Dollar Down on a Perfect Storm of Tensions Fraught with Uncertainty
June 20, 2019
The dollar lost 0.6-0.9% overnight against the euro, Swiss franc, loonie, yuan, kiwi, Australian dollar and Mexican peso. The greenback also has fallen 0.4% relative to the yen and 0.3% vis-a-vis sterling.
The list of unknowns keeps lengthening.
- Iran shot down a U.S. surveillance drone, seemingly bringing another Middle East war closer.
- From Fed Chairman Powell’s press conference on Wednesday, investors took away a greater likelihood that the fed funds target will be cut at the next meeting.
- Other central banks today in the U.K., Taiwan, the Philippines, Indonesia, and Australia cited increasing global uncertainties and slower growth in flagging a mounting possibility that their monetary policies may ease as well.
- British retail sales data reported today for the month of May confirm that households are worried that there will be a no-deal Brexit, which is likely to hurt the economy badly.
- President Trump reportedly is claiming that he has the authority to replace Fed Chairman Powell.
- European Union leaders are meeting in Brussels to fill several key positions, including the next president of the European Central Bank, a post with an 8-year nonrenewable term.
- Street unrest continues in Hong Kong.
- Later this month, Group of twenty leaders gather for their annual meeting. The fate of the Sino-U.S. trade war, climate change, tensions between the U.S. and Iran, and tensions between North Korea and the U.S. hang in the balance.
Ten-year sovereign debt yields fell nine basis points in Italy, 8 bps in Greece, 6 bps in the U.K. and 3 bps in France, German, Japan, and the United States.
Equities climbed in Asia overnight by 2.4% in China, 1.5% in Hong Kong, 1.3% in India, 0.8% in Singapore, and 0.6% in Japan. Stocks in Europe are so far up 0.9% in Switzerland, 0.8% in Italy and Germany and 0.7% in the U.K. and France.
West Texas Intermediate crude oil shot up 3.5% on news of the shot-down American drone.
Comex gold has advanced 2.7% to $1,285 per ounce and is fast closing in on $1400.
Japan’s all industry index, a monthly GDP proxy, rose in April for the first time in a half year, climbing 0.9% but only 1.0% on year. Japanese machine tool orders were confirmed to have recorded a 27.3% on-year drop in May following 12-month declines of 33.4% in April and 29.3% in March.
Following its scheduled monetary policy review, the Bank of Japan left its stance unchanged but observed weak industrial production, export demand, housing, and expected inflation. Amid escalating global uncertainties and ahead of a planned domestic sales tax hike, BOJ officials flagged a rising possibility of more easing in the future, but the credibility of that warning was tempered among investors by the belief that the central bank’s options are limited because the mounting damage to banks of prolonged massive stimulus. For now, the short-term central bank interest rate remains -0.1%, and its target for the 10-year JGB yield is zero percent, give or take 20 basis points.
The Bank of England left the British Bank Rate at 0.75%, its level since a 25-basis point hike last August. The baseline forecast, which was formally reviewed at the prior meeting, anticipates further rate normalization, but assumed a smooth Brexit process that looks increasingly unlikely. Today’s statement identifies increased downside growth risks, projects flat GDP growth this quarter, and anticipates CPI inflation dropping below 2% in the second half of this year. “The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction. The Committee will always act to achieve the 2% inflation target.”
British retail sales volume fell for a second consecutive month, this time dropping 0.5% in May after a 0.1% downtick in April. On-year retail sales growth of 2.3% was the lowest in seven months. Core retail sales dropped 0.3% on month.
Bank Indonesia’s 7-day reverse repo rate was left unchanged at 6.0% at the latest policy review. However, a released statement indicates that a cut in the future is possible and announced a 50-basis point reduction of the required reserve ratio to 6.0%. First-quarter growth in Indonesia was lower than expected, global trade tensions have escalated, and the inflation outlook is okay. A rate cut would constitute a trend reversal. The last repo rate change in November 2018 culminated a series of six hikes totaling 175 basis points in the space of a half year.
