Dollar Remains Resilient

Dollar Yen

  • The US dollar is edging higher against most of the major currencies in a session devoid of much news
  • European politics is widely cited as an important driver
  • The greenback has been resilient in the face of the latest decline in the Treasury yields
  • During the North American session, the US reports weekly mortgage applications and DOE oil inventories
  • BOT and RBI kept rates steady; Poland is also expected to keep rates steady at 1.5%
  • RBNZ decision will come out today at 3 PM ET, no change expected

The dollar is mostly firmer against the majors. The dollar bloc and the yen are outperforming, while the euro and the Scandies are underperforming. EM currencies are mostly weaker. PHP and INR are outperforming, while the CEE currencies are underperforming. MSCI Asia Pacific was up 0.3%, with the Nikkei rising 0.5%. MSCI EM is down 0.1%, despite China markets rising 0.5%. Euro Stoxx 600 is up 0.5% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is flat at 2.39%. Commodity prices are mixed, with WTI oil down 0.8%, copper up 1.4%, and gold up 0.2%.

The US dollar is edging higher against most of the major currencies in a session devoid of much news. The Canadian dollar and the Japanese yen are the exceptions. The euro is the weakest of the majors; off about 0.3% near $1.0650. After a strong advance yesterday, sterling just missed recording an outside up day, and is consolidating yesterday’s gains in a narrow range.

European politics is widely cited as an important driver. The most obvious metric is the premium being paid over Germany. Yet the premiums narrowed a little yesterday and are narrowing a little today. Moreover, on one hand, some observers argue investors are not taking the political risk seriously enough, and on the other hand, other accounts emphasize how much the spreads have widened already. How can the Stiglitz scenario be discounted? He suggests the monetary union could blow up this year.

The US 10-year yield is holding below the 2.40% that was breached yesterday. Recall the yield peaked the day after the December 14 FOMC decision to hike rates near 2.64%. It fell to 2.30% on January 17 and recovered over the next week to 2.54%. It has been drifting lower. The March 10-year note futures peak on January 17 at 125-13. Yesterday, it reached 125-10. The 125-16 area is the 38.2% retracement of the sell-off since the US election.

Although the dollar-yen rate is sensitive to US rates and the differential with Japan, the greenback has been resilient in the face of the latest decline in the Treasury yields. The dollar remains within the roughly JPY111.65-JPY112.80 range established on Monday. Still until the dollar resurfaces above JPY112.80, the technical tone is vulnerable.

The correlation between the dollar-yen rate and the Topix (percent change, 60-day rolling) is about 0.37, which is the highest since last September. The correlation between dollar-yen and the S&P 500 is has slipped to 0.18. It was above 0.5 for most of the first nine months of 2016.

Abe and Trump meet this week. Trump has already complained about the weakness of the yen and has withdrawn from the TPP. Although Abe was not initially a strong advocate of TPP, he came around to be key supporter, at least in part due to its help in overcoming domestic rivals (like the Agricultural Co-ops). One way to square the circle is to turn the multilateral agreement into a bilateral agreement. It would be consistent with Trump’s desire for bilateral over multilateral agreement. It would also blunt some of concerns about the Administration’s protectionism.

One talking point this week is about the significance of China’s reserves falling through $3 trillion. Some in the media are claiming this is come kind of important threshold, but it is not. For all practical purposes $2.998 bln is $3 trillion as much as .33333+.66666 is really the same thing as 1. Still, the fact is that China’s reserves continue to fall but the pace is slower. The Chinese way to address this is most likely NOT going to abandon the managed float, but to tighten capital controls and lending, especially now that 1) the economy appears to have stabilized and 2) PPI wholesale inflation is rising. Aggregate lending figures may be released before the weekend and are expected to show a sharp jump. The problem is that it can become a bit of a stop-go policy. Lending supports the economy, and when it works, curb lending, economy weakens and credit expansion is relaxed.

During the North American session, the US reports weekly mortgage applications and DOE oil inventory data. A 2.7 mln barrel increase in crude stockpiles is expected. Last night, API reported a 14.2 mln barrel increase in crude stockpiles so there are upside risks to the DOE data. There are no Fed speakers today. It’s worth noting that the Atlanta Fed tweaked its GDPNow forecast down to 2.7% SAAR from 3.4% on February 1.

Bank of Thailand kept rates steady at 1.5%, as expected. January CPI rose 1.55% y/y, the highest since September 2014. With low base effects from last year, we believe inflation will move toward the upper end of the 1.0-4.0% target range over the course of this year. While the BOT reiterated its accommodative stance, we believe that it is likely to start thinking about a rate hike towards mid-year. The bank also noted that recent baht gains might not be good for the economic recovery.

Reserve Bank of India unexpectedly kept rates steady. Most were looking for the bank to cut rates 25 bp. The RBI reiterated that it wants to get a clearer picture of the economic impact of the November demonetization. We had warned of surprised by hawkish surprise and no cut. The RBI moved its stance from accommodative to neutral, which we believe signals the end of the easing cycle. Price pressures are expected to pick up this year.

National Bank of Poland is expected to keep rates steady at 1.5%. Here too inflation pressures are rising and could force the NBP to hike in 2017, before its plan to start tightening in 2018. The economy remains robust, while CPI is expected to pick up from 0.8% y/y in December to 1.7% in January. If so, this would be the highest rate since January 2013.

The RBNZ decision will come out today at 3 PM ET. It is widely expected to keep rates on hold at 1.75%. One thing to focus on is when the RBNZ thinks inflation will hit the 2% midpoint of its 1-3% target range. At its last meeting November 10 (when it cut rates 25 bp), the RBNZ did not see this convergence until late 2018. Note CPI inflation accelerated to 1.3% y/y in Q4 from 0.4% in Q3. This is the highest since Q2 2014. Also, 2-year inflation expectations rose to 1.92% in Q1 from 1.68% in Q4, the highest since Q3 2015.