Dollar Remains on Back Foot After ADP and FOMC

footbridge with symmetrical structure

  • Neither the stronger-than-expected ADP nor the as-expected FOMC managed to put a solid floor under the dollar
  • Data suggest a strong NFP reading
  • The highlight today is the BOE meeting and its quarterly inflation report
  • Czech central bank is expected to keep policy unchanged
  • The Mexican government has begun a formal 90-day consultation process with its business community that’s required before any talks to revise Nafta

The dollar is broadly weaker against the majors. The Aussie and the yen are outperforming, while sterling and the euro are underperforming. EM currencies are broadly firmer. TRY and KRW are outperforming, while INR and MYR are underperforming. MSCI Asia Pacific was up 0.1%, even with the Nikkei falling 1.2%. MSCI EM is up 0.4%, with China markets closed until February 6 for the Lunar New Year holiday. Euro Stoxx 600 is down 0.1% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is flat at 2.46%. Commodity prices are mixed, with Brent oil up 1%, copper down 0.1%, and gold up 1%.

The US dollar remains on its back foot despite the stronger than expected ADP job estimate and the FOMC that said nothing to dissuade investors that it will be gradually raising rates this year. The FOMC acknowledged rising consumer and business confidence. The decision to keep rates on hold was unanimous as expected. The FOMC continues to expect gradual hikes this year.

US headline ISM came in stronger than expected at 56.0 and compares to a revised 54.5 in December. The employment component rose to 56.1 from a revised 52.8 in December. Now, we have three pieces of the puzzle (PMI, strong ADP gain (246k), and low jobless claims for the survey week) that will probably have some observers leaning towards a stronger NFP number Friday. Consensus is currently at 175k vs. 156k in December, but the recent data suggest it could be closer to 200k. Also of note, the PMI’s prices paid component jumped to 69.0 from 65.5 in December. This is the highest reading since May 2011.

The US data today is of less significance. We note productivity and unit labor costs are a function of GDP. Soft GDP is likely to mean disappointing productivity and firm unit labor costs. Weekly initial jobless claims pale after ADP and ahead of tomorrow’s national report.

Japanese equities tumbled more than 1% while the 10-year JGB yield rose above 10 bp without eliciting a response from the BOJ. The dollar failed to push above JPY114 yesterday and has been pushed back to JPY112.50. Although it initially seemed that Japan was not in the US Administration’s cross-hairs, recent comments suggest it too is subject to the same kind of jawboning as Germany and China.

The euro is confined to an exceptionally narrow range around $1.08 and is inside yesterday’s range which is itself inside Tuesday’s range. The $1.08 area houses the 100-day moving average and the 50% retracement of the euro’s slide since the US election (~$1.0820).

The focus today is on the BOE meeting and the Quarterly Inflation Report. Carney has been sounding more optimistic on the economy and this may see the economic forecasts tweaked a bit. The combination of the drop in sterling and easier monetary policy may have helped the economy weather the potential disruption. The asset purchase program is nearing completion and is not expected to be renewed.

Sterling remains well bid and is at its best level since the US election. Sterling’s highs from December offer the next technical targets. These are found near $1.2720 and $1.2725. The UK parliament easily voted to give Prime Minister May authority to trigger Article 50 to begin its divorce from the EU. She is expected to do so in the first half of next month.

The Australian dollar is leading the move against the US dollar today, extending its rally another 1% today. The fundamental impetus came from a record trade surplus in December and an upward revision to the November series. The December trade surplus was A$3.5 bln and the November surplus was revised to A$2.04 from A$1.24. Rising commodity exports, especially coal (14%) and iron ore (10%), bolstered the trade figures. Natural gas exports are also increasing. Exports overall were up 5% in value terms. The favorable terms of trade are expected to carry into at least the start of this year. The Aussie is approaching $0.7700, which had been an important ceiling in the last few months of 2016. Although it had traded above the ceiling, it rarely closed above it and ultimately failed to establish a foothold.

It’s worth noting press reports suggesting some possible tensions in US-Australia relations. At issue is the refugee deal that was struck between Obama and Australian PM Turnbull. In a reportedly shortened phone call, President Trump expressed unhappiness with the agreement to take on 1250 refugees. However, Turnbull later implied that he was able to get a commitment to honor it. Stay tuned.

The Czech central bank is expected to keep policy unchanged. It should also keep its forward guidance steady, which sees an end to the koruna cap around mid-year. There is still a lot of debate about what the bank can and should do to limit CZK gains after the cap is ended. Negative rates seem unlikely, but perhaps the bank will shed some more light on this issue.

Press reports that the Mexican government has begun a formal 90-day consultation process with its business community that’s required before any talks to revise Nafta. Foreign Minister Videgaray said firms must be prepared for all scenarios. Mexico’s presidential spokesperson denied press reports that President Trump told Pena Nieto he could send in US soldiers to deal with the so-called “bad hombres” if the Mexican military proved unable to handle the situation.

The peso continues to rally despite the ratcheting up of tensions. Yet despite the recent drop, USD/MXN has only retraced about 38% of the November-January rise. It would take a break of the 50% objective near 20.10 to convince us that the trend has changed.