Dollar Holding on to Week’s Gains

Japan (4)

  • Ahead of the meeting with Abe, Trump indicated that currency manipulation is not at the top of the agenda
  • China’s trade surplus may be the largest macro report
  • The front page story in the FT is about Greece
  • Czech January CPI rose 2.2 y/y; Law and Justice party in Poland appears to have dropped plans to force banks to convert $36 bln in foreign currency loans

The dollar is mostly firmer against the majors as the week winds down. Sterling and Aussie are outperforming, while Nokkie and the yen are underperforming. Norway reported lower than expected CPI data. EM currencies are mostly softer. ZAR and RUB are outperforming, while KRW and RON are underperforming. MSCI Asia Pacific was up 1%, with the Nikkei rising 2.5%. MSCI EM is up 0.3%, with China shares rising 0.5%. Euro Stoxx 600 is up 0.1% near midday, while S&P futures are pointing to a flat open. The 10-year UST yield is up 2 bp at 2.41%. Commodity prices are mostly higher, with Brent oil up 1.2%, copper up 1.5%, and gold down 0.1%.

The US dollar is less than 12 hours away from gaining against all the major currencies this week. The main talking points today remain Trump-centric.

Ahead of the meeting with Abe, Trump indicated that currency manipulation, of which he has accused several countries, including Japan, is not at the top of the agenda. This may have encouraged further yen weakness today.

Trump also reportedly indicated to Chinese President Xi that the US will continue to abide by its previous commitment to a one-China policy. These two developments reinforce a sense of bluster in the negotiating style of the new President. The US president also had another legal setback as a US federal appeals court rules unanimously rejected reinstating the ban on immigrants from 7 Muslim-majority countries. The case is on its way to the Supreme Court.

Meanwhile, Trump yesterday indicated that a “phenomenal” tax-related announcement would be made in the next several weeks. During the campaign, he talked about a 15% corporate tax rate while the GOP plan was for 20%. The Government Accounting Office says US large corporations paid an average 14% rate in 2008-2012. Other studies say that overall US business pay 21.1% vs. the 21.7% OECD average.

China’s trade surplus may be the largest macro report. Caution that January-February data is distorted by the Lunar New Year. Still, the direction is favorable. The surplus was $51.3 bln, up for $40.7 and $48.5 bln. Exports rose 7.9% year-over-year after being off 6.2% in December, and this was more than twice what was expected. Imports rose 16.7%, and this is good for countries that export into China. Economists knew they would bounce back and expected 10% increase.

MSCI Asia Pacific has alternated between gains and losses this week and as it lost ground yesterday, it is only fitting that it was up today (+0.9%). It was up 1.2% for the week and it is the third weekly gain.

The US dollar is mixed as North American trading gets underway. Of note, the dollar is continuing to gain on the yen. USD/JPY appears to have put in a good base around the 111.60-65 area this past week. The yen is off 0.4%, which is nearly half the week’s decline. The Aussie is the strongest on the day, up about 0.2% to trim the week’s loss to about 0.45%. Sterling is the strongest of the majors this week and it is off about 0.1%.

The front page story in the FT is about Greece. There has been a surge in Greek yields as divisions within IMF are played up. We will try to have a post on it later today, but the key point here is that Greece does not need the funds until July, when it has big payment due. Dutch parliament dissolves shortly for March election so no decision is likely by February 20 and it means nothing probably until after the French elections. Brinkmanship is still the most likely scenario.

The UK reported December trade, IP, and construction output. Bottom line: we saw a smaller trade deficit and greater than expected industrial and manufacturing output. It is Q4 data so it is a bit dated, though it could lead to a small upward revision in GDP growth. Next week’s data includes CPI (monthly ease still consistent with higher year-over-year rate) and retail sales (after December weakness, a flat to better number is likely).

Sterling is knocking on $1.2520 resistance. A move above it might yield another 20-40 pips, but yesterday’s high near $1.2600 may be too far given intra-day technicals and the firm USD undertone.

Charlotte Hogg was appointed the Bank of England’s Deputy Governor for markets and banking. She joins the MPC and will replace Minouche Shafik, whose term ends this month. Her appointment coincided with the announcement that Kristin Forbes, an external member of the MPC, will leave when her three-year term ends on June 30. No replacement has been named yet. Forbes is one of the most hawkish on the MPC, just this week calling for imminent rate hikes.

During the North American session, the US reports January import prices and preliminary February Michigan confidence. There are no Fed speakers today, though Vice Chair Fischer speaks at a UK economic conference tomorrow. Canada reports January jobs, with consensus currently at -10k.

Czech January CPI rose 2.2 y/y vs. 2.0% consensus. This was the highest since December 2012 and above the 2% target. Next central bank meeting isn’t until March 30. Despite this inflation print, we believe it will maintain its forward guidance for ending the koruna cap around mid-year. That would suggest no change at the May 4 meeting and then ending it at the June 29 meeting.

The ruling Law and Justice party in Poland appears to have dropped plans to force banks to convert $36 bln in foreign currency loans. Party leader Jaroslaw Kaczynski implied as much in a radio interview, but there has not been an official statement yet. This has triggered a rally in Warsaw-listed banks. This was one of the party’s signature promises during the campaign, and it submitted a draft plan last year that was roundly criticized.