The US dollar is seeing its pre-weekend gains pared. Trade tensions are running high as the US is said to be preparing to levy new tariffs on China as early as today. Meanwhile, the better tone of Brexit talks lends sterling a hand. Emerging market strains are re-appearing after a brief hiatus in the second half of last week.
The US dollar finished last week on a strong note, snapping four-day drop against the euro, sterling, Australian dollar, and Norwegian krona. and rose above JPY112. The S&P 500 and NASDAQ gapped higher early last week, and entered the gap, without filling it before the weekend and rebounded, suggesting good underlying demand. US 10-year yield is flirting with the upper end of its range. Will it break out?
The euro went bid in response to the ECB meeting and Draghi’s seeming optimism. The staff shaved the GDP forecasts for this year and next while keeping inflation forecasts steady. Risks were seen as broadly balanced.
The WTO is in need of modernization. Canada will formally kick off the process next week. Expectations should be kept low as rising protectionism and trade tensions warn that a consensus for change will be elusive.
Commodity prices have been retreating for the past several months. It is possible that a low of some importance is in place. Commodity prices often move inversely with the dollar, but that inverse correlation appears near an extreme so that a recovery in commodity prices does not necessarily prejudice our dollar outlook, even if there is a small negative bias.
The US policy mix an important driver for the dollar. We briefly review the outlook for both monetary and fiscal policy and anticipate the mix to be dollar constructive for at least the next six months.
With the balance of payments data, Japan reports portfolio flows into foreign bond markets. MOF data does not dovetail with the US TIC data but point to Japanese investors buying US government bonds and agencies in July. The TIC data for July will be reported September 18.
The US dollar is narrowly mixed as it consolidates the gains scored ahead of the weekend after the jobs data. Initial follow-through buying faded as important chart points were reached. We expect participants to take advantage of the euro’s gains early this week to provide a selling opportunity ahead of the ECB meeting on September 13.
The US dollar gains in the wake of the jump in hourly earnings and a decline in the underemployment rate reversed what had been losses for the week. The gains appeared to mark the end of a downside correction that began in mid-August. The S&P 500 posted its second weekly loss since the end of June. Has a corrective phase begun?