Dollar Marks Time

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  • The EU-IMF/Greece deal is more of the same
  • There are three highlights of the North American session today: US trade data, the BOC decision, and DOE oil inventory data
  • Brazil’s Congress passed a bill that allows the government to post a primary budget deficit of BRL170.5 bln in 2016
  • Mexico reports April trade and Q1 current account; Banco de Mexico releases its quarterly inflation report

The dollar is mixed against the majors in consolidative trade. The Antipodeans and the Norwegian krone are outperforming, while the yen and sterling are underperforming. EM currencies are mostly firmer. KRW, INR, and MYR are outperforming while ZAR, TRY, and CNY are underperforming. MSCI Asia Pacific was up 1.5%, with the Nikkei up 1.6%. MSCI EM is up 1.6%, with Chinese markets down modestly. Euro Stoxx 600 is up 1.1% near midday, while S&P futures are pointing to a higher open. The 10-year UST yield is flat at 1.87%. Commodity prices are mostly higher, with oil up 1% ahead of DOE inventory data. Copper is up 0.5%.

The US dollar is little changed against the major currencies as yesterday’s moves are consolidated and traders wait for fresh developments. Global equities were higher after Wall Street’s advance yesterday. Asia Pacific bond yields were firm, following the US lead, but European 10-year benchmark yields are lower, led by the continued rally in Greek bonds after an agreement was struck that will free up a tranche of aid.

The relatively stable capital markets are itself news. Last summer and again earlier this year, weakness of the yuan and Chinese equities were a major disruptive force. Earlier today, the PBOC “fixed” the yuan at its lowest level since March 2011. The dollar has been trending higher against the yuan steadily even if slowly all month. Today it is at three-month highs.

Chinese equities were the only Asian market to weaken today. The MSCI Asia-Pacific Index advanced 1.5% today off seven-week lows seen earlier in the week. The HK China Enterprise Index was up 2.7%. China’s markets were off 0.25% today, and year-to-date off 20-22%

Yesterday, the Wall Street Journal thought it was news that China is not letting market forces drive the yuan. We have long discussed the gap between China’s declaratory policy and its operational policy. Today, Bloomberg reports that the Chinese delegation to the upcoming Strategic and Economic Dialogue talks (June 6-7) is keenly interested in whether the Fed hikes in June or July.

The report claims China would prefer July. Can it really make that much of a difference? Is this a topic for a strategic discussion? Even though the Federal Reserve may practice a type of democratic centralism that is familiar in China, can Yellen (Fed chair often attends the talks) commit one way or the other, and even if she could, would she (or the US) want to?

Moody’s downgraded Germany’s largest bank to start the week, and now the CEO of Italy’s largest bank has stepped down, clearing the way apparently for a capital campaign. The Dow Jones Stoxx 600 is up 1.1% as the financials continue to outperform (+1.6%). The news stream in Europe has been mostly limited to the German May IFO, which was better than expected, and the Italian industrial sales and orders were weak.

The EU-IMF/Greece deal is more of the same. Over the weekend, the Greek parliament approved numerous measures that tightened fiscal policy. It also adopted a contingency plan if it had not met its fiscal targets in 2018. The EU agreed to free up 10.3 bln euros so that Greece can service its debt, chiefly in official hands.

There has been tension between the EU and IMF over the sustainability of Greece debt. The IMF had called for “unconditional” relief. Germany appeared the most adamant: No. This seemed to be both a principled position as well as a political consideration ahead of next year’s election. The IMF capitulated. Rather than debt relief up front, the IMF has agreed to give its blessings to debt relief after the completion of the current program in 2018.

There had been reports that the many of the non-European members of the IMF had een critical of the multilateral lender’s exposure to Greece. The major concession made today does not address that criticism. However, a new battle likely will be fought as later this year the IMF will conduct a new debt sustainability analysis and assess before committing new funds.

There are three highlights of the North American session today. First, the US advance merchandise trade report for April (expected to widen to $60 bln from $56.9 bln) will be plugged into Q2 GDP models.

Second, the Bank of Canada will announce the decision of its monetary policy meeting. There will be no change in rates, but the accompanying statement will be quickly scrutinized for bias. The economy appears to have lost some momentum, and the Alberta fires won’t help. At the same time, the apparent recovery in the US after a six-month soft patch is welcome news for Canada. The recovery in oil prices is also a favorable development for Canada. Also, since the last meeting, the Canadian dollar’s four-month 14% rally ended, and it has pulled back almost 5% this month.

The third development is the oil market itself, or more to the point, the inventory data. Late yesterday, API estimated that oil inventories fell 5.1 mln barrels last week. This helped lift prices to seven-month highs. The EIA’s estimate is regarded as more reliable. The median was expecting a 1.6 mln barrel draw down before the API’s estimate. A larger liquidation of inventories could see the price above $50 a barrel for the first time since last October.

Brazil’s Congress passed a bill that allows the government to post a primary budget deficit of -BRL170.5 bln in 2016. The Rousseff government had proposed a primary surplus. Both the Senate and lower house voted after a joint session that ran well past midnight last night. The vote counts were not made public yet. Chalk this up as a small victory. Passing the actual austerity measures needed to narrow this deficit will be the hard part. We believe the days of BRL outperformance are behind us as markets come to grips with hard realities that Brazil is facing.

Mexico reports April trade and Q1 current account data. Banco de Mexico also releases its quarterly inflation report today. Last week, it cut its 2016 growth forecast range to 2.2-3.2% from 2.6-3.6% previously. Mid-May CPI came in lower than expected, up 2.53% y/y vs. 2.67% median forecast. Despite a nearly 7% drop in the peso this month, inflation pass-through has yet to be seen. There is an ongoing debate about possible Banxico intervention and rate hikes in response to the weak peso, but we just don’t see a clear-cut case for imminent action.