Greenback Goes Nowhere Quickly, While Yen Remains Bid

new drill

  • The summer doldrums begin early; fresh market moving news remains light
  • Canada reports April retail sales
  • Federal Reserve Governor Powell speaks before the Senate Banking Committee shortly after the US equity market opens
  • The central banks of New Zealand and Norway left rates on hold
  • Philippine and Taiwan central banks kept rates steady, as expected; Brazil central bank will release its quarterly inflation report; Banxico expected to hike rates 25 bp

The dollar is mixed against the majors in narrow ranges. Nokkie and Kiwi are outperforming, while Swissie and sterling are underperforming. EM currencies are mostly firmer. RUB and ZAR are outperforming, while PHP and IDR are underperforming. MSCI Asia Pacific was up 0.4%, even with the Nikkei falling 0.1%. MSCI EM is up 0.2%, even with the Shanghai Composite falling 0.3%. Euro Stoxx 600 is down 0.5% near midday, while S&P futures are pointing to a lower open. The 10-year US yield is down 2 bp at 2.15%. Commodity prices are higher, with Brent oil up 1%, copper up 0.2%, and gold up 0.4%.

The summer doldrums begin early. The US dollar is little changed against most of the major currencies. Bond yields are mostly one-two basis points lower, and equity markets are mixed but with a downside bias. Oil prices slumped more than 2% on Tuesday and again on Wednesday. This is weighing on bond yields and equities.

European shares are lower for the third day and the Dow Jones Stoxx 600, off 0.5%, is dragged down by a 1.5% drop in the energy sector. The MSCI Asia Pacific Index rose nearly 0.4% as the other markets offset the losses in Japan and China. The Nikkei slipped 0.15%, with a 0.75% drop in energy. The Shanghai Composite surrendered half of the gains scored yesterday, ostensibly in response to the MSCI decision to include A-shares for the first time in its emerging market equity index beginning near the middle of next year.

Fresh market moving news remains light. The US and Canada report data that provide some headline risk. The US reports weekly initial jobless claims that cover the week when the national non-farm payrolls survey is conducted. As of last week, weekly jobless claims were at three-week lows.

Contrary to claims in some quarters that the US is headed or already in a recession, the Leading Economic Indicators are not signaling anything like a recession. The monthly reading was negative three times last year. The last time was in August. The LEI rose on average 0.2 each month in 2016. It is averaging 0.4% gains this year.

Canada reports April retail sales. The headline is unlikely to repeat the 0.7% gain in March. Auto sales will likely drag it lower. Higher gasoline prices may boost the ex-auto figure, but the volume of retail sales may have fallen. The Canadian dollar has pared half of the gains scored in the wake of the more hawkish talk from senior BOC officials. US dollar sellers have emerged in front of the retracement level near CAD1.3350. Support is pegged near CAD1.3380. Tomorrow, Canada reports May CPI figures and the headline rate is expected to ease.

Federal Reserve Governor Powell speaks before the Senate Banking Committee shortly after the US equity market opens. Powell is the only Republican-appointed Governor. One cannot tell that by his voting pattern. This is important to keep in mind as in the coming weeks, nominations for the vacant three Governor seats are expected. We are struck by the technocratic and collegiate culture. Think about more than three- decade tradition of the Chair being named by the president from one party and re-nominated by the president of the other party (Volcker, Greenspan, Bernanke).

This is not to argue for rigid institutional inertia. Rather, it suggests the difficulty, for example, in trying to set monetary policy driven by a set of decision-making rules, like the Taylor Rule. It also suggests that being in favor or high or low interest rates is a misleading abstraction. The views must be understood within the context of economic and financial conditions. Hawks and doves are contextual and relative categories.

Notable option expiries today include 1.5 bln euros at $1.1175, 1.1 bln euros at $1.12, and 1.5 bln euros at $1.1250. There is $2 bln struck at JPY111.00, and another nearly $400 mln struck at JPY110.95 that roll off today. Almost GBP375 mln options with a $1.27 strike are on the bubble.

The central banks of New Zealand and Norway left rates on hold, as did the couple of Asian central banks that met. That leaves Mexico still on tap.   With firm price pressures, the market is looking for the central bank to deliver a 25 bp rate hike, which would be the seventh consecutive meeting it would hike. Ahead of the decision, mid-June CPI will be reported and is expected to rise 6.26% y/y vs. 6.17% in mid-May. This would be the highest rate since January 2009 and further above the 2-4% target range. However, the m/m gains have been easing.

The Mexican peso remains the world’s strongest currency this year, gaining a little more than 14% against the US dollar (the Polish zloty in second place with a 10.4% gain). Since the end of June 2016, the peso is practically flat (+0.7%). It has been a round trip, but the price pressures from the past depreciation are proving sticky. With the peso firm and inflation showing signs of topping out, today is likely to see the last hike in the cycle.

Things are about to get tougher for UK Prime Minister May, who is carrying on as if the Tories still enjoyed a majority. The DUP is reportedly seeking an increase of about GBP2 bln in government spending on infrastructure and National Health Service for their support of a minority government (which means no ministerial portfolios for DUP MPs). The Tories themselves seem to be jockeying for position behind the scenes to succeed May. Depending on which report you read, Hammond, Davis, and/or Johnson are quietly maneuvering, not wanting to seem too eager.

Meanwhile, Labour and the Lib Dems are reportedly considering the more than 70-year old convention that the House of Lords refrains from blocking or significantly amending laws that implement the governing party’s manifesto. How can the Tory’s manifesto now have the same gravitas as then the Tory’s had a majority?

In addition to this fluid, yet fractured, political situation, we seemed to learn yesterday that the BOE Governor and its chief economist are odds about the outlook for the UK economy, and the urgency by which the accommodation provided last summer should be removed. Haldane suggested he nearly voted for a hike last week. That would have made it a four-four tie. The odds of a rate hike before the end of the year have risen but does not appear to be the most likely scenario (still below 40%, interpolating from the OIS). UK high frequency data in the run up to the next BOE meeting, which is in August, may have more impact in the market than is usually the case.

Philippines central bank kept rates steady at 3.0%, as expected. The bank cut its 2017 inflation forecast to 3.1% from 3.4% previously, whilst maintaining its 201 forecast at 3.0%. CPI rose 3.1% y/y in May, close to the 3% target and well within the 2-4% target range. We see steady rates for now, but the bank has signaled a more hawkish stance if price pressures rise.

Taiwan central bank also kept rates steady at 1.375%, as expected. The bank noted that “massive” inflows have boosted TWD, which in turn has helped ease inflation. Note CPI rose only 0.6% y/y in May. While the bank does not have an explicit inflation target, low price pressures should allow it to keep rates steady for the rest of the year.

Brazil central bank will release its quarterly inflation report. At the last COPOM meeting, the bank implied the pace of easing will slow. Brazil reports mid-June IPCA inflation Friday, which is expected to rise 3.48% y/y vs. 3.77% in mid-May. Petrobras just announced cuts to gas and diesel fuel prices, so price pressures are likely to move lower. COPOM next meets July 26, and a 75 bp cut to 9.5% is expected.