Dollar Bounce Limited

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  • The US dollar was firmer in fairly quiet Asian turnover, but saw those gains pared in early Europe
  • US highlights are not very high
  • There’s scope for more bond market volatility after US 30-year auction results are announced at 1 PM ET
  • Banco de Mexico is widely expected to hike rates 50 bp to 6.25%; Peru expected to stand pat

The dollar is mostly firmer against the majors. Sterling and the Loonie are outperforming, while Kiwi and the yen are underperforming. EM currencies are mixed. TRY and RUB are outperforming, while PHP and RON are underperforming. MSCI Asia Pacific was down 0.3%, with the Nikkei falling 0.5%. MSCI EM is up 0.4%, with China markets rising 0.4%. 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 2 bp at 2.36% ahead of the 30-year auction today. Commodity prices are mixed, with oil up 1.1%, copper down 0.2%, and gold flat.

The US dollar was firmer against most of the major currencies in fairly quiet Asian turnover, but saw those gains pared in early Europe. The highlights include the RBNZ meeting that left rates on hold, as widely expected. The concern about the strength of the Kiwi saw the market reduce the perceived likelihood of a rate hike. NZD came off accordingly.

Japan reported stronger core machine orders (6.7%, more than twice the median). The German trade surplus was smaller than expected at 18.7 bln euros rather than 20.5 consensus and 22.7 previously. Exports were off 3.3% in December. This follows the disappointing drop in December industrial output reported earlier this week (-3.0% rather than +0.3% as the median would have had it).

The MSCI Asia Pacific shares are off about 0.3%. The Nikkei traded heavily (-0.5%), and the auto sector was under pressure ahead of Abe’s meeting with Trump tomorrow. A good part of the US trade deficit can be traced to autos and auto parts. Japanese companies are thought to be vulnerable to the new America First thrust, even though Japan produces in the US most of the cars it sells to the US.

Still, it looks like Japan has surpassed Germany to move into second place by having the largest trade surplus with the US after China. Separately, in the region, we note that China’s shares that trade in Hong Kong were the strongest with the 1.2% rise. It is a 14-month high.

Core bond yields are firmer. Of note, despite the continued political focus, the premiums over Germany are mostly narrowing again. The French premium is smaller for the third consecutive session, for example. The Italian premium pushed through 200 bp at the start of the week, but is now back near 190 bp.

US highlights are not very high. Weekly initial jobless claims and wholesale sales and inventories are not the stuff that moves the market. Two Fed officials speak, Bullard and Evans. Bullard adopted a new framework last year and his views were a bit of an outlier. Evans has been a dove but most recently he suggested he sees scope for two and possibly three hikes this year.

Some were linking yesterday afternoon’s bounce in the dollar to the 10-year UST auction, where a lack of demand helped push 10-year yields up from the 2.32% intraday low. Rates were higher across the curve as a result. Today, there’s scope for more bond market volatility as the US holds a 30-year auction with results to be announced at 1 PM ET.

Sterling has been pushed to a new high for the week. The $1.2570 level in cable that has been tested corresponds with the 61.8% retracement of the drop since the key reversal on February 2. A move above $1.26 could spur another cent higher, and several of our technical signals converge near $1.28.

The euro slipped to its lowest level yesterday since January 30 near $1.0640. It is consolidating in a narrow range near $1.07. A move above $1.0720 warns of another run at $1.0800-$1.0830. The dollar is continuing to consolidate against the Japanese yen in narrow ranges. The range was largely established on Monday of roughly JPY111.60-JPY112.80.

The Australian dollar is finding support near $0.7600, while the $0.7700 ceiling remains intact. The US dollar bounced from CAD1.2970 in late January to CAD1.3210 a couple of sessions ago. The CAD1.3120 area is a 38.2% retracement objective of that bounce. The 50% retracement objective is found near CAD1.3090.

The Philippines central bank kept rates steady at 3.0%, as expected. It raised its 2017 and 2018 inflation forecasts slightly to 3.5% and 3.1%, respectively, but noted that inflation risks are to the upside. Earlier this week, January CPI was reported at 2.7% y/y and was the highest since December 2014. Low base effects from 2016 suggest inflation will accelerate in H1 and likely move into the top half of the 2-4% target range soon. We see risks of a rate hike by mid-year if price pressures intensify.

Banco de Mexico is widely expected to hike rates 50 bp to 6.25%. Of the 26 analysts polled by Bloomberg, 1 sees no hike and 6 see a 25 bp hike. The rest (19) see 50 bp, as do we. Earlier in the day, Mexico reports January CPI and it is expected to rise 4.71% y/y vs. 3.36% in December. If so, this would be the highest since September 2012 and moves further above the 2-4% target range. We believe it will stick with another 50 bp hike.

Peruvian central bank is expected to keep rates steady at 4.25%. CPI rose 3.1% y/y in January, the lowest since August but still above the 1-3% target range. Chile and Colombia have already started easing, but it’s too early now. Peru is likely to join them later this year if disinflation continues.