Dollar Firms as Equities Search for Stability : BBH

Reuters reported that there may be a loosening up of China’s controls on outbound capital flows

The focus is on the BOE meeting and quarterly inflation report where forecasts are updated

A key issue in the US today is the pending government shutdown starting tomorrow unless action is taken

Before the House votes, the US will be auctioning 30-year bonds to round out the quarterly refunding

Mexico January CPI is expected to rise 5.52% y/y; Banxico to cut 25 bp, Peru to stand pat

The dollar is mostly firmer against the majors.  Sterling and the Scandies are outperforming, while the yen and euro are underperforming.  EM currencies are broadly weaker.  INR and MXN are outperforming, while THB and CNY are underperforming.  MSCI Asia Pacific was up 0.3%, with the Nikkei rising 1.1%.  MSCI EM is down 0.3% on the day, with the Shanghai Composite falling 1.4%.  Euro Stoxx 600 is down 0.8% near midday, while S&P futures are pointing to a lower open.  The 10-year US yield is flat at 2.83%.  Commodity prices are mostly lower, with oil down 0.6%, copper down 0.6%, and gold down 0.6%.

The swings in the equity markets are subsiding, bond yields are firm, and the US dollar is extending its recovery.  Although US equities closed lower, the MSCI Asia Pacific Index snapped a four-day drop by posting a 0.25% gain.  However, the MSCI Emerging Markets Index is off nearly as much, though the range was modest.  European markets are also lower, and the range for the Dow Jones Stoxx 600 is the smallest in more than a week.

There have been several developments in addition to the price action to note.  First, China reported a January trade surplus that was less than half the forecast size.  The $20.34 bln surplus contrasts with expectations for little change from the December $54.7 bln reading.  Exports were up 11.1%, which marked a small acceleration.  That was not issue.  Imports surged 36.9%.  They were up 4.5% year-over-year in December, and while acceleration was expected, nothing on this magnitude was anticipated.

The data is likely distorted by the impact of the Lunar New Year, which was earlier in 2017.  But the optics work in China’s favor which is facing increased trade tensions with the US.  By China’s calculations, its trade surplus with the US narrowed to $22 bln.  Exports rose 12.5, while imports from the US rose 26.5%.

Separately, Reuters reported that there may be a loosening up of the controls of outbound capital flows (QDLP).  The yuan, which has been strengthening steadily since mid-December snapped back today.  The US dollar rose 0.75% against the yuan, its biggest move since the 2015 devaluation.  The greenback returned to levels seen at the end of last month (~CNY6.3250).

For more on the overnight move in the yuan, check out : Heisenberg Report

Second, the Reserve Bank of New Zealand provided a dovish hold for investors, and the New Zealand dollar fell to the its lowest level since January 10 (~$0.7175).  The central bank pushed out further when its expects to reach its inflation target (now late 2020, a two-year delay) and shaved its GDP forecast.  This signals that policy may be on hold longer than the market previously expected.  The strength of the New Zealand dollar (~5% on a trade-weighted basis in the past 2.5 months) was unexpected, but the central bank continues to expect it to weaken.

Third, the focus now is on the BOE meeting and quarterly inflation report where forecasts are updated.  There is little doubt that the policy is on hold.  The question is how many MPC members disagree.  The consensus expects no dissents, but a single dissent would not be too much of a miss.  Two dissents and the market may take more seriously a hike in May (now about 48% chance).  The BOE forecasts had assumed that about 62 bp of tightening would be delivered over the next three years.

BOE Monetary Policy Meeting Minutes

BOE Inflation Report

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