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Dollar Firm Despite Rising US Political Uncertainty

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  • The dollar continues to benefit despite US political uncertainty
  • President Trump claimed to be getting “closer and closer” to a trade deal with China; we are very skeptical
  • There is a lot of US data to be reported and a heavy slate of Fed speakers today
  • ECB board member Lautenschlaeger has resigned; sterling continues to soften as Brexit optimism fades
  • Netanyahu has been tasked with forming the next Israeli government; Singapore August IP contracted -8.0% y/y; Philippines cut rates 25 bp to 4.0%, as expected

The dollar is mixed against the majors as markets digest US political developments.  The Antipodeans are outperforming, while Swissie and sterling are underperforming.  EM currencies are broadly weaker.  PHP and INR are outperforming, while CZK and THB are underperforming.  MSCI Asia Pacific was up 0.2% on the day, with the Nikkei rising 0.1%.  MSCI EM is up 0.3% so far today, with the Shanghai Composite falling 0.9%.  Euro Stoxx 600 is up 0.7% near midday, while US futures are pointing to a higher open.  10-year UST yields are down 4 bp at 1.70%, while the 3-month to 10-year spread has inverted 3 bp and stands at -17 bp.  Commodity prices are mixed, with Brent oil down 0.1%, copper up 0.1%, and gold up 0.3%.

The dollar continues to benefit despite US political uncertainty.  The greenback remains supported by a string of strong US data as well as safe haven flows as risk-off takes hold.  DXY is trading at a new high for this move and is on track to test the September high near 99.37.  After that is the May 2017 high near 99.888.  Among other things, this would imply that the euro weakens to the May 2017 low near $1.0840.  For now, political uncertainty in the US has not weighed on the greenback, as the economy appears to be back on track.

The US political outlook remains cloudy and fluid.  It is impossible to say with any certainty where the impeachment process will end up.  The base case that has developed is that the House will impeach by a simple majority but the Senate will not vote to convict by a two-thirds majority.  For now, we think markets can live with this outcome.  Yes, some legislation will likely be derailed, like the USMCA.

Investors cannot look at past impeachments as guidance for how financial markets might react, as that sample size is one.  Furthermore, the alleged crimes are very different.  The one major thing we can say now is that we do not put any weight on the various conspiracy theories making the rounds that basically revolve around Trump setting a trap for the Democrats.  As Occam’s Razor posits, the simplest explanation is most often the best explanation.

US equity markets jumped yesterday after President Trump claimed to be getting “closer and closer” to a trade deal with China.  Color us very skeptical.  Compare this to the belligerent tone he took at the UN and the days right before.  We get the sense that Trump is looking for any sort of win to take the spotlight off of impeachment.  Furthermore, we think China is fully aware of this as well.

US releases another revision to Q2 GDP.  Growth is expected to remain steady at 2.0% SAAR.  The Atlanta Fed’s GDPNow model is tracking 1.9% SAAR growth in Q3, up from 1.8% previously, which is near trend (~2%) with little drop-off from Q2.  Elsewhere, the NY Fed’s Nowcast model is tracking 2.2% SAAR growth in Q3, up from 1.6% previously.  Its forecast for Q4 growth is now 2.0% SAAR, up from 1.1% previously.

There is a lot of other minor US data today.  The regional Fed manufacturing surveys continue today with Kansas City (-4 expected), along with advance August goods trade (-$73.4 bln expected), August retail (0.1% m/m expected) and wholesale (0.1% m/m expected) inventories, weekly jobless claims, and pending home sales (1.0% m/m expected).

The Fed continues to struggle in keeping the Fed Funds rate within its target range.  It will boost the size of its overnight repos today from $75 bln to $100 bln.  It will also boost the size of its 14-day repos from $30 bln to $60 bln.  These sizes bring the offerings more in line with recent demand.  While we continue to see no implications for the real economy, this is causing a lot of headaches in interest rate-sensitive markets.

Today features a heavy slate of Fed speakers.  Kaplan (non-voter), Bullard (voter), Clarida (voter), Daly (non-voter), Kashkari (non-voter), and Barkin (non-voter) are all scheduled.  Fed officials have so far downplayed the significance of the recent repo market turmoil, but it seems something more lasting needs to be done.  Powell said as much when he said the Fed would study “organic” growth of the Fed’s balance sheet.

ECB board member Lautenschlaeger has resigned effective October 31.  No reason was given for her departure two year before her term ends, but she was reportedly opposed to the stimulus package announced this month.  She follows a long line of German policymakers that have resigned in apparent protest from the ECB.  Juergen Stark and Axel Weber come to mind, as do Joerg Asmussen and Ernst Welteke.  This suggests incoming ECB President Lagarde now has one less opponent to further stimulus if it is needed.

There’s not much to add with regards to sterling underperformance this week.  We think markets are just coming to the realization that having Parliament back doesn’t get the UK any closer to a Brexit deal.  Odds of a no-deal Brexit may have fallen marginally but at best, we likely get another delay beyond October 31.  The next major retracement objectives from the September rally come in near $1.2270 (50%) and $1.22 (62%).

Israeli President Rivlin picked Prime Minister Netanyahu to form the next government.  Blue and White won the most seats (33 to 31 for Netanyahu’s Likud) and should have gotten first shot.  However, it appears Likud had a slim lead after all the parties were asked to give their choice of premier.  He has six weeks to get a working majority of 61 seats in the Knesset.  Netanyahu failed after the April election but refused to give Blue and White a chance by calling for new elections.

Singapore August IP contracted -8.0% y/y vs. -0.6% expected.  The US-China trade war continues to impact the region, with Korea and Taiwan also feeling the heat.  The MAS does not have an explicit inflation target.  However, low price pressures and a sluggish economy should lead the MAS to ease policy at its October meeting by adjusting its S$NEER trading band.

Bangko Sentral ng Pilipinas cut rates 25 bp to 4.0%, as expected.  It said inflationary pressures had eased further since the last policy meeting, and the bank now sees inflation remaining in the bottom half of the 2-4% target range through 2021.  Low inflation and sluggish growth should allow the bank to cut rates well into 2020.  Next meeting is November 14 and another cut then seems likely.

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About Win Thin
Win Thin
Win Thin is a senior currency strategist with over fifteen years of investment experience. He has a broad international background with a special interest in developing markets. Prior to joining BBH in June 2007, he founded Mandalay Advisors, an independent research firm that provided sovereign emerging market analysis to institutional investors. He received an MA from Georgetown University in 1985 and a B.A. from Brandeis University 1983. Feel free to contact the Zurich office of BBH
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