FX

March 31st, 2016 6:42 am | by John Jansen |

Via Marc Chandler at Brown Brothers Harriman:

Dollar Still Suffering From Post-Yellen Hangover

  • The dollar remains vulnerable as markets continue to pile into foreign currencies and EM FX
  • UK Q4 GDP growth was revised higher to 2.1% y/y from 1.9% previously
  • S&P cut the outlook on its AA- rating on China from stable to negative
  • During the North American session, the US reports March Challenger job cuts, weekly jobless claims, and the Milwaukee and Chicago March PMIs
  • Czech National Bank meets and is expected to keep policy steady

The dollar is broadly weaker against the majors as Yellen’s dovish speech continues to reverberate.  The euro and the Swiss franc are outperforming, while sterling and the Swedish krona are underperforming.  EM currencies are broadly firmer too.  RUB, ZAR, and MYR are outperforming while PHP, MXN, and IDR are underperforming.  MSCI Asia Pacific was up 0.1%, though the Nikkei fell 0.7%.  MSCI EM is up 0.25%, with Chinese markets up marginally despite the S&P cut in China’s outlook.  Euro Stoxx 600 is down 1% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is down 2 bp at 1.80%.  Commodity prices are mixed, with oil down, copper down nearly 1%, and gold up nearly 1%.  

The dollar remains vulnerable as markets continue to pile into the foreign currencies and EM FX.  The implied yield on the December 2016 Fed Funds futures contract is now around 0.54%, the lowest since February 29.  That’s less than one 25 bp hike priced in this year.  Note also that the 2-year US-German rate differential is currently around 124 bp, the lowest since February 18.  The euro made a marginal new high for this move, and is testing the $1.1375 high from February 11.  After that is the October high near $1.15.      

Germany reported mixed February retail sales.  Sales were weaker than expected in m/m terms (-0.4% vs. +0.4% consensus) but were stronger than expected in y/y terms (5.4% vs. 2.2% consensus).  French consumer spending that month was unequivocally stronger than expected, rising 0.6% m/m and 1.8% y/y.  

The eurozone reported revisions for March CPI.  Headline inflation improved to -0.1% y/y from -0.2%, while core picked up to 1.0% y/y from 0.8% (consensus 0.9%).  After Germany’s upside surprise yesterday (0.3% y/y vs. 0.1% consensus), it seems clear to us that sustained deflation in the Eurozone seems unlikely right now.  Along with the measures announced at the March 10 ECB meeting yet to be fully implemented, it seems that the next several ECB meetings won’t really be live.

UK Q4 GDP growth was revised higher to 2.1% y/y from 1.9% previously.  The Q4 current account deficit came in much larger than expected at -GBP32.7 bln, while the Q3 gap was revised higher to –GBP20.1 bln.  Sterling is lagging today, and it seems the economic data will continue to be overshadowed by growing Brexit risks.  The $1.45 area for cable is offering resistance for now.      

S&P cut the outlook on its AA- rating on China from stable to negative.  Weeks ago, this would likely have caused some shudders.  Post-Yellen, markets basically yawned.  The agency noted that China’s rebalancing of its economy may be slower than expected, with risks to government creditworthiness gradually increasing.  S&P also cut the outlook on its AAA rating on Hong Kong from stable to negative. At the beginning of March, Moody’s cut the outlook on its Aa3 (equivalent to AA-) rating on China from stable to negative, citing similar concerns as S&P.  For what it’s worth, our own sovereign rating model views China as correctly rated at AA-/Aa3/AA-.  Fitch is the outlier at A+.  Note that the PBOC fix for USD/CNY today was the low for the year, and the lowest since mid-December.  

During the North American session, the US reports March Challenger job cuts, weekly jobless claims, and the Milwaukee and Chicago March PMIs.  The Chicago PMI will be the most important (50.7 consensus vs. 47.6 actual in February), and markets will likely focus on the employment component.  Note that the ADP jobs reading came in at 200k vs. 195k consensus.  The Fed’s Evans and Dudley speak today.  

Yesterday, Evans sounded relatively hawkish.  He noted that two rate hikes were warranted this year, with perhaps even more if the data come in strong.  However, the dollar remains under pressure as the markets are clearly taking their cue to sell from Yellen.  

Elsewhere, Canada reports January GDP.  It is expected to rise 1.1% y/y vs. 0.5% in December.  With the Canadian economy starting to look a bit better, it seems unlikely that the BOC will ease again after the last 25 bp cut to 0.50% back in July 2015.  The next policy meeting is April 13, and no change then is expected.  USD/CAD made new lows for the year this week near 1.2910, with the next target seen near 1.2830 (the October 15 low).      

Korea reported February IP, which rose 2.4% y/y vs. expected -0.2%.  Korea reports March CPI Friday, which is expected to remain steady at 1.3% y/y.  This is well below the 2.5-3.5% target range but with some improvement seen in the real sector data, the BOK is likely to keep rates steady at 1.5% when it next meets April 19.  The JPY/KRW cross has been falling steadily towards the key 10 level, which will act as a headwind on Korean exporters.

Czech National Bank meets and is expected to keep policy steady.  CPI rose 0.5% y/y in February, which is well below the 1-3% target range.  However, base effects will rise in Q2 and so deflation risks have not been fully addressed.  Some central bankers have discussed negative interest rates, but for now, we think the bank is likely to remain on hold.    

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