- The 45th President of the United States will be sworn in today, and the heavy cloud of uncertainty over priorities and policies will begin being lifted
- Our constructive outlook for the US dollar is based on the divergence of monetary policy, broadly understood, and the political risks emanating from Europe
- Ahead of Trump’s inauguration, China and the UK have reported important data
- Canada reports December CPI and November retail sales
- Taiwan December export orders rose 6.3% y/y; Chile’s central bank cut rates 25 bp to 3.25%, as expected
The dollar is mostly firmer against the majors. The Antipodeans and sterling are underperforming, while the Scandies are outperforming. EM currencies are mostly softer. KRW and TWD are outperforming, while SGD and the CEE currencies are underperforming. MSCI Asia Pacific was down 0.2%, even with the Nikkei rising 0.3%. MSCI EM is down 0.4%, even with China markets rising 0.8%. Euro Stoxx 600 is up 0.1% near midday, while S&P futures are pointing to a higher open. The 10-year UST yield is up 3 bp at 2.50%. Commodity prices are mixed, with oil up 1.1%, copper down 0.3%, and gold down 0.4%.
The 45th President of the United States will be sworn in today, and the heavy cloud of uncertainty over priorities and policies will begin being lifted. Much of the focus in the media has been soon-to-be President Trump’s comments about the dollar being too strong, partly because of the Chinese yuan. Mnuchin, the Treasury Secretary nominee, sought to clarify Trump’s remarks, suggesting that they were not meant to be a long-term policy endorsement. Indeed, at the ECB’s press conference yesterday, Draghi reminded reporters of the G20 consensus to refrain from competitive devaluations.
The dollar’s rise, which some trace back to mid-2014, has little to do with the strong dollar policy. In fact, many have poked fun or ridiculed the strong dollar policy in the first place, though it has not stopped some of the same observers who now are suggesting that it is being abandoned. On the other hand, we have argued that the strong dollar policy was meant to assure investors and the world that the US would not seek to devalue the dollar to promote trade or ease its debt burden.
Rubin articulated this stance in 1995 to differentiate his tenure from his predecessor Bentsen, who had threatened to let the dollar fall if Japan did not change its trade policies. Eight years earlier, then Treasury Secretary Baker had made a similar threat to Germany, which some observers suggest contributed to the equity market crash in 1987.
Also, we note that many observers who argued that there has been a currency war for several years now are also playing up Trump’s comments as if some threshold has been only now crossed. We have argued that there has never been a currency war. The pursuit of a monetary policy to stimulate or support domestic economic activity, we argued, is not a currency war, even if the currency falls as a consequence.
There is a risk that if the US abandons the G7 and G20 best practices of letting the markets determine exchange rates and does actually begin to talk the dollar down, other countries will follow, and a genuine currency war and trade war could be ignited. It is far too early to draw strong conclusions about the Trump Administration’s dollar policy, or nearly any policy for that matter. That said, we recognize that many of the economic team is pro-growth and favor reducing regulation.
Our constructive outlook for the US dollar is based on the divergence of monetary policy, broadly understood, and the political risks emanating from Europe. Since the spring, we have anticipated that the next US administration would complement the less accommodative monetary policy with fiscal stimulus and recognized the bullish implications of the policy mix. Our view then puts emphasis on interest rates in absolute terms and also relative to Europe and Japan.
US 10-year bond yields bottomed this week on Monday near 2.30% and now are pushing above 2.50% for the first time since January 3. This is lending the dollar some support. The dollar bottomed on Wednesday a little below JPY112.60 and is now trying to establish a foothold above JPY115.00. The euro peaked on Tuesday near $1.0720. Yesterday’s push below $1.06, seemingly on the back of Yellen’s confidence, was rejected and the euro was squeezed back to almost $1.07 today in Asia. However, activity remains choppy, and the single currency is back near $1.0630 before the North American session.
Ahead of Trump’s inauguration, China and the UK have reported important data. China reported its first increase in GDP growth in two years. It increased to 6.8% year-over-year from 6.7% and is in the middle of the 6.5%-7.0% official range. Industrial production rose 6.0%, which was slightly lower than expected and down from 6.2% in November. Retail sales rose 10.9%, a bit faster than expected and the strongest rise in 2016. Fixed asset investment slowed to 8.1% from 8.3%. For all of 2016, the Chinese economy reportedly expanded by 6.7%, helped by a 15.4% increase in loan growth.
The dollar peaked against the yuan two days after the Federal Reserve hiked interest rates in the middle of last month. We argue that that is when the market correction began, not at the turn of the calendar. Despite claims that China’s currency is dropping like a rock, it has actually risen for the fifth consecutive week. That is the longest rising streak for the yuan since early 2016.
The UK reported dismal December retail sales. The 1.9% headline decline on the month is the largest decline in four years. The Bloomberg median forecast was for a 0.1% decline. Adding insult to injury, the November series was revised to -0.1% from 0.2%. The decline was broad based. There are a few post hoc explanations, like rising prices and that Black Friday discounts in November took sales from December, but nothing particularly convincing. As a whole, retail sales rose 1.2% in Q4, which regarding next week’s first estimate of GDP is worth a one-tenth of one percentage point.
Sterling had seemed to be running out of steam near $1.2370, and the data saw it fall to almost $1.2280 before finding support. Sterling is poised to snap a two-week fall. Recall it had begun the week by gapping lower amid hard Brexit signals and briefly dipped below $1.20. Sell the rumor, buy the fact, coupled with the weaker US dollar tone in general, helped sterling recover. However, it was unable to rise through the $1.2430 area, where it had peaked ahead of the hard Brexit talk.
Canada reports December CPI and November retail sales. Headline CPI is expected to be flat, but the base effect would lift the year-over-year rate to 1.7% from 1.2%. Retail sales were likely lifted by auto sales, without which they would be flat. We suspect the risk is on the downside after November’s outsized 1.1% rise (1.4% excluding autos). The US dollar is advancing against the Canadian dollar for the third consecutive session. The greenback is snapping a three-week decline against the Loonie. The CAD1.3380 area is an important retracement target, and surpassing it could spur a move toward CAD1.3460-CAD1.3500 initially.
Trump’s inauguration and related stories will likely dominate the weekend press. Note that the French Socialists hold the first round of their primary on Sunday. The top two will face off on January 29. The polls suggest that former Socialist Macron, running as an independent, will likely handily beat any Socialist candidate. However, Le Pen’s base is sufficient to ensure participation in the second round of the presidential election in May. The real issue is who will run against her. Currently, the center-right Republican candidate Fillon is the most likely, but Macron may offer a robust challenge. In the Socialist primary, it appears to be a contest between three former ministers, including former Prime Minister Valls, Montebourg (energy) and Hamon (education).
Taiwan December export orders rose 6.3% y/y vs. 9.0% expected and 7.0% in November. With the mainland economy improving, it’s no surprise that Taiwan is feeling some positive impact. Export orders have now risen y/y for five straight months, while exports have risen y/y for three straight months and in five of the past six.
Late yesterday, the Chilean central bank cut rates 25 bp to 3.25%, as expected. It maintained its easing bias, and so another cut at the next meeting February 14 seems likely. The statement said that “The board forecasts that if recent economic trends persist, along with their implications for the medium-term inflation outlook, a further monetary impulse will be necessary.” Full minutes of the meeting will be published February 3.