Dollar Firms on Turnaround Tuesday

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  • As widely expected, the UK Supreme Court ruled that Parliamentary approval is needed to trigger Article 50 and start the divorce proceedings with the EU
  • Turning to the eurozone, the flash January PMI was reported
  • Japan’s preliminary manufacturing PMI was also reported
  • Central Bank of Turkey unexpectedly kept the benchmark repo rate unchanged at 8.0%
  • Hungary and South Africa likely to remain on hold; Mexico reports mid-January CPI

The dollar is broadly firmer against the majors. The Kiwi and the Scandies are outperforming, while the yen and sterling are underperforming. EM currencies are mixed. RUB and IDR are outperforming, while the TRY and the CEE currencies are underperforming. MSCI Asia Pacific was down 0.2%, with the Nikkei falling 0.6%. MSCI EM is up 0.3%, with China markets flat. Euro Stoxx 600 is up 0.3% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is up 3 bp at 2.43%. Commodity prices are mixed, with oil up 0.6%, copper up 0.8%, and gold down 0.5%.

As widely expected, the UK Supreme Court ruled that Parliamentary approval is needed to trigger Article 50 and start the divorce proceedings with the EU. The Court decided by an 8-3 majority that a bill needs to be submitted to both chambers, but that the approval of the regional assemblies (e.g. Scotland, Northern Ireland) is not necessary.

A bill is more onerous than a motion in that not only are both chambers involved, but amendments can also be added that contain further conditions. This appears to be Labour’s strategy; not to oppose the triggering of Brexit, but to ensure a larger role for parliament to ensure it is integral in the process. Two elements that could work in favor of the government is the fact that it was not an unanimous decision, and that the regional assemblies have no role. The former had been anticipated, though some reports suggested a 7-4 decision. The latter had greater potential to disrupt May’s timetable given the recent collapse of the Northern Irish assembly.

The issue now becomes parliamentary in nature in the sense that the government will craft a bill to minimize the scope for amendments, and which amendments are discussed and for how long. The Tories have a small majority in the House of Commons, and the challenge will be for an amendment to find sufficient support. Initially at least, the Supreme Court ruling ought not to push back May’s end of Q1 target for triggering Article 50.

Turning to the eurozone, the flash January PMI was reported. The composite reading of 54.3, down ever so slightly from the 54.4 December reading, is consistent with continued steady growth. Two details in particular were notable. Employment is at its best level in nine years and forward-looking new orders also rose. In addition, there were some signs of pricing power from suppliers, which likely reflect the rise in commodity prices. Import prices may also have been lifted by the euro’s depreciation.

Although it will do little to change the dialogue ahead of the April election, France’s composite reading of 53.8 is the highest in this short time series (three years old). Consider that last January the composite was at 50.2, and in June it was at 49.6. The gains came from services, not manufacturing. By contrast, the German composite slipped to 54.7 from 55.2. Services were a drag, falling to 53.2 from 54.3. Manufacturing, on the other hand, rose to 56.5 from 55.6, matching its record high set in January 2014. We do not want to make a big deal of the decline in German composite reading. The average from Q4 16 was 55.1 and Q3 53.8. The 12-month average is 54.3.

Japan’s preliminary manufacturing PMI was also reported. It rose to a three-year high of 52.8 (from 52.4). It bottomed last May near 47.7. The average from Q4 16 was 51.7 and Q3 49.7. This is consistent with our anticipation that the Japanese economy has some positive momentum to start the year.

The dollar’s recent losses were extended marginally against the yen in Asia before it recovered. Yesterday’s low was about JPY112.70 and last week’s low was JPY112.60. In Asia, the dollar was sold to nearly JPY112.50.   Near-term potential extends to JPY113.50, while a move above JPY113.70-JPY114.00 may be an early indication that a low may be in place.

The euro also made a marginal new multi-week high (~$1.0772) before hitting a wall of offers that sent it back to $1.0735. Trading is choppy and ranges are narrow. Although we still read the technical indicators as suggesting that the euro’s upside correction may be in its last stages, the underlying tone still is firm. A break of the $1.0700 area and, ideally, the $1.0660-$1.0680 area is needed to boost the chances that a high is in place.

Helping the dollar today is the recovery in US yields. Recall that last week; the 10-year yield fell to 2.30% before poking through 2.50% before the weekend. It fell to 2.40% yesterday and now is up a few basis points today. Investors are still waiting for more details about the infrastructure spending, deregulation, and tax cuts. Yesterday’s executive orders, including the federal hiring freeze and the prohibition of US funds being used by foreign organizations that facilitate abortions, are traditional Republican positions.

Central Bank of Turkey unexpectedly kept the benchmark repo rate unchanged at 8.0%. The market was truly split. Of the 26 analysts polled by Bloomberg, 5 saw no change, 4 saw a 25 bp hike, 9 saw a 50 bp hike, 2 saw a 75 bp hike, and 6 saw a 100 bp hike. The central bank hiked the late liquidity rate by 100 bp to 11%, hiked the top of the rates corridor by 75 bp to 9.25%, and kept the bottom steady at 7.25%. Bottom line: this was the bare minimum and very disappointing. The lira should remain under pressure.

National Bank of Hungary is expected to keep rates steady at 0.90%. Deputy Governor Nagy said recently that the bank is still in easing mode, but added that the bank would wait until March to decide on whether to adjust its cap on 3-month deposits again. We think rising inflation may prevent further easing this year.

South African Reserve Bank is expected to keep rates steady at 7.0%. The monetary policy statement should begin at 8 AM ET, with the decision to come 20-25 minutes later at the end. With CPI inflation accelerating to 6.8% y/y in December, it will be a closer call than we previously expected. Still, the bank is likely to wait until at least the March 30 meeting to see if the CPI acceleration last month was an outlier or a new trend.

Mexico reports mid-January CPI, which is expected to rise 4.52% y/y vs. 3.48% in mid-December. If so, this would be the highest since May 2013 and supports the case for further rate hikes. Next Banxico meeting is February 9, and another 50 bp hike then is likely. The peso remains volatile, but this recent bounce, if sustained, could provide some relief ahead for the central bank.