Monday, January 21, 2019

Is the US shutdown helping the Dollar push higher and will it continue?

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MORNING BRIEFING

The Dollar ended last week on a positive note forcing most of its counterparties lower while equities extended their rallies. Even though the US government remains in shutdown mode, the expectation that this should have a limited impact on domestic growth helps the Dollar recover the losses seen at the end of last year. The Euro and the Pound both start the week on the back foot but they may take diverging path during the course of the next few days. Gold retreated to $1,280 but Oil extended its rally to $54, reaching our short-term target.

The US currency has been doing great over the past few days weathering the effect of the government shutdown as Republicans and Democrats still can't find a way out from this dead end. However, there are some indications that point directly towards this situation as the primary driver behind Dollar's rally: a host of important US releases have been delayed due to the shutdown and this has prevented investors from getting fresh, potentially bearish, data from the US economy.

If you remember, the trend we've been seeing before the US when on partial paralysis was weaker figures from several sectors of the domestic economy. So when the government re-opens, the greenback will initially benefit from this news but as soon as delayed data like retail sales and trade performance starts coming in, market participants may refocus on the “slower 2019 growth” narrative and take the Dollar lower. Especially, if this development is combined with some sort of trade war resolution then the higher beta currencies like the Euro and the commodity dollars will look to rally again.

The European currency has been battered by softer Eurozone figures lately and this week may not be different at all. The ZEW and IFO reports from Germany and the Euro area may again highlight the effect of the global trade war on the domestic economy while the PMIs on Thursday may be a bearish prelude to Mario Draghi's press conference after the ECB meeting the same day. If Draghi remains cautious about growth and hints that the ECB is seriously considering delaying any rate hikes until the end of the year the Euro may see further decline towards 1.13 in the medium term.

The Pound came off its 1.30 highs during Friday's session. The initial optimism that drove Sterling higher subsided but this may not be the end of the currency's recent rally. Theresa May has a tough choice to make: either call for an extension to Article 50's deadline or move ahead with a no-deal Brexit. Unless the British PM intends to commit political suicide, an extension request is the most likely scenario and the EU will most probably agree, which should be a positive development that will take the Pound towards 1.30 again. Of course, in the off chance that she doesn't request an extension or the EU rejects such a request, the Pound will crash to 1.25.

Gold saw a material decline on Friday that drove prices close to the $1,280 support. Limited risk aversion and a Dollar rally contributed to taking the yellow metal lower and the test of this significant support area will decide whether a reversal of the previous rally is next. Should this be the case, the next area of support lies around the $1,265 mark, otherwise further consolidation between $1,280 and $1,295 should be expected. Oil on the other hand extended its rally and reached our medium-term $54 target. The next barrier for Oil sits around the $55 mark and if prices manage to overcome this then the next area of interest lies at $58.

Equities were positively bullish on Friday and saw strong gains across the globe. Today the US markets will be closed due to the Martin Luther King holiday but Europe is looking mostly positive with futures pointing slightly higher, with the exception of the German DAX. Overnight Chinese growth figures indicated a bullish outlook with the Asian giant beating estimates and showing strong growth and consumption towards the end of 2019. This should be a bullish catalyst for global equities and with the US earnings' season on full swing we should expect an encouraging start for the week.

MARKET EVENTS TO WATCH

  • German Producer Price Index – 11am

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research