Dollar Comes Back Bid

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  • The focus is on US politics and the high degree of uncertainty
  • The UK trade balance deteriorated more than expected
  • Turkey November current account deficit came in at -$2.3 bln; Mexico reports November IP
  • Polish central bank is expected to keep rates steady at 1.5%
  • Brazil IPCA December inflation came in at 6.29% y/y ahead of COPOM decision (50 bp cut expected)

The dollar is mostly firmer against the majors.  The dollar bloc is outperforming, while the yen and the euro are underperforming.  EM currencies are mostly weaker.  ZAR and MXN are outperforming, while TRY and the CEE currencies are underperforming.  MSCI Asia Pacific was up 0.2%, with the Nikkei rising 0.3%.  MSCI EM is up 0.3%, even with China markets falling 0.7%.  Euro Stoxx 600 is up 0.2% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is up 1 bp at 2.39%.  Commodity prices are mostly higher, with oil up 0.6%, copper flat, and gold up 0.1%.

Reports that a file from a former UK intelligence officer that has circulated among policymakers and reporters for some time have been unable to derail the dollar, which is edging higher against most of the major currencies today.  The reports claim that Russia collected damaging material to try to blackmail Trump and that senior people close to the President-elect were in contact with Russia during the campaign

The focus is on US politics and the high degree of uncertainty.  The lead story in the Financial Times is that Trump’s nominee for Attorney General “Sessions retreats from Trump’s election rhetoric on in Senate hearing.”  In particular, the paper identifies three areas of divergence:  Russia, Muslims, and torture.  Today, Tillerson, the former Exxon CEO and nominee for Secretary of State, is also expected to take a firmer line on the risks from Russia.

These hearings may be overshadowed to some extent today by Trump’s press conference, the first since July.  The topic initially was going to be how he was arranging his extensive investments to avoid potential conflicts of interest, but the reports on Russia may be of more immediate interest.  And it is not like there is much US data to compete with these political developments.  The MBA’s Mortgage Applications report is the only data on tap.  The economic calendar picks up starting tomorrow with import prices and weekly initial jobless claims, followed by Friday’s PPI and retail sales.

In fact, the economic calendar has been sparse today.  The highlights are the continued reporting of national industrial output figures for November in Europe and the UK’s trade figures.  The UK and Spain reported industrial production figures, and both followed the lead of France yesterday to report stronger than expected data.  Spain’s industrial output jumped 1.8% in the month of November.  The Bloomberg median forecast was for a 0.4% gain.  The year-over-year seasonally adjusted pace is 3.2%, up from 0.6% in October (initially 0.5%).

The UK’s industrial output rose 2.1% in November, and the October decline was shaved to -1.1% from -1.3%.  This is the largest increase in seven months.  The year-over-year pace stands at 2.0%.  The Bloomberg median forecast was for a 0.7% pace.  Manufacturing drove the increase.  It rose 1.3% on the month and 1.2% year-over-year.

On the other hand, the UK trade balance deteriorated more than expected.  The overall trade balance (goods and services) rose to GBP4.167 bln, which is more than 10% larger than anticipated.  The October shortfall was revised to GBP1.547 bln from GBP1.971 bln.  The deterioration can be accounted for by merchandise trade.  That trade deficit widened to GBP12.16 bln from a revised GBP9.885 bln (from GBP9.711 bln).  Total imports jumped 8.4%.  Imports of transport equipment (e.g., ships and aircraft) rose and the increase (GBP1.4 bln) accounts for around half of the trade deterioration.  Exports rose 2.8%.

Higher commodity prices are helping lift equity markets today.  Oil is firming after approaching one-month lows, partly in anticipation of a 1.5 mln barrel build in US oil stockpiles.  Iron ore prices rose 3% in China after a 5.5% gain on Tuesday.  The MSCI Asia Pacific Index rose 0.2%.  It has been up every day this week and has advanced five of the past six sessions and nine of the past 11.  Korea and India markets led with gains of near 1.5% and 1.0%, respectively.  The Hang Seng’s 0.8% advance is notable because it is the fifth successive gain and the ninth gain in 10 sessions.

European markets are narrowly mixed.  Germany, France, and the UK equities are edging higher, while Spain and Italy are slightly heavy.  Telecoms and materials are leading the small gain in the Dow Jones Stoxx 600.  It is the opposite in the bond markets.  Core bonds heavy and peripheral bonds are firmer.  The US 10-year Treasury is just below 2.40%.

The euro poked above $1.0625 yesterday, its high for the year, but found keen sellers.  As North American dealers return, the euro is back at the week’s lows a little above $1.0510.  We have suggested a break of $1.0480-$1.0500 would offer the first sign that the dollar’s correction that arguably began in mid-December is over.  The dollar found support near JPY115.20 yesterday and has recovered to almost JPY116.50.  There seems to be potential toward JPY117.50 (the week’s high), but this is still a big figure off last week’s high near JPY118.60.

Sterling has traded on both sides of yesterday’s range.  As we noted, the break of $1.22 earlier this week was the first time in more than two months and is important from a technical point of view.  It now is acting as resistance and sterling was sold as this was approached in Asia.  Sterling briefly dipped below $1.21 for the first time since October 25.  A near-term low may be in place, and another test on $1.22 cannot be ruled out now.

The Australian and New Zealand dollars are among the best performers today and are extending this week’s advance.  The Aussie is knocking on $0.7400, its best level since the Fed hike.  A move above there would spur gains toward $0.7500.  The Kiwi continues to trade in the same broad range it has been in since the second half of last week.  The Canadian dollar is firm, and although, like the Aussie is near its best levels since mid-December, it is trading in a relatively narrow range for the last several sessions.

Turkey November current account deficit came in at -$2.3 bln vs. -$2.75 bln expected.  The 12-month total rose to -$33.7 bln from -$33.6 bln in October, the highest since November 2015.  Yesterday’s move to cut the central bank’s FX reserve requirement had little lasting impact, with USD/TRY recovering to make a new all-time high today near 3.8950.  Furthermore, threats of FX intervention ring hollow given how low foreign reserves are currently.

Polish central bank is expected to keep rates steady at 1.5%.  CPI jumped 0.8% y/y in December, the highest rate since October 2013.  Whilst central bank officials have said that the tightening cycle is unlikely to start until 2018, we think that rising price pressures will move up that timetable.

Brazil December IPCA inflation came in at 6.29% y/y vs. 6.34% expected.  This was the lowest rate since April 2014, and supports an acceleration of the easing cycle as COPOM meets today.  Consensus is a 50 bp cut to 13.25%, but a small handful of analysts are looking for 75 bp.  We believe 50 bp is likely.  For now, BRL continues to outperform within a negative EM environment.

Mexico reports November IP, which is expected to rise 0.5% y/y vs. -1.4% in October.  Some may express dismay that MXN is still under pressure despite Banxico intervention, but we are in a strong dollar environment.  Banxico is under no illusions that it can reverse the trend, but it can add liquidity to increasingly illiquid markets.  USD/MXN hit a new all-time high overnight around 21.85, but the pace is more important than the level for policymakers.