Dollar Remains Bid

new united states

  • US PMI report yesterday certainly supports the notion that price pressures are rising and the labor market is tightening  
  • During the North American session, the US reports February trade and factory orders 
  • RBA kept policy steady overnight, as expected; its statement was dovish 
  • S&P cut South Africa one notch yesterday to sub-investment grade BB+; more downgrades are expected 

The dollar is mostly firmer against the majors as risk off sentiment seems to be taking hold. The yen and Swiss franc are outperforming, while the Antipodeans and Scandies are underperforming. EM currencies are broadly weaker. PHP and TRY are outperforming, while MXN and RUB are underperforming. MSCI Asia Pacific was down 0.3%, with the Nikkei falling 0.9%. MSCI EM is down 0.2%, with China markets closed for holiday. Euro Stoxx 600 is down 0.1% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is flat at 2.33%. Commodity prices are mixed, with oil flat, copper up 0.1%, and gold up 0.5%.

US PMI report yesterday certainly supports the notion that price pressures are rising and the labor market is tightening. Signs are pointing to a good NFP reading Friday, where Bloomberg consensus is currently at 175k. After the PMI data, one would think that the 10-year yield would be closer to 2.5% than to 2.3%, and yet here we are at 2.33%, the lowest since February 24.

Yet the 2-year differential with Germany has widened out to 207 bp, the highest since March 17. This has helped push the euro lower, though support is still holding around the $1.0650 area. Most of this move has been from the German side, with yields falling as political concerns in France have risen. The second televised debate between the candidates will be held tonight.

Eurozone reported February retail sales. Instead of rising the expected 0.5% m/m, sales rose 0.7%, pushing the y/y rate up to 1.8% vs. 1.0% expected. This has had little impact on the euro today, as the markets continue to reassess their hawkish take on the March ECB meeting.

Furthermore, the mood in the markets today seems to be “risk off.” This has helped the yen, with dollar/yen about to test the 110 area once again. The pair has not been below 110 since mid-November, and a break below would set up a test of the 200-day MA near 108.50 currently.

During the North American session, the US reports February trade and factory orders. Fed Governor Tarullo speaks at 430 PM ET. Fed officials continue to make a case for at least three hikes total in 2017. Other central bank speakers of note include Norges Bank Governor Olsen (8 AM ET) and ECB President Draghi (930 AM ET).

Canada also reports February trade. The Loonie was the worst performing major yesterday, due in part to lower oil prices and some reported M&A flows. Further losses today saw the Loonie break above the $1.3430 area, which sets up a test of the March high near $1.3535. The BOC meets next week and is likely to maintain its extremely dovish stance from last month.

UK reported March construction PMI at 52.2 vs. 52.5 expected. This was also lower than the revised 54.5 (was 54.6) in February. Yesterday, manufacturing PMI came in at 54.2 vs. 55.0 expected. Sterling’s rally against the dollar ran out of steam above the $1.26 area last month, and it continues to trade heavily as economic concerns mount. A break of the $1.23 area is needed to set up a test of the March low near $1.2110.

RBA kept policy steady overnight, as expected. The statement was seen as dovish, however, as the central bank noted a deteriorating labor market and expressed concern about a strong currency. Governor Lowe also criticized the nation’s banks for having lax lending practices, adding that regulators are prepared to take more macro prudential measures to limit this. In other words, the bank is in no hurry to hike rates. This helped negate an earlier AUD bid on the back of better than expected February trade data.

AUD is testing its 200-day MA near .7550. Break below sets up a test of the March low near .7490. A break below .7455 and then .7385 is needed for a more bearish scenario to unfold. Lower iron ore prices aren’t helping, falling below $80 for the first time since January.

Brazil reports February IP, which is expected to rise 0.3% y/y vs. 1.4% in January. March IPCA inflation will be reported Friday, which is expected to rise 4.57% y/y vs. 4.76% in February. Inflation continues to move closer to the 4.5% target, and remains well within the 2.5-6.5% target range. With the economy so weak, markets are looking for a 100 bp cut to 11.25% at the next COPOM meeting April 12.

S&P was the first of the agencies to move, cutting South Africa one notch yesterday to sub-investment grade BB+. This should not come as a big surprise, as it has been long overdue. We also agree with S&P’s decision to keep the outlook at negative, as our own sovereign ratings model shows South Africa’s implied ratings at BB/Ba2/BB. Break of the 13.7575 area sets up a test of the November high near 14.65.

Moody’s gives its review this Friday, and we believe a one notch cut to Baa3 is a done deal. However, there is a small chance of a two notch cut to Ba1. Note that many investment grade bond indices require an investment grade rating from at least two of the three major agencies, and so the next cut to sub-investment (likely by Fitch) would lead to forced selling.