Dollar Flexes Its Muscles - BBH

Analysts at Brown Brother Harriman noted, "The US dollar is broadly firmer against the majors. The Antipodeans and the yen are outperforming, while the Loonie and Nokkie are underperforming. AUD was helped by an upbeat RBA statement even as it held rates steady. EM currencies are broadly weaker. IDR and THB are outperforming, while TRY and RUB are underperforming. MSCI Asia Pacific was down 0.3%, with the Nikkei falling 0.4%. MSCI EM is down 0.5%, with China markets falling 0.2%. Euro Stoxx 600 is up 0.4% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is up 1 bp at 2.42%. Commodity prices are mostly lower, with oil down 0.4%, copper down 0.4%, and gold down 0.5%."

Key Quotes

"The US dollar is reasserting its strength. There have been several data reports and comments that are supportive of euro weakness, but today’s move is not just about the euro. The greenback is higher against every major currency and virtually every EM currency as well. We believe this is a return to the underlying trend after an extended correction."    

"Germany reported very weak December IP. It plunged -3.0% m/m vs. +0.3% consensus, and follows stronger than expected factory orders yesterday (up 5.2% m/m vs. 0.7% consensus). Yesterday, Draghi made some dovish comments regarding ECB policy that broke no new ground. That weighed on the euro briefly, but the single currency then reversed higher as US rates fell as the day progressed."

"During the North American session today, the US will report December trade, JOLTS job openings, and consumer credit. There are no Fed speakers scheduled today. Canada reports December trade, building permits, and January Ivey PMI."

"The Reserve Bank of Australia kept rates steady at 1.5%, as expected. The bank reaffirmed its forecasts for 3% growth over the next couple of years, noting a stronger global growth outlook. With the economy rebounding and the housing market remaining buoyant, we think the central bank will be reluctant to ease policy further, especially when global growth prospects have improved. The Kiwi was helped today by the rise in Q1 inflation expectations to 1.92% from 1.68% previously."

"The recent strength of the Aussie has drawn some attention, but we note that Australia last week reported much strong than expected trade data. Goods exports jumping 38% y/y in USD terms.  This was the fifth straight y/y gain, and fits in with the RBA’s more upbeat outlook. The .7700 capped AUD gains in recent days. If USD strength is maintained, we see scope for AUD to first test the late January lows near .7500."    

"Taiwan reported strong January trade data. Exports rose 7% y/y vs. 8% expected while imports rose 8.4% y/y vs. 10.4% expected. Korea and Brazil already reported strong trade data for the month, and so Taiwan continues the trend." 

"Chile will report January trade shortly. It too should show a strong rebound. Chile then reports January CPI Wednesday, which is expected to rise 2.5% y/y vs. 2.7% in December. This is moving towards the bottom of the 2-4% target range and should keep the central bank in dovish mode. Minutes from the last central bank meeting showed that a 50 bp cut was discussed before they settled on a 25 bp one. Next policy meeting is February 14, and another 25 bp cut then seems likely."  

The Buck Bounces Back