Dollar Soft Even as US Rates Rise and Trade Tensions Mount

  • US rates continue to march higher
  • Meanwhile, trade tensions continue to ratchet up
  • UK reported higher than expected August CPI
  • Yen weakness continues in the wake of the BOJ decision overnight
  • Bank of Thailand kept rates steady at 1.5%, as expected; Brazil COPOM is expected to keep rates steady at 6.5%

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Markets Calm Even as Trade Tensions Mount

  • The main drivers for global markets remain in play: trade tensions and higher US rates
  • The US moved ahead with its plan to slap 10% tariffs on another $200 bln of Chinese imports next Monday
  • Markets have to start thinking about the inflationary implications of these tariffs
  • The implied yield on the December 2019 Fed Funds contract has shot up this month
  • EM remains under pressure; National Bank of Hungary is expected to keep rates steady at 0.9%

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Drivers for the Week Ahead

  • The trajectory of monetary policy in the US and Europe has been fairly clear
  • This week’s high-frequency UK data is expected to reinforce the notion that there will not be another increase in the base rate until after next March
  • The Bank of Japan has been more difficult to read for investors
  • Norway’s central bank meets Thursday and is likely to hike rates
  • After the hawkish surprises last week from Turkey and Russia, all eyes are on Brazil and South Africa this Wednesday and Thursday, respectively

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Initial Extension of Euro and Sterling Losses Stall

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. 

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Emerging Markets Stabilize While Euro Shrugs Off Disappointing Data

  • The global capital markets are finishing the week on a more stable note than it began
  • To be sure, Germany is not the only source of disappointment in the EMU today
  • The euro’s resilience strikes us as a potentially important reflection of market psychology
  • When news broke yesterday that President Trump may next turn his attention on bilateral trade with Japan, the initial instinct was to buy the yen
  • US jobs growth disappointed in July, and most are looking for a rebound in August; Canada also reports August jobs data today
  • Mexico August CPI is expected to rise 4.85% y/y; Chile August CPI and trade will be reported

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Fragile Calm Weighs on Greenback

  • The global capital markets are calmer today
  • The Riksbank kept rates steady but the sub-text was dovish as it sees excessively low inflation as a risk
  • Although the gains in euro and sterling are modest, their resilience in the face of negative developments is noteworthy
  • A theme that has emerged this week, and which is also supportive for the euro, is the recovery in Italy
  • The US economic calendar is chock full today
  • South Africa Q2 current account deficit came in at -3.3% of GDP; Brazil August IPCA inflation is expected to rise 4.29% y/y

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Continuing EM Pain Helps the Dollar, Does Little for Yen

  • While the trade tensions were cited for disappointment in the manufacturing PMIs, today’s service PMIs were also mostly disappointing
  • UK manufacturing and construction PMIs disappointed, but the service PMI made up for it
  • Australia reported softer services and composite PMIs, but Q2 GDP surprised on the upside
  • The Bank of Canada meets and is widely expected to keep its overnight rate steady at 1.50%
  • Philippines and Taiwan reported August CPI; Colombia reports later today
  • Bank Negara kept rates steady at 3.25%, as expected; National Bank of Poland is expected to keep rates steady at 1.5%

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Dollar Gains Broadly

  • The US dollar is rising against all the major and emerging market currencies today
  • The Bank of Japan sent a clear message to the market today to dampen ideas that it is engaged in so-called “stealth tapering”
  • AUD briefly moved higher on the back of the RBA, which was a bit more upbeat than anticipated
  • Sterling has been sold with the help of a weak construction PMI, which follows a disappointing manufacturing PMI released yesterday
  • The US economic calendar is chock full today with the manufacturing PMI/ISM, construction spending, and auto sales
  • South Africa Q2 GDP contracted -0.7% SAAR; Brazil July IP is expected to rise 2.2% y/y; Chile central bank is expected to keep rates steady at 2.5%

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6 Things That Happened On Monday You Should Know About

The first session of September was marked by the US Labor Holiday.  Several developments will help shape the investment climate.

 

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