Dollar Firm as Markets Calm

UK (2)

  • UK Prime Minister May surprised the global investors and world policymakers by calling snap elections 
  • There are risks associated with May’s move  
  • Eurozone reported final March CPI and trade 
  • Malaysia March CPI rose 5.1% y/y vs. 5.2% expected; South Africa March CPI rose 6.1% y/y vs. 6.3% expected 

The dollar is broadly firmer against the majors as markets calm a bit. The Swiss franc and sterling are outperforming, while the dollar bloc and yen are underperforming. EM currencies are mostly softer. RUB and MYR are outperforming, while ZAR and PHP are underperforming. MSCI Asia Pacific was down 0.4%, even with the Nikkei rising 0.1%. MSCI EM is down 0.3%, with China markets falling 0.5%. Euro Stoxx 600 is up 0.4% near midday, while S&P futures are pointing to a higher open. The 10-year UST yield is up 4 bp at 2.20%. Commodity prices are mixed, with oil up 0.4%, copper up 0.8%, and gold down 0.5%.

The dollar is gaining some limited traction, helped by higher US rates. The US 10-year yield is up 4 bp to 2.20%, off the low of 2.16% recorded yesterday. Similarly, the US 2-year yield is up 2 bp to 1.18%. Markets are noticeably calmer, with gold down after posting a cycle high Monday.  

There are no US data releases of note. The Fed releases its beige book for the May FOMC meeting, while the Fed’s Rosengren speaks. Until US rates can climb, we believe the dollar will have trouble gaining any sort of sustained traction.

UK Prime Minister May surprised the global investors and world policymakers by calling snap elections. This is precisely what the 2011 electoral law sought to prevent by fixing the date of elections. As recently as right before the Easter break, May’s office denied the persistent speculation that she would (or should) maneuver for early elections. It is not an ethical or moral issue. It is pure pragmatic realism. The benefits of an election outweighed the costs and risks by a margin that could not be refused. Bold decisions are often those that achieve many objectives and this is no exception. The window of opportunity may not have been open for very long.

There is the long-run strategic objective of ensuring that the conclusion of the Brexit negotiations are not held hostage by electoral politics and the previously scheduled election in 2020. There is the opportunity offered by her popularity, which is helping to give the Tory Party more than a 20-point lead in the polls. Labour’s Corbyn is a vulnerable leader. Labour is expected to be trounced in the May 4 elections, and there is some risk that the defeat forces Corbyn out. Waiting too long could risk facing a stronger Labour Party.

UKIP appears to be faltering, losing to Labour in a special election in a district that voted in favor of Brexit. Its sole member of parliament, Carswell, recently resigned to become an independent. The Liberal Democrats are positioned to pick up a few seats from its current nine (especially in Southwest England), but the Tories can pick up many more seats from Labour (especially in Northern England and Midlands). May will achieve her own mandate, which in turn strengthens her hand against both domestic rivals (within her party) and in negotiations with Europe.

There are risks associated with May’s move. To pull the end run around the 2011 electoral law, May needs the approval of Labour to secure the 2/3 votes needs. Corbyn quickly handed May his noose, while the Lib-Dem’s leader Farron also accept the gauntlet as he may be trying to position himself as the anti-Brexit leader. If her motion were to fail, it would force the less desirable alternative of a vote of confidence that May must lose to win the election.

Sterling has been unable to extend yesterday’s gains. Cable has backed off the $1.29 high from yesterday, while the EUR/GBP cross was unable to break below the .8300 low from December. The euro has so far been unable to break above the $1.0740 area, which is the 50% retracement objective of the March-April drop.

Eurozone reported final March CPI and trade. Inflation was 1.5% y/y, as expected, while the trade surplus was slightly larger than expected and rising to a seasonally adjusted EUR19.2 bln. Data had little impact, as markets are focused on the first round of France’s presidential election this Sunday. In what has basically become a 4-person race, the potential mix of the top two candidates will be key for the euro.

Composites of polls show Macron and Le Pen leading the race. However, Fillon and Melenchon have closed the gap in recent days and either one could conceivably take one of the top spots too. A Melenchon/Le Pen matchup in the second round would be the least market-friendly outcome, in our view.

Malaysia March CPI rose 5.1% y/y vs. 5.2% expected and 4.5% in February. This was the highest rate since November 2008. The central bank does not have an explicit inflation target, but rising inflation will make it hard to keep policy steady. Policymakers are concerned about sluggish growth and so for now, we see steady rates. Next policy meeting is May 12, no change is expected.

South Africa March CPI rose 6.1% y/y vs. 6.3% expected. This is still above the 3-6% target range and yet for now, SARB is on hold. The weak economy should dictate lower rates, but high inflation is preventing this for now. Next policy meeting is May 25. What SARB does then will in depend on both internal and external factors.