Dollar Block in Focus

  • The Aussie was bid after supportive data, and the RBA did not talk the currency lower
  • A poor milk auction later today in New Zealand could bring Kiwi in focus
  • Despite expectations for supportive news on Thursday, sterling is not participating in the correction against the dollar today
  • On the EM side, Korea’s CPI came in at 0.7%, as expected, and the RBI kept rates on hold

Price action:  The dollar is broadly weaker on a Turnaround Tuesday.  The antipodeans are outperforming, while the yen and sterling are underperforming.  The Aussie rebounded after the RBA left rates steady but omitted any reference to further currency weakness in its statement.  The euro is little changed, trading just below $1.10.  Sterling is trading just below $1.56, while dollar/yen is trading around 124.  EM currencies are mostly firmer, with HUF and MYR underperforming.  RUB and INR are outperforming, after the RBI left rates unchanged.  MSCI Asia Pacific rose 0.3%, with the Nikkei down 0.1%.  The Shanghai Composite rose 3.7%, while the Shenzhen Composite rose 4.8%.  Mainland stocks rebounded after restrictions on short selling were announced, but nearly 20% of Chinese stocks are still not trading.  Euro Stoxx 600 is down 0.4% near midday, with Greek stocks down 1.2%.  S&P futures are pointing to a lower open.  The US 10-year yield is up 2 bp to 2.16%, while European bond markets are mostly firmer within narrow ranges.  Commodity prices are rebounding today.

  • Narrow ranges in the foreign exchange market continued for the most part, and the US dollar is a little softer.  The Reserve Bank of Australia did not talk the Aussie lower, and the data were better than expected.  This sent the Australian dollar sharply higher.  Its 1.25% gain is the biggest in two months.  This, coupled with gains in Chinese stocks (Shanghai Composite + 3.7%) and firmer commodity prices (including oil) are helping to lift the dollar bloc currencies more generally.
  • The Australian dollar is trading at an eight-day best, just below $0.7400.  It had fallen to fresh multi-year lows at the end of July near $0.7235.  The RBA left cash rates unchanged at 2.0%, as nearly everyone had expected.  In past statements, it argued that a weaker currency was both necessary and desirable.  This time it recognized that the Australian dollar had depreciated in line with key commodity prices.
  • Separately, Australia reported stronger than expected retail sales and a smaller than expected trade deficit.  June retail sales rose 0.7%.  The consensus was for a 0.4% increase.  The May series was revised to 0.4% from 0.3%.  This put Q2 real retail sales up 0.8%, twice what consensus forecast.  The June trade deficit was A$2.933 bln, just less than expected, though still larger than the downwardly revised A$2.677 bln deficit in May.  Exports rose 3% while imports rose 4%.
  • But caution is still in order as today’s Aussie gains are corrective in nature.  It is obvious that RBA policy must remain accommodative.  Monetary policy in the US and UK will shift in the other direction, even if the precise timing is being debated.  Moreover, sentiment may prove fickle if the employment data later this week disappoints.  The Australian dollar has not closed above its 20-day moving average since June 25.  It is found today near $0.7365.
  • A poor milk auction later today in New Zealand could see the Kiwi stall in front of its 20-day moving average (~$0.6625).  This would set the stage for a disappointing Fonterra meeting later this week.  Turning to the Canadian dollar, the US dollar peaked near CAD1.3180 yesterday and is consolidating the move today.  Thus far, it has held above CAD1.3100.  Sentiment is poor as it has become clear that the Canadian economy is the worst performing of the high income economies here in 2015.  It has contracted each month this year.  Monetary policy divergence with the US, weak oil prices and the political uncertainty raised by the October election may limit corrective gains in the Canadian dollar.
  • Despite expectations for supportive news on Thursday, sterling is not participating in the correction against the dollar today.  The disappointing construction PMI has kept sterling flat.  The consensus had expected a small rise from the June reading of 58.1.  Instead, the construction PMI slipped to 57.1.  Sterling remains inside yesterday’s range, which was inside last Friday’s range.
  • Trading in most Greek stocks is calmer today.  The Athens Stock Exchange is off 1.2%.  However, banks are struggling to find a “clearing price” and financials are off 14% today.  At its worst, the index of the top four banks was off 29%, after a 30% decline yesterday.  Utilities are up 8%, and industrials and energy are up more than 6%.
  • Chinese stocks advanced, with the Shanghai Composite snapping a three-day down draft.  After the markets closed yesterday, it announced a ban on intraday shorts as well.  Regulators had already banned buying and selling shares on the same day.  That is, one cannot short a stock in the morning and buy it back in the afternoon.  Chinese regulators also froze a little more than three dozen accounts as they crack down on algorithmic traders they blame for disrupting market stability.  The policy response to the price action, more than the price action itself, will likely encourage international fund managers to continue preferring the ADRs and H-shares to the mainland markets.
  • We note that the US reported strong July auto sales.  The 17.46 mln unit pace compares with 17.11 mln consensus expectations.   This is the third consecutive month above the 17 mln mark and the first such streak since Q2 2000.  It bodes well for headline retail sales.  Strong sales, especially by US brands, which gained market share, will also underpin production.   The US reports factory orders, which outside of some response to the headline, is not a market mover, with durable goods orders out earlier, and the market is no longer focused on the Q2 data.  Lastly, the default of Puerto Rico yesterday is a talking point, and compare/contrast with Greece seems popular.  However, PR’s default is localized and does not have the existential quality of the Greek drama.  While the world sees it as a sovereign default, fourth largest (after Greece, Argentina, and Russia), the US sees it as a municipal failure.
  • Korea’s July CPI came in right on expectations at 0.7% y/y.  This is well below the 2.5-3.5% target range.  Officials have downplayed the need for more rate cuts, especially as a reaction to the MERS outbreak.  And with the key JPY/KRW cross moving higher, they may feel more confident.  However, we think domestic activity will need a boost soon, and so we see the possibility that the BOK will cut rates later this year.
  • Reserve Bank of India meets to keep rates steady, as expected.  A small handful of analysts expected a 25 bp cut. CPI inflation picked up in recently, rising to 5.4% y/y in June and pass-through from the weaker rupee remains an upside risk, partially offsetting the benefits of lower oil prices.  Moreover, given uncertainty about the monsoon season, we think the RBI will remain cautious.  Easing is likely later in H2, however, if the monsoon impact is manageable.