Dollar Mixed Ahead of Delayed Health Care Vote

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  • The US House vote on the health care act was delayed until today
  • During the North American session, the US reports February durable goods orders and Markit preliminary March PMI 
  • Strong eurozone flash PMI readings were reported for March 
  • European Commission President Juncker said that the UK will have to pay about GBP50 bln when it leaves the EU 
  • Sri Lanka hikes unexpectedly; Russian and Colombian central banks also meet  

The dollar is mixed against the majors ahead of the delayed health care vote in the House. The Swiss franc and the euro are outperforming, while sterling and Kiwi are underperforming. EM currencies are mostly firmer. TRY and the CEE currencies are outperforming, while PHP and ZAR are underperforming. MSCI Asia Pacific was up 0.5%, with the Nikkei rising 0.9%. MSCI EM is flat, even with China shares rising 0.8%. Euro Stoxx 600 is down 0.3% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is flat at 2.42%. Commodity prices are mixed, with oil up 0.7%, copper up 0.6%, and gold down 0.1%.

The US House vote on the health care act was delayed until today. The scheduled vote Thursday was called off, ostensibly because the Republicans did not have the votes to pass it. The Trump administration made a last minute compromise with House conservatives by removing Obamacare’s requirement that essential benefits be covered by insurers, but it remains to be seen if this was enough. There is no scheduled time for the vote.

If today’s vote fails, what comes next? Will President Trump go back and try to compromise to get an eventual passage, or does he move on to other pressing matters? Press reports suggest that he gave lawmakers an ultimatum: vote yes or this will be your last chance to overturn Obamacare. That is, Trump is saying that he will move on to work on tax cuts and the stimulus package.

Markets might be happier if President Trump moves on. The lack of focus and attention on tax reform and infrastructure has been one of the factors behind the stalled reflation trade. Yet a failure to overturn Obamacare could also be taken as an initial failure that will make Trump’s agenda harder to achieve.

During the North American session, the US reports February durable goods orders and Markit preliminary March PMI. The Fed’s Evans, Bullard, Dudley, and Williams all speak today. Evans and Dudley are voting members of the FOMC this year, while the other two are now.

Strong eurozone flash PMI readings were reported for March. The composite reading was 56.7 vs. 55.8 expected. Looking at the breakdown, the manufacturing PMI was 56.2 vs. 55.3 expected, while the services PMI was 56.5 vs. 55.3 expected. The firmer than expected data will feed into the notion that the ECB is moving a step closer to ending its unconventional policies.

Looking at the country breakdown, German composite PMI was 57.0vs. 56.0 expected. Of this, German manufacturing PMI was 58.3 vs. 56.5 expected, while the services PMI was 55.6 vs. 54.5 expected. Likewise, French composite was 57.6 vs. 55.8 expected. Here, French manufacturing PMI was 53.4 vs. 52.4 expected, while the services PMI was 58.5 vs. 56.1 expected.

The data helped propel the euro off the lows and back above $1.08. A close above yesterday’s high near $1.0805 would be an outside up day, signaling further gains for the euro. The 2-year US-German differential is currently around 200 bp, the lowest since mid-February and due not only to lower US rates, but to higher (less negative) German rates. Until this widens out again, it will be hard for the dollar to gain much traction against the euro.

European Commission President Juncker said that the UK will have to pay about GBP50 bln when it leaves the EU. Comments come ahead of the expected Article 59 trigger next week. Juncker’s estimate is in line with Austrian Chancellor Kern’s estimate last month. This sum is likely to be very contentious, with UK officials already pushing back. Ironically, the EU’s remaining members will celebrate the 60th anniversary of the Treaty of Rome this weekend.

BOE MPC member Vlieghe played down the need for tightening. He said that he needs to see evidence of strong wage growth before voting for a rate hike. We continue to believe that markets are overestimating the capacity of the BOE to tighten this year. Carney has been very steadfast in his belief that the bank’s current accommodative stance is appropriate, and we do not think that will change until the impact of actual Brexit is better known. Cable has been unable to gain a foothold above $1.25 and could see deeper losses on another failure to break above it.

Canada reports February CPI, with headline expected to rise 2.1% y/y. The BOC sounded very dovish at its last meeting, and continued to point to slack in the economy. The next meeting is April 12, and we expect a similar dovish tilt then as well.

Sri Lanka’s central bank hiked rates 25 bp unexpectedly. We think this is a harbinger of things to come in Asia. CPI rose 6.8% y/y in February, a record high for the rebased CPI series. Most of emerging Asia is also experiencing rising inflation, with many central banks expected to lean more hawkish this year. Indeed, Malaysia reported February CPI at 4.5% y/y, much higher than the expected 3.9%. As a result, Bank Negara will likely contemplate a rate hike in the coming months.

Central Bank of Russia is expected to keep rates steady at 10.0%. However, a handful of analysts expect cuts of 25-50 bp. CPI inflation eased to 4.6% y/y in February, the lowest since June 2012 and very close to the 4% target. Governor Nabiullina has said that rates likely won’t be cut in H1. We see no move, as the 15.1% y/y rise in February PPI argues for continued caution.

Colombia’s central bank is expected to cut rates 25 bp to 7.0%. Falling inflation and a sluggish economy led to the start of the easing cycle in December. The bank stood pat in January and cut another 25 bp in February. This pattern suggests no move at this meeting. However, we think increasing downside growth risks will lead to a 25 bp cut.