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Counting Dollars: Full Week Ahead Preview

Here's what's in play.

In addition to the usual deluge of Iran and North Korea headlines (the former should be increasingly contentious while the latter are likely to tip more conciliatory measures on both sides ahead of the Trump-Kim summit), all eyes will be on the dollar.

The resurgent greenback took a breather last week, falling for the first time in a month as the CPI miss helped put the brakes on, coming as it did less than a week after payrolls and AHE both printed shy of estimates:


In the week through Tuesday, the net dollar short was trimmed by some $5 billion. As Goldman notes, “bearish Dollar positioning has now eroded by nearly $15 billion over the past three weeks from a nearly seven-year peak of $28 billion in mid-April.”



Here’s a snapshot from Barclays that shows how the broad-based dollar strength has become less, well, less broad-based since May 4:


“Stabilization in risk sentiment, soft US wage and core inflation data, cleaner positioning and the rapid pace of the USD appreciation raise risks of a near-term retracement,” Barclays warned on Sunday, although given the pain the dollar rally has caused for any number of crowded trades, I’m not sure “warned” is the right word.

The marquee data point in the U.S. this week is retail sales, on Tuesday. Here’s BNP:

The main data point in focus next week is the April retail sales report, which will give us an indication of consumer spending to start the second quarter. Both retail sales and overall personal consumption started the year slower than we expected, with control group sales (which exclude autos, gas, and building materials) declining by 0.4% from December through February, after expanding by a heady 2.6% from September through November of last year. This slowdown was reflected in overall personal consumption growth in the first quarter of the year, which slowed to 1.1% q/q saar from 4.0% q/q saar in Q4 2017.


This will be yet another opportunity for the market to assess the new, U.S.-centric growth narrative that’s underpinned the greenback and stoked speculation that we’ve transitioned from a world defined by “synchronous global growth” to a situation where the data continues to surprise to the downside in Europe. Here’s Nordea’s Martin Enlund from his weekly FX outlook piece:

Some dollar positives should be fading. The difference between EA data and US data hasn’t been this wide since early 2012, and a rebound in the EA surprise index might moderate the upside in the dollar. The outright difference will still favour some more near-term upside in the dollar however, as it will take time for the wide gap to close. Also, we must not forget that EA growth expectations have started to drop, and will drop further – this might influence real money reallocations.


The pound will be interesting. The BoE was on hold as expected last week although remember that those “expectations” shifted rapidly headed into the meeting. Time was, markets were pretty sure that the conditions were in place for a May hike and then came a bevy of concerns, capped off by a truly abysmal Q1 GDP print that showed the U.K. economy all but flatlining. The BoE was careful to keep the door open for another hike and the market is now focused on August.

“The Bank of England’s weak conviction over the outlook, but clear intent to keep the possibility of a rate hike embedded in the in the short sterling curve implies a heightened degree of data-dependency for GBP,” Barclays wrote over the weekend, adding that while “Brexit news is still a source of volatility [it] no longer appears to be the driver of sterling’s direction [and] an August hike will require solid Q2 GDP growth and ‘uninterrupted improvements in the labour market’, making Tuesday’s labour report the key event for the GBP in the week ahead.”

GBPUSD hit a four-month low on Thursday following the BoE:


The euro could really use some help from the data. As noted above, this has become a policy/economic divergence story again, as the dollar’s correlation with rate diffs has been restored and a feeble bounce off local lows notwithstanding, the decline since mid-April has been harrowing:


And I mean, this looks like it still has the potential to get worse based on positioning:



European equities like it though; as the FX headwind has abated, the EuroStoxx closed last week by extending a seven-day rally:


We’ll get German GDP, Euroarea industrial production and final HICP this week.

As discussed at length (here and here) last week, Italy is back in the spotlight and although the consensus seems to be that although a populist government clearly isn’t the most desirable outcome, a Di Maio/ Salvini tie-up likely won’t entail anything bad enough to throw the ECB too far off track in terms of slapping an official sell-by date on APP.

Although I guess what I would note is that eventually, what you see in the following chart won’t be sustainable if BTPs aren’t getting ECB support:


BTP-bund spread is leaking wider but we’re not even close to where we were just five months ago, so I’d hardly say anyone is panicking, presumably because the ECB is going to end up ensuring that whatever happens with the government doesn’t cause periphery spreads to blow out:


In EM, eyes will again be on Argentina, which is trying to nail down an emergency credit line with the IMF to help shore up confidence as the peso has gone no-bid:


According La Nacion, the IMF is asking Argentina to think about a tighter fiscal deficit and is requesting the country open up its markets to more trade in order to help ameliorate the current account deficit. The following excerpts from a recent Bloomberg piece don’t sound great:

The Argentine government must do a better job of communicating with financial markets as it seeks help from the International Monetary Fund, said Daniel Marx, the country’s veteran negotiator with the Washington-based lender.

“Somebody from the government need to address the market fast,” said Marx, who was finance secretary between 1999 and 2001 during Argentina’s economic crisis and is now executive director of Buenos Aires-based research company Quantum Finanzas. “Without a clear message, people will continue walking away and panic may arrive.”

I don’t know Daniel, I think “panic” may have already “arrived.” Those goddamn silly 100-year bonds fell to something like 86 last week:


Meanwhile, Erdogan was trying his best on Sunday to make the lira crisis worse, promising to cut rates as soon as the “election” is out of the way. Because that’s what one does in a currency crisis – promise easier monetary policy and declare that interest rates are the “mother and father of all evil”.

More broadly, EM stabilized last week as the MSCI EM equities index rose for five consecutive days and EM FX found its footing on Thursday and Friday as the dollar receded.

The first test will be Malaysia, where local markets will reopen for the first time since the shock election result. The ETF of course plunged before recovering late in the week and the NDFs were tipping ringgit weakness.

Clearly oil is in play as the market tries to come to terms with what the Iran situation is likely to entail for prices that were already sitting at a three-and-a-half year high before Trump officially pulled the U.S. out of yet another multilateral agreement. Where things go from here is anyone’s guess. Our latest on this is here and of course you can peruse last week’s pieces for all manner of analysis on the subject.

In “very stable genius” news, there are “misbehaving” Iranian devils who are trying to take over the Mideast:

There are Chinese scoundrels who are scamming Americans on trade, but that’s something everyone should just “be cool” about because he’s got it under control:

And there’s new bestie (and former “short, fat rocket man”) Kim, dismantling nukes because he’s now a very “smart”, not to mention “gracious”, guy:


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