Dollar Softer As Markets Head Into Holiday Mode

BBH CurrencyView

• US dollar is softer vs. majors Friday as markets head into holiday mode; sentiment improving a bit in the absence of any major negative euro zone developments
• France Q3 GDP revised weaker, Italy confidence lower than expected; euro zone recession in 2012 will likely exacerbate debt problems
• RUB outperforms as central bank narrows interest rate corridor; TRY weaker after central bank auctions only $50 mln today vs. $1 bln bid

US dollar is softer vs. majors Friday in very narrow ranges as sentiment improves in the absence of any new euro zone developments. After being unable to extend its rally Wednesday, the euro continues to trade heavily but is still finding some modest support near 1.3050 for now. So far today, Aussie and Stockie are outperforming vs. USD and are up on the day while Kiwi and Swiss franc are underperforming vs. USD and are flat on the day.

Equity markets are mostly higher, with Asian stocks largely up and European stocks opening up. Euro Stoxx 600 is up 0.9% (financials up 0.6%) while US equity market futures are pointing to an up open.

Bond markets are mostly higher despite higher equity markets. Periphery yields are mixed, as 10-year Greece flat, Portugal up 7 bp, Ireland down 1 bp, Spain flat, and Italy down 2 bp. The US 10-year yield is down 1 bp, Germany down 2 bp, France down 10 bp, and UK down 1 bp. The 2-year US-German spread is at -2 bp vs. -4 bp Wednesday, which was a new low for the year.

The commodity complex is mixed, with oil mixed, and copper up, gold flat. EM currencies were mostly firmer. ZAR, HUF, RUB, and TRY are outperforming in EM vs. USD and are up on the day, while INR, IDR, and THB are underperforming vs. USD and are down on the day.

What to look for today in EM:

Singapore November CPI came in at 5.7% y/y vs. 5.3% y/y expected and 5.4% y/y in October. November IP came in at -25.2% m/m vs. -9.0% m/m expected and +14.2% m/m in October. Mixed data this month should not prevent the MAS from easing policy at its next meeting in April.

Taiwan November IP came in at -3.6% y/y vs. -2.8% y/y expected and +1.4% y/y in October. Commercial sales were also weaker than expected in November, contracting -1% y/y vs. 2.6% y/y expected and 1.8% y/y in October. Central bank next meets December 29 and is likely to keep rates steady at 1.875% for a second straight quarter. However, easing is likely in 2012.

Mexico November trade due out at 9:00 AM EST, -$475 mln expected vs. -$466 mln in October. Also, the IMF reaffirmed Mexico’s $73 bln flexible credit line. Not that we think Mexico will ever tap into it, but free insurance never hurts.

Thailand signed a CNY70 bln ($14.3 bln) swap agreement with China, intended to strengthen trade, financial integration and diplomatic relations between the countries.

Russia central bank held policy meeting. No move was expected, but it instead narrowed the interest rate corridor, reducing the refi rate by 25bps to 8.0% and hiking the deposit rate by 25bps to 4.0% (the repo rate was left at 5.25%). We are expecting easing in early 2012 but today’s move should be seen as neutral in terms of monetary policy. According the bank’s statement, “It should contribute to restraining money market rates volatility and strengthening of the interest rate channel of monetary policy transmission to inflation.” Perhaps the move reflects concerns over capital flight and the bank’s intention to get a better handle on domestic liquidity.

Turkey offered $1.35 bln for auction today, leading TRY to firm. However, TRY then sold off sharply after it only accepted $50 mln of the $1 bln bid. Overall, the bank has seemed to signal a shift towards a more aggressive posture after the market’s negative reaction to the smaller USD sales earlier this week, but did not quite carry its intentions through today. Even though we are still negative on Turkey, we would caution against holding short TRY positions in the short-term. Aside from the bank’s renewed vigor towards defending the lira, recall that there will be an unscheduled meeting on December 27. The risk here is that authorities signal a gradual return towards a more orthodox framework, which would probably cause a sharp short-covering rally, especially in these thin markets.

What to look for today in DM:

France Q3 GDP growth was revised down to 0.3% q/q from 0.4% q/q previously and -0.1% q/q in Q2. These numbers are only going to get worse in 2012.

Italy consumer confidence was lower than expected at 91.6 in December vs. 95.3 expected and 96.5 in November. This was the lowest reading since the beginning of the series in 1995, as current economic climate fell to 77.2 from 83.1 and overall future climate fell to 82.9 from 88.9.

Canada October GDP due out at 8:30 EST, 0.1% m/m expected vs. 0.2% m/m in September. For now, better US data is helping Canada and keeping the BOC in dovish wait-and-see stance.

US November durable goods orders, personal income and spending, core PCE, new home sales are all due out today. US data has been coming in on the strong side in recent months, and good readings today should help keep this modest risk rally going.