Reserve Bank of Australia Governor Lowe called the possibility of a further cut of the record low 1.25% Official Cash Rate “not unrealistic.” Such was reduced at this month’s scheduled meeting on the 4th. That move had been the seventh easing of this cycle, which began in May 2013.
At the quarterly policy review of the Central Bank of the Republic of China (Taiwan), the discount rate was left unchanged at 1.375%, but a released statement insinuated that policy could be eased in the future, citing the U.S.-Sino trade war, global economic uncertainty, and moderate inflation in Taiwan maintained by a rising negative output gap. The discount rate has been at 1.375% since a 12.5-basis point cut in June 2016.
Filipino monetary policy is in a wait-and-see mode after a 25-basis point cut in the central bank’s overnight reverse repo rate to 4.5% announced on May 9th. That decision at the prior Board meeting had been the first reduction since May 2016 and represented a trend reversal after 175 basis points of tightening in 2018. Today’s statement from the Monetary Board revises projected CPI inflation this year and next downward and expresses continuing concern about the spillover risks ot domestic demand from global trade tensions. “the Monetary Board believes that the manageable inflation outlook and firm domestic growth prospects support keeping monetary policy settings steady for the time being. A prudent pause allows the BSP to observe and assess the impact of prior monetary adjustments including the phased reduction in the reserve requirements to be completed by the end of July.” More easing could follow.
South Korean PPI inflation slowed 0.2 percentage points to only 0.4% in May.
New Zealand real GDP grew 0.6% on quarter and 2.5% on year last quarter, matching the performance of the previous quarter. On-year growth was below 3.1% experienced in the first quarter of 2018.
The Bank of Brazil’s Selic interest rate was kept at a record low of 6.5%, and a released statement from the monetary board known as Copom observed that Brazil’s tepid recovery has stalled for now. A 0.1% GDP dip in the first quarter after a 0.1% uptick in 4Q18 was the first sub-zero result since late 2016. From October 2016 through March 2018, the Selic Rate had been cut by 725 basis points, but the real’s vulnerability persuaded officials to pause that easing. The statement today does observe that “the global outlook has become less challenging, owing to changes in the prospects for monetary policy in major economies. Nevertheless, the risks associated with a slowdown in global growth remain.” Officials expect inflation to hover in the 3-6% target.
Consumer confidence in the Netherlands recovered to a 5-month high of zero in June but that’s still well down from +23 last July.
Danish consumer sentiment dipped to a 2-month low in June of 5.8 from a 9-month high of 5.9 in May. And Turkish consumer confidence rebounded 2.3 points to a 2-month high in June of 57.6 but remained well below its year-earlier level of 72.7.
The last of today’s bonanza of central bank policy announcement was the exception to the global trend. The Bank of Norway as expected raised its policy interest rate by 25 basis points to 1.25%. This was the third tightening move following 25-bp increases last September and March but leaves the rate still a full percentage point under its pre-March 2016 level. In a released statement, the Executive Board asserts that “the policy rate will most likely be increased further in the course of 2019.” Norway is an oil producer and exporter, and its economy has grown faster than expected. Above-normal capacity usage warrants a tighter monetary policy to ensure against above-target core inflation, but officials promise to proceed cautiously given world trade tensions.
Switzerland’s trade surplus of CHF 1.654 billion last month was the smallest in four months but the CHF 9.2 billion year-to-date total was 49% greater than a year earlier.
Released U.S. data today accentuate downside risks. The current account deficit last quarter of $130.4 billion, though down from the 4Q, was larger than expected. The index of leading economic indicators flat-lined in May. And the Philly Fed manufacturing index dropped to 0.3 in June from a reading of 16.6 in May.
Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bangko Sentral Ng Pilipinas, Bank Indonesia, Bank of Brazil, Bank of England, Bank of Japan, Bank of Norway, British retail sales, Central Bank of the Republic of China, U.S. current account