The dollar is starting the week on the soft side, with both pull and push factors at work. On the pull side, we have a bid environment for risk assets, where US big tech pulled back from the brink last week (Nasdaq +2%), and global equity markets are performing well. Nowhere is that more apparent than in Japan, where the Nikkei was briefly up over 5% on the Liberal Democratic Party’s landslide win. The consensus in FX markets has been that a large LDP win would trigger a large sell-off in both JGBs and the yen, as an unchecked LDP would push ahead with unfunded fiscal giveaways and lean on the Bank of Japan not to tighten.
So far, the LDP seems to have contained the fallout in the JGB market by arguing that the temporary tax cut on food would not require the issuance of fresh debt. And the risk to markets is that instead of this being a ‘Sell Japan’ story from the JGB side, it evolves into a ‘Buy Japan’ story on a government with a clean mandate to deliver growth. It may be too early to conclude the latter just yet, but we do note that the market is pricing a higher BoJ policy rate on this and given that the market will be bracing for intervention above the 158 area in USD/JPY.
If the negative pull factor for the dollar is the attractiveness of overseas asset markets, the push factor is what is going on at home. US labour market data surprised on the downside last week, and markets are now bracing for the Federal Reserve to potentially re-appraise its view of the jobs market. The focus this week will be on Wednesday’s release of the January NFP jobs report and also benchmark revisions. Consensus expects a decent +70k increase, but the market will be more sensitive to a downside miss. Further US data this week includes December retail sales data tomorrow and the release of January CPI on Friday. Soft data can weigh on the dollar.
And earlier today Bloomberg reported that the Chinese state regulator had asked Chinese private sector banks to rein in their exposure to US Treasuries, from a market concentration risk perspective. Mainland China and Hong Kong together held $938bn of US Treasuries as of last November. Comments like these come at a vulnerable time for the dollar, when the dollar diversification theme is rife.
Barring a significant turn for the worse in risk appetite, it looks like we could see a down week for the dollar. DXY stalled at 98.00 last week, and 97.00/05 looks like an initial target.
Chris Turner
