoots.