Dollar Bid as Rates Firm

new business

  • US rates are rising in absolute terms and relative to Europe and Japan
  • China trade data surprised the market
  • The ADP estimate of US private sector employment is the most important report today
  • The Turkish lira is the worst EM performer today; National Bank of Poland is expected to keep rates steady at 1.5%

The dollar is broadly firmer against the majors. The Swiss franc and Stockie are outperforming, while sterling and Aussie are underperforming. EM currencies are mostly weaker. KRW and IDR are outperforming, while TRY and ZAR are underperforming. MSCI Asia Pacific was down 0.2%, with the Nikkei falling 0.5%. MSCI EM is down 0.1%, with China shares falling 0.2%. Euro Stoxx 600 is flat near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is up 2 bp at 2.54%, the highest since late December. Commodity prices are mixed, with WTI oil down 0.8%, copper up 0.2%, and gold down 0.2%.

The US dollar is moving higher against nearly all the other major foreign currencies today. As far as we can tell, the driving force remains interest rate considerations. US rates are rising in absolute terms and relative to Europe and Japan. The US 10-year yield is moving above the downtrend that has been in place since the day after the Fed hiked rates last December. It is now near 2.53%. The US two-year yield is making new multiyear highs today.

At the same time, official, investor, and collateral-related demand for German paper have continued to widen the interest rate differential. The correlation (60-day, percentage change) between the rate differentials and the euro-dollar and dollar-yen exchange rates remains high.

The euro is lower for the third session. Recall that last Friday; the euro snapped a three-day slide. It has now retraced 61.8% of its bounce (~$1.0550). The euro was unable to resurface above $1.06 in North America yesterday, and this will likely continue to cap the single currency ahead of the ECB meeting tomorrow. The strong German (January 2.8% and December revised to -2.4% from -3.0%) and Spain (0.3% vs. consensus 0.2%) were largely ignored by the market. There had been some talk last week that the ECB could alter its forward guidance at tomorrow’s meeting, but most seem to be downplaying the likelihood in recent days.

The US 10-year yield is higher for the eighth consecutive session. Over this span, the dollar has risen against the yen in six sessions, including today. That said, the ranges remain tight. For the third day, the dollar is in a JPY113.50 to the JPY114.15 range. The small upward revision to Japan’s Q4 16 GDP was of little importance to trading. The upward revision to 0.3% from 0.2% left consumption flat and seemed to be mostly a function of slightly stronger capex, which appears tied to the export sector. It was the fourth consecutive quarter that the world’s third-largest economy expanded in three years. The key test for the dollar comes near JPY115.00.

China surprised the market. Despite being well aware of distortions caused by the Lunar New Year, investors were surprised by the news that China recorded a trade deficit in February. The $9.15 bln shortfall is the first since February 2014. Exports collapsed, falling 1.3% after rising 7.9% year-over-year in January. The median estimate in the Bloomberg survey was for a 14% increase. Imports surged 38.1% (16.7% in January), compared with the median estimate of 20%. The recorded trade deficit and the build in reserves reported yesterday are not preventing new yuan weakness. The dollar is edging above CNY6.91 to reach its highest level since mid-January. It has nearly retraced 61.8% of this year’s fall (~CNY6.9135). It seems more a case of dollar strength then yuan weakness.

Sterling continues to trade like a dog. Last Friday was the only session since February 23 that it has not fallen. Once cable broke $1.24, it has not looked back. Perhaps the Gilt market is awaiting Hammond’s budget, but the foreign exchange market is not. Sterling is extending its losses below $1.22. We continue to look for a test of the two-point trendline from the spikes of the flash crash last October and the mid-January dip below $1.20. It is found near $1.2050 and edges up to about $1.2065 by next Wednesday (when the Fed meets and the Dutch hold elections).

Yesterday, the S&P 500 posted its first consecutive losses since the end of January. Asia followed America’s lead, and the MSCI Asia-Pacific Index was off 0.2%, snapping a two-day advance. European shares firmer as the Dow Jones Stoxx 600 is trying to snap a four-day drop (for a total drop of 1%). Industrial metals are stabilizing. Copper is firmer after its four-day slide. Chinese steel futures hit eight-day lows, though iron ore eked out a small gain (0.5%) after being up nearly two percent earlier. Higher API oil inventory estimates weigh on oil prices today.

The Australian dollar has given up yesterday’s gains and is approaching the multi-week low set before the weekend near $0.7545. Below there, support is seen in the $0.7500-$0.7520 area. The US dollar is making near highs against the Canadian dollar and is approaching the year’s high set on January 3 near CAD1.3460.

The ADP estimate of US private sector employment is the most important report today. A gain of around 190k is expected. Productivity and unit labor costs for Q4 16 that will also be reported are functions of last week’s revised GDP report. Recall that contrary to expectations, there was no upward revision. This warns of risks to survey expectations of a small increase in productivity and a tick down in unit labor costs. Canada reports Q4 productivity and housing starts and permits.

The Turkish lira is the worst EM performer today. January IP rose 2.6% y/y vs. 1.8% expected, but this had little impact on trading. The economy is sluggish, but the central bank cannot ease in light of rising inflation. February CPI rose 10.13% y/y vs. 9.74% expected despite the firmer lira last month. This is further above the 3-7% target range. Recent lira weakness and the 15.36% y/y surge in PPI suggest price pressures are intensifying. Next policy meeting is March 16, and further tightening is likely by adjusting the rates corridors again.

National Bank of Poland is expected to keep rates steady at 1.5%. The bank may tilt slightly more hawkish in light of rising price pressures. Some NBP officials are finally acknowledging that 2018 may be too late to start the tightening cycle, and that 2017 is becoming more likely. CPI rose 1.8% y/y in January, within the 1.5-3.5% target range but the highest since December 2012.