March 16th, 2017 6:42 am | by John Jansen |

Via Marc Chandler at Brown Brothers Harriman:

Greenback Consolidates Losses as Yields Stabilize

  • The Fed hike and Dutch election were not very surprising; the surprise of the day was China
  • The BOJ, SNB, and Norges Bank stood pat; the focus shifts to the BOE
  • AUD and NZD are under some pressure after both reported poor data
  • Turkey is expected to tighten policy with a 75 bp hike in the late liquidity window rate; Chile is expected to cut rates 25 bp to 3.0%

The dollar is mostly firmer against the majors, recouping some of its post-FOMC losses.  The Swiss franc and the Loonie are outperforming, while Nokkie and Kiwi are underperforming.  EM currencies are mixed.  KRW and RUB are outperforming, while the CEE currencies and TRY are underperforming.  MSCI Asia Pacific was up 1.5%, with the Nikkei rising 0.1%.  MSCI EM is up 2%, with China shares rising 0.5%.  Euro Stoxx 600 is up 0.6% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is up 3 bp at 2.53%.  Commodity prices are mostly higher, with oil up 1.2%, copper up 1.1%, and gold up 0.4%.

The US dollar remained under pressure in Asia following the disappointment that the FOMC did not signal a more aggressive stance, even though it delivered the nearly universally expected 25 bp rate hike.  News that the populist-nationalist Freedom Party did worse than expected in the Dutch elections also helped underpin the euro, which rose to nearly $1.0750 from a low close to $1.06 yesterday.  European activity has seen the dollar recover a little, but the tone still seems fragile, even though US interest rates have stabilized and the 10-year Treasury yield is back above the 2.50% level.

The US premium over Germany on two-year money peaked a week ago near 2.23.  After the US yield had fallen in response to the Fed’s move, the spread finished near 2.12%, from which it has not moved far.  Initial euro support has been found a little above $1.07.  The first retracement target of the run-up is a little below there at $1.0690.  The other retracement targets are seen near $1.0675 and $1.0655.

Few expected Wilders in the Netherlands to have a say in the next Dutch government.  He drew about 13% of the vote and will hold about 20 seats, which is five more than currently.  Prime Minister Rutte’s party appears to have received the most votes and won 33 seats, down from 41.  The other coalition partners did worse.  In particular, the disastrous showing of Labor means that Dijsselbloem, the current finance minister and head of the Eurogroup of finance ministers, is unlikely to hold his post.  Labor may have less than 10 seats in the new parliament, down from 38.  The other coalition partner, Liberals, lost eight seats.

The new parliament will sit in a week and negotiations for a new government will begin.  It will take some time.  The last election (2012) took 54 days to sort out, while in 1977 it took more than 200 days to form a new government.

The Fed hike and Dutch election were not very surprising; the surprise of the day was China.  The PBOC announced a 10 bp increase in its medium lending facility loans and open market operation reports.  Its statement did try to temper the surprise by noting that these increases were not the same as an increase in the benchmark rates.  This seems to suggest that the increase in rates is unlikely to be passed on to households or business.

Three other central banks have met today, and as expected, did not change policy.  The Bank of Japan, the Swiss National Bank, and Norway’s Norges Bank stood pat.  The focus shifts to the Bank of England.  It too is widely expected to maintain its neutral stance.

The Australian and New Zealand dollars are under some pressure independent of the US dollar.  Both reported poor data.  Australia reported a 6.4k drop in employment.  The Bloomberg survey’s median forecast was for a 16k increase after 13.5k in January.  The unemployment rate ticked up to 5.9% from 5.7%, while the participation rate was unchanged at 64.6%.  One positive aspect of the report was the mix of full and part-time jobs.  Full-time positions increased by 27.1k after a 44.1k decline previously, while there were 33.5k less part-time jobs after a 57.5k surge in January.

New Zealand reported Q4 GDP expanded by 0.4%, not the 0.7% expected.  Q3 growth was revised to 0.8% from 1.1%.  This puts the year-over-year rate at 2.7% down from a revised 3.3% (was 3.5%) in Q3.

The Australian dollar pushed back from the nearly $0.7720 high seen in the US to a little below $0.7680 in Asia.  However, it has been better supported in the European morning, perhaps helped by the reports of a large foreign acquisition in the energy space.

The drop in US yields weighed on the dollar against the yen.  It fell from the upper end of its two-month range toward the middle of it.  It was near JPY114.50 before the Fed announcement and was pushed a little through JPY113 in early European activity.  It managed to recover to around JPY113.50 before stalling, seemingly awaiting fresh cues from the US session.

Risk appetites like the confluence of political and economic developments.  European peripheral bonds are firmer, while core bonds are mostly heavier.  MSCI Emerging Market equity index is extending its rally into a sixth consecutive session and the nearly 2% gain thus far today is the most since last July.  The MSCI Asia-Pacific Index rose nearly 1.5%, for a five-day streak.  European markets are following suit.  The Dow Jones Stoxx 600 is up 0.6%, after a gap higher opening.  It is the second advance in a row, and six of the past seven sessions.  

Materials are up the most, followed by energy and financials.  Iron ore prices edged higher to bring this week’s rise to 11%.  Rebar steel eased after yesterday’s rally lifted it its highest closing level since December 2013.  Oil prices are up about 1%, helped by the first decline in US inventories this year and the heavier dollar tone.

The US session features February housing starts and permits, weekly jobless claims, JOLTS, and the March Philadelphia Fed.  Given the Fed’s move, we suspect the market will not be particularly sensitive to the data.  Attention may shift to a fiscal policy where President Trump has provided an outline for the budget for the remainder of the year.  It looks to increase defense and security spending (and a little for education) whilst cutting other programs, such as the State Department and Environment Protection Agency, deeply.  The opposition from the Republican Party appears to be based more in the Senate than the House.

Central Bank of Turkey is expected to tighten policy with a 75 bp hike in the late liquidity window rate to 11.75%.  Lately, the central bank has tightened by forcing banks to borrow at this window rather than at the overnight rate of 9.25%.  We still think reliance on back door tightening reflects Erdogan’s heavy-handed tactics to prevent outright rate hikes.  

Chile central bank is expected to cut rates 25 bp to 3.0%.  CPI inflation eased to 2.7% y/y in February, below the 3% target for the fifth straight month.  After the easing cycle started with a 25 bp cut to 3.25% in January, the central bank then stood pat in February.  As such, we think it will cut again today.


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