Stronger Dollar and a Few Central Bank Policy Meetings

February 7, 2017

The theme of tightening Fed policy and looser U.S. fiscal policy returned to the fore, lifting the dollar overnight by 1.1% against the euro, 0.8% versus the Swiss franc, loonie and sterling, 0.6% relative to the yen, 0.5% against the Australian dollar, 0.4% versus the Mexican peso and 0.3% vis-a-vis the New Zealand dollar and Chinese yuan.

China reported a further $12.3 billion drop in international reserves, which slipped to $2.998 trillion, lowest since 2011 and down about 25% from their peak in 2014. Capital flows have been considerably greater than the Chinese current account surplus for some time, and the Peoples Bank of China has had to buy its own currency to avoid a larger depreciation.

The Reserve Bank of Australia retained a record low 1.5% Official Cash Rate. The last change were a pair of 25-basis point cuts in May and August of 2016.

The National Bank of Romania kept its key interest rate and reserve requirements unchanged. Nine cuts of 25 basis points each were implemented from the start of 2014 through May 2015, reducing such to 1.75%, its present level.

The Central Bank of Sri Lanka also made no change to its lending and deposit rates, which have been respectively at 8.5% and 7.0% since reductions of 50 basis points in July 2016.

German industrial production suffered a surprise 3.0% plunge in December, and the 12-month change swung to a 0.7% decline from a 2.3% on-year rise in November. Industrial output limped along in the final three quarters of 2016, falling 0.8% in the spring, rising 0.3% in the summer but dipping 0.1% in the final quarter of the year.

Stock markets in the Pacific Rim slid overnight by 0.4% in Japan and India, 0.5% in Singapore and New Zealand, and 0.3% in Indonesia. Markets in China, Hong Kong, Australia and South Korea were barely changed.

European equities have done better, rising 0.6% so far in the U.K., Germany, and Switzerland.

Ten-year sovereign debt yields in Germany, Japan, Japan and the U.S. stayed essentially unchanged overnight, but those in France and Italy fell 3-4 bps after big rises on Monday.

West Texas Intermediate oil dropped 0.4% to $52.78 per barrel. Gold is little changed at $1,232.40 per troy ounce.

The British Halifax house price index dropped 0.9% on month in January and posted a 5.7% on-year advance in November-January, well down from last year’s peak of 10.0% in the first quarter. The British Retail Consortium reported a 0.6% on-year decline in same-store sales during January.

Industrial production in the 12 months to December climbed 11.4% in Denmark, 2.7% in the Czech Republic, and 1.8% in Hungary.

Australia’s Performance of Construction index improved to a 4-month high of 47.7 in January from readings of 47.0 in December, 46.6 in November, and 45.9 in October. September was the last month with a reading above 50, which is the breakeven point between contracting and expanding activity in the sector.

South African business sentiment improved last month.

President Trump’s lawyers will be in court today appealing the judicial ruling that halted his ban on immigration from seven Islamic countries.

Scotland’s legislature will vote today on whether it supports the move to leave the EU. Legally, this is only a symbolic gesture.

Philadelphia Fed President Harker, a voting member of the FOMC this year, indicated a predisposition to consider raising the federal funds rate at next month’s meeting. The uncertain timing, content, size, and potential impact of Trump’s fiscal changes argues for some caution, however.

U.S. and Canadian trade data will be released today. The U.S. JOLTS index on job separations and hires and the IBD/TIPP Optimism index arrive, too.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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