Monday, January 22, 2018

Foreign Exchange: "Dollar Remains Heavy"

From Marc to Market:
The US dollar closed last week on a firm note, but it has been unable to build on its gains to start the new week. News that Germany's SPD agreed to enter formal negotiations with Merkel's CDU/CSU alliance saw the euro open in Asia around a half a cent higher. However, sellers emerged near $1.2275 but seemed to lose their nerve as the pre-weekend low near $1.2215 was approached. It requires a break of $1.2165 to be of technical importance. On the upside, the market may be reluctant to extend gains much above $1.2300 ahead of the ECB meeting later this week.

The US government shutdown enters its third session. Half of the government shutdowns since 1977 have lasted three days or less. It is mostly about political theater and less about principles. It is a peculiar expression of the US presidential system and the idiosyncratic fiscal process. The direct economic impact of is thought to be minor, but of course, the more protracted the shutdown, the more disruptive. The next step may be a procedural vote in the Senate near midday.

One impact of the government shutdown may be on the US economic data schedule. Fortunately, the week begins off with private sector data reports. However, reports later in the week, including the advanced look at durable goods orders and Q4 GDP could be postponed. For the record, the Atlanta Fed's GDP tracker is looking at a 3.4% annualized paced, spurred by a 4% rise in real consumption. The New York Fed sees a 3.9% pace.

Korean shares reacted to the MSCI warning about the capital gains changes being contemplated. The KOSPI and the KOSDAQ shed around 0.75% and bucked the regional advance. The MSCI Asia Pacific Index rose 0.15%. The Korean won is the weakest of the emerging market currencies with a 0.4% loss. Foreign investors were net sellers of Korean shares for the second consecutive session. The Taiwanese dollar briefly touched new five-year highs.

The South African rand is the strongest of the emerging market currencies, gaining 1% against the US dollar and coming close to ZAR12.00. The ostensible impetus came from the ANC pressure on Zuma to step down. On the other hand, Turkey's decision to pursue a ground offensive against US-support Kurds in Syria has spurred some modest lira losses (~0.20%)...