Markets Shrug-Off Trump's Attempt to Talk the Dollar Down

Overview:  Comments by US President Trump over the weekend, complaining about the dollar's strength weighed on the greenback initially in Asia, but it quickly recovered.  Reports of progress on a US-China trade deal helped lift the Shanghai Composite above the 3000-level for the first time since the middle of last year. Asian equities mostly rallied with China.  Korea and Taiwan were notable exceptions after disappointing PMI data.  European shares are moving higher, and the Dow Jones Stoxx 600 is up 0.5% to extend the advance for the third session.  Bond yields are mostly firmer, though Moody's two-notch increase in Greece's rating to "B" with a stable outlook has spurred a bid.   The 10-year yield is about five basis points lower at 3.60%, the lowest before the Great Financial Crisis.  S&P cut Mexico's sovereign outlook to negative, and this has seen the peso shed about 0.5% today and is the weakest of the emerging market currencies.  Signs that the Tory Party may have found some common ground is helping sterling recover from the two-day slippage seen at the end of last week. 

Asia Pacific

Reports suggest the US and China are nearing a trade deal.  Of course, they are, however, there are not any fresh details.  Yes, a deal would have to include the lifting tariffs and retaliatory tariffs to be meaningful, unlike the new NAFTA deal that left the steel and aluminum tariffs on national security grounds intact.  China would buy more US agriculture, energy, autos, chemicals.  However, if China's overall imports do not go up by as much, the US will simply displace other suppliers.  This would be the 21st century equivalent of getting a 19th-century concession.  Instead of a Bund District, there is US soy rather than Brazilian soy.  

There is no sign of economic recovery in South Korea and Taiwan.  South Korea's manufacturing PMI fell to 47.2 in February from 48.3 in January.  Taiwan's manufacturing PMI fell to 46.3 from 47.5.  Both currencies are a little softer on the day.  Note that foreigners bought $4.2-$4.3 bln of both equity markets this year after net sellers last years.   Note that although the US-North Korean talks broke down last week, the US has agreed to cease the large-scale war games with South Korea that antagonize the North.  At first, Trump said that North Korean's demands were why the talks ended, but over the weekend he linked his decision to the Congressional testimony of his former lawyer Cohen.  

Last week, reports that the US wanted China to agree to a stable yuan and not use its currency to aid its economy.  President Trump complained about the dollar's strength.  China might be able to agree to a stable yuan-dollar exchange rate, especially if the US seems poised to devalue it.  The US demand from China means that the US may not be able to secure a competitive devaluation against China.  

The Australian dollar drew initial support from the verbal intervention against the US dollar, but it failed to rise through the pre-weekend high and gave up the gains by the time Asian markets were up and running.  Stronger building approvals (2.5% in January, compared with expectations for a 1.0% gain after an 8.1% drop in December) helped the Aussie re-test $0.7100 from below before turning back lower.  There is a large A$1.5 bln) option struck at $0.7050 that expire tomorrow that may inject a note of caution today.   The dollar-yen is in a narrow 30-tick range below JPY112.00 as it consolidates last week's 1% advance, its fourth consecutive weekly gain, the longest advance since last October.   Although the momentum stalled in Europe, the intraday technicals suggest the dollar is poised to push higher in North America.  There is a  $1.6 bln option at JPY112 that expires tomorrow.

Europe

UK Prime Minister's May gambit is beginning to show some promise.  May has led Parliament to the brink.  Accept the controversial Withdrawal Bill with some additional assurances or take the risk of no exit.  Parliament appears to block a no-deal exit.  The hardline Tories are showing some flexibility as the brink draws near.  Some stronger language about how the backstop is intended to be temporary is likely to be agreed to with the EC before next week's vote.  Attorney General Cox appeared to drop his demand for an explicit time limit on the backstop.  The Democrat Unionists appear to be warming up to the prospects of the old Withdrawal Bill with a new wrapper of intent.  Still, we see a delay as the most likely outcome and note that the Irish Taoiseach (Prime Minister) reportedly told his cabinet over the weekend that a three-month delay was likely.  

The ECB meets on Thursday. Over the past year, the euro typically falls on ECB meeting days. Accompanying the lower staff forecasts, the ECB will likely indicate it is getting closer to offering new long-term loans to banks predicated on their lending.  We suspect the worst may be behind the eurozone economy and look for data to begin improving slowly and carrying into Q2.   In this respect, the new TLTROs are a way to buy time even though the stimulative aspects are not particularly robust.  Markit is likely to confirm tomorrow that the EMU Composite PMI edged higher in February.  It only rose three times last year and not two months in a row since 2017.  The March reading will test our hypothesis.   

Turkey's February CPI came in lower than expected at 0.16% after a 1.6% increase in January.  They year-over-year pace eased to 19.67% from 20.35%.  The median forecast in the Bloomberg survey was for 19.9%.  The central bank meets this week, but hopes of a rate cut may be premature.  Still, the lira is low for the fifth consecutive session.  The dollar is testing TRY6.40 for the first time since mid-January.  

The euro peaked in the middle of last week near $1.1420, ahead of some large option expirations.  It failed to resurface above $1.14 on the back of Trump's tweets and proceeded to return toward last week's lows (~$1.1330) before stabilizing in the European morning.  Initial resistance is pegged in the $1.1360-$1.1370 area in North America.  Sterling is in a half a cent range, within the ranges seen before the weekend, but lacks any momentum.  There is a GBP270 mln option at $1.3250 that will be cut today.  Look for support in the $1.3200-$1.3220 band. 

America 

The US (and Canadian) employment data at the end of the week are the economic highlights.  The Fed's Beige Book, perhaps more talked about than read, will attract interest in the middle of the week.  The week is off to a slow start with little data or official speak today.  The US 10-year yield rose 10 bp last week, the largest increase since November.  It is slightly softer just below 2.75% today.  The S&P 500 closed last week above 2800 for the first time since last November as well.  Although the local press is about the President's domestic political fights, the key to the dollar and the capital markets more broadly are not to be found there.  Macro-economic considerations still seem more important than domestic politics.  

After the markets closed last week, S&P cut its outlook for Mexico's BBB rating to negative from stable, citing weakening growth and uncertainty over the new government's policies.  Its contingent liabilities relating to the oil company PEMEX is problematic.  Recall that Fitch cut PEMEX's rating two notches at the end of January. Today Mexico report its Leading Economic Indicator.  It has been negative for three consecutive months through the end of last year.  

The US dollar is firm against the Canadian dollar, holding on to the pre-weekend gains scored in disappointment with Canada's GDP data (0.4% annualized pace in Q4) and mounting political challenges.  The CAD1.3340 area, the highs from mid-February is the immediate target.  Our initial target for the dollar to test MXN19.50.  The Dollar Index has recouped half of what it lost since the middle of February at 96.60.  Above there is 96.80, but the mid-February high was near 97.35.  

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