Dollar Sports Heavier Tone as Yesterday’s Bounce Runs out of Steam

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  • Global capital markets have stabilized
  • The US succeeded in winning a unanimous decision on North Korean sanctions from the UN Security Council
  • The Great Repeal Bill that is the legal basis for Brexit was approved by Parliament
  • UK and Sweden reported CPI data for August
  • Brazil COPOM minutes will be released

The dollar is mixed against the majors.  Sterling and Kiwi are outperforming, while the yen and Nokkie are underperforming.  EM currencies are mostly softer.  KRW and ZAR are outperforming, while TRY and RUB are underperforming.  MSCI Asia Pacific was up 0.3%, with the Nikkei rising 1.2%.  MSCI EM is up 0.3%, with the Shanghai Composite rising 0.1%.  Euro Stoxx 600 is up 0.5% near midday, while S&P futures are pointing to a slightly lower open.  The 10-year US yield is up 2 bp at 2.15%.  Commodity prices are mostly lower, with oil own 0.5%, copper down 0.8%, and gold down 0.1%.

Global capital markets have stabilized after appearing downright frightful at the end of last week, as stocks, yields, and the dollar plummeted.  Equities rallied om Monday and there was follow through buying in Asia today.  The US S&P 500 gapped higher yesterday, leaving a four-day island in its wake (after gapping lower on September 5) and posting a new record closing high.  The dollar was two-three standard deviations below its 20-day moving average at the end of last week, and the recovery on Monday helped ease the over-extended condition of the market.

Higher US rates are clearly helping the dollar.  US 10-year yield is up 2 bp to 2.15% after flirting with 2.0% last week.  The US 2-year is trading at 1.32%, while the spread with German 2-year is up 4 bp to 206 bp.  This is the highest premium since last Monday.  Note that the US 10-year yield is about 10 bp above the low hit last week, amid optimism that the Irma storm may not have been as devastating as initially feared before hitting Cuba sapped some of its energy.

There are three macro developments to note.  First, after tough rhetoric, the Trump Administration chose to dilute some of its demands for another round of sanctions on North Korea in order to ensure Chinese and Russian consent.  It succeeded in winning a unanimous decision from the UN Security Council.  South Korea’s Kospi advanced for the second consecutive session.  Its gains are modest (0.75% this week) in line with the MSCI Asia Pacific Index (except that the MSCI benchmark is at new 10-year highs).  The Korean won itself remains a little lower on the week (~-0.2%).  Of course, the underlying challenge has not been addressed, and many seem to be increasingly skeptical that the sanction regime result in a change in behavior of North Korea.

Second, the Great Repeal Bill that is the legal basis for Brexit was approved by Parliament.  The fight within the Tory Party seemed to have been deferred, as the fundamental issue of ministerial powers remains a divisive issue.  In some ways, the UK government is fighting a two-front battle.  The first is with the EU, and it does not appear yet that sufficient progress has been made on the terms of the separation from the EU’s vantage point that would allow the next stage in the negotiations to start next month, as some had hoped.

The UK reported higher than expected CPI data for August, with most measures accelerating from July.  Headline inflation rose 2.9% y/y vs. 2.8% expected, while core rose 2.7% y/y vs. 2.5% expected.  However, the preferred CPIH measure rose the expected 2.7% y/y.  The pass through of last year’s decline in sterling is not quite complete yet, though it is expected to peak in the next couple of months.  This comes ahead of the Bank of England meeting Thursday.  Whilst no change is expected, the data will feed into the notion that the bank will lean more hawkish.

Third, the center-right appears to have won a third term in Norway.  The Conservative Party will continue to lead the government, but will rely on four smaller parties rather than three.  At least on the surface, this makes its somewhat more fragile.  Labour suffered a sharp defeat.  It had been polling near 40% a few months ago, but garnered slightly more than a quarter of the vote.

The euro advanced yesterday from NOK9.30 to NOK9.40.  It is consolidating in a tight range today.  The election results may have been a bit closer than expected, but the weight on the krone yesterday seemed to stem more from the unexpectedly soft inflation report.  The median forecast expected an increase in price pressures, but they fell.  Headline CPI eased to 1.3% from 1.5% rather than increase to 1.7%.  Underlying inflation, which excludes energy and tax changes, slowed to 0.9% from 1.2%.  The median expectation in the Bloomberg survey was for a small rise.

Sweden reported CPI data for August.  Headline inflation was 2.1% y/y vs. 2.2% expected, but the preferred underlying CPIF rose 2.3% y/y vs. 2.2% expected.  Here too, the data will feed into notions that the Riksbank will lean more hawkish.  EUR/SEK sank on the news after falling short of breaking the 200-day moving average, which comes in near 9.60.  A break below 9.5060 is needed to set up a test of the August 31 low near 9.45.

After sterling, the New Zealand dollar is the strongest of the major currencies.  It is up about 0.2%.  The ostensible trigger are polls suggesting that the National Party is doing better than it seemed last week when it appeared the opposition Labour was moving ahead.  The election is September 23.  The New Zealand dollar has been the worst performer since the start of last month, losing nearly 3% against the otherwise heavy US dollar through yesterday.  A move now above the $0.7330-$0.7345 area would confirm a low is in place and suggest another run at $0.7500.

The euro’s pullback from the post-weekend high (just shy of $1.21) was extended slightly in Asia.  It overshot our $1.1960-$1.1980 target to trade near $1.1945.  Below there, support is seen around $1.1925.  The technical indicators are mixed, though a bullish divergence is seen in the Slow Stochastics.  Initial resistance is seen in the $1.2000-$1.2020 band.

Yesterday, the dollar recovered smartly from its pre-weekend plunge toward JPY107.30 to test resistance in the JPY109.40 area.  It has edged slightly higher today (~JPY109.60).  It may take greater follow through selling of US Treasuries encourage a move to JPY110.  The US 10-year yield has not traded above its 20-day moving average in nearly a month.  It is found near 2.15% today.  The December 10-year note futures gapped lower yesterday.  That upside gap is potentially an important technical development, especially if it is not closed in the next several days.  The real test may come later in the week when core CPI is expected to have eased again. The 20-day moving average of the futures contract is seen near 126-24.

We will get only minor US data today (JOLTS jobs) ahead of the more important PPI (tomorrow) and CPI (Thursday) readings.  There are no Fed speakers this week as the press embargo for the September 20 takes effect.

Brazil COPOM minutes will be released.  It cut rates 100 bp to 8.25% last week, as expected, but the minutes will be studied for clues about future policy.  COPOM signaled a slower pace of easing.  Next policy meeting is October 25, and we think a 75 bp cut to 7.5% is likely then, followed by a 50 bp cut to 7.0% at the December 6 meeting.  USD/BRL posted on outside up day yesterday, a potential reversal pattern that suggests further dollar gains ahead.