Dollar Holding Recent Gains

Markets

Geopolitical tensions yesterday receded as a driver for global trading. President Trump taking a more guarded tone regarding direct action against Iran halted the recent upward squeeze in the oil price. Brent returned below $64/b. The ‘safe haven/scarcity‘ rally in gold and sliver that recently also spilled-over to other industrial metals (copper, thin,…) also fell prey to some profit taking. It has often been different of late, but in this (temporary?) more benign geopolitical context, US eco data even play a role in intraday price action. US weekly jobless claims (198k) eased back to sub 200k levels. The New York Fed Empire manufacturing survey (7.7 from -3.7, with strong orders and shipments) and the Philly Fed business outlook (12.6 from -8.8 also with solid underlying details) printed strong. These series are no game-changers regarding the broader eco picture and their message still can be contradicted by other more high profile releases. Still, they confirm the view that the Fed is right in its assessment that the US economy is holding up rather well and that no immediate stimulus is needed, especially not as inflation is holding above target. After a risk-off driven bull flattening on Wednesday, the US yield curve yesterday bear flattened with yields rising between 5.5 bps (2 & 5 y) and 1.2 bps (30-y). Moves in Europe stayed more benign with the German 2-y yield adding 2.6 bps. The 30-y still eased 1.8 bps. Decent data and some easing in geopolitical tensions was enough to inspire a bid on global equity markets (Dow & Eurostoxx +0.6%). Still the dollar outperformed (DXY close 99.3) EUR/USD is struggling not to fall below the 1.16 barrier. The yen-decline took a breather after the announcement of new elections (USD/JPY 158.6), but the (yen)-picture remains fragile. UK yields rebounded 3.5-5.5 bps across the curve on better UK monthly GDP/production data, but it didn’t help further sterling gains. EUR/GBP even rebounded from the 0.8650/55 support area to close at 0.8675.

Asian equities show a mixed picture today, with Japan and China suffering modest losses. US futures are gaining slightly (S&P +0.3%). The dollar is holding its recent gains (DXY 99.35, EUR/USD 1.1605). The eco calendar again only contains second tier eco data (NY Fed services activity, US production data, NAHB housing index). US markets are also preparing for a long weekend (Martin Luther King Day on Monday). A long weekend in the current uncertain (geopolitical) context might cause some cautious positioning. The technical picture in the likes of DYX and EUR/USD (break above 99.25 and below 1.161) at least suggests an ongoing constructive USD-momentum for now.

News & Views

The European Commission in reviewing the EU accession rules is considering to replace the current system with a two-tier model, the Financial Times reported. Under the current 30-yr old system, an EU member state candidate can only enter when it ticks all the boxes, including adopting huge amounts of EU regulation. The new model under discussion would allow for fast-tracking a candidate’s entry. After joining, the country would hold far less decision-making power, stripped from voting rights at leaders’ summits for example, and gain incremental access to parts of the bloc’s single market as well as funding and subsidies, after meeting post-membership milestones. The proposal is specifically being considered for Ukraine. As part of the US-led peace plan, the country is allowed to join the EU. But officials note it could take a decade of reform for Ukraine to meet the current EU accession rules and understand that president Zelenskyy can probably only accept other parts of the peace deal (including territorial concessions) if he has short-term EU membership to showcase in return. The EC’s proposal is highly contentious with some fearing it waters down the value of membership and may undermine stability in the bloc.

The US and Taiwan signed a trade agreement yesterday that slashes the current 20% tariff rate on Taiwanese imports to 15%. That’s in line with regional peers including Japan and South Korea. The deal also waives tariffs on generic drugs, aerospace parts and natural resources that are unavailable in the US and offers Taiwan a most-favoured nation treatment. In return, Taiwan pledges a $250bn investment in the chip industry in the US and tariff-free imports of chips to the US are subject to a quotum. President Trump has previously threatened to impose a 100% levy on semiconductors, which would significantly weigh on Tawain as being the world’s most important producer. Some in Taiwan, however, criticize the agreement as moving the chip industry out of the country and thereby disincentivizing Washington to protect Tapei against a possible Chinese attack.