Dollar Bounces as Markets Shift into Risk-Off Mode

  • The virus news stream remains negative; the dollar remains stuck in narrow ranges
  • The only US data release today is May JOLTS job openings; Congress has gone on recess until July 20; Canada reports June Ivey PMI
  • German May IP came in well below expectations; the EC cuts its 2020 forecast for the eurozone economy a full percentage point to -8.7%
  • Japan reported weak May real cash earnings and household spending; RBA kept policy unchanged, as expected
  • Chinese equity markets continue to rally; Philippines reported June CPI; Malaysia cut rates 25 bp, as expected

The virus news stream remains negative. Melbourne is seeing its largest outbreak since the pandemic began and this led officials to announce a new lockdown. Brazil President Bolsonaro is showing symptoms and is being tested. Here in the US, more states are mandating masks and slowing or reversing reopening plans. Of note, USD/JPY price action yesterday seems to have presaged today’s risk-off tone. We had a similar disconnect between this currency pair and equity markets back on June 23. The next day, equities sold off as the drop in USD/JPY acted like a leading indicator of risk-off sentiment.

The dollar remains stuck in narrow ranges as markets contend with conflicting drivers. On the one hand, better than expected economic data and continued stimulus has tended to boost market sentiment, but the virus news stream has gotten worse for many countries, including the US. DXY is back above 97 today but remains near the middle of the 96-98 range seen since late May. Similarly, the euro is trading just below $1.13 and is smack in the middle of the $1.12-1.14 range since early June. We look for continued swings in market sentiment this week but believe dollar weakness will likely resume when the pendulum of sentiment swings back the other way.


The only US data release today is May JOLTS job openings. It is expected to come in at 4800 vs. 5046 in April. If so, this would be the lowest since November 2014 and reflects ongoing weakness in the labor market. From the BLS website: “These data serve as demand-side indicators of labor shortages at the national level. Prior to JOLTS, there was no economic indicator of the unmet demand for labor with which to assess the presence or extent of labor shortages in the United States. The availability of unfilled jobs—the job openings rate—is an important measure of the tightness of job markets, parallel to existing measures of unemployment.”

Other signs suggest the labor market remains under stress despite adding 7.5 mln jobs over the past two months. Yesterday, the employment component in June ISM non-manufacturing employment came in at 43.1 in June vs. 31.8 in May. This still suggests services employment is contracting and remains well below the year-ago level of 55.2. On Thursday, weekly jobless claims are expected to show little improvement from elevated levels.

There are several Fed speakers. Bostic, Daly, and Barkin all speak today. Bostic gave an interview to the FT and noted signs that economic activity is leveling off. He added some of these signs are “troubling and might suggest that the trajectory of this recovery is going to be a bit bumpier than it might otherwise.” Bostic suggested more support for small businesses may be needed but declined to say whether more stimulus from the Fed will be seen. While Bostic is not a voter this year, we believe Fed officials are all on the same page right now.

Congress has gone on recess until July 20. It probably couldn’t have picked a worse time to do so, as parts of the country are struggling to reopen. When lawmakers return, they will debate the next round of stimulus even as the $600 per week bump in unemployment benefits expires at the end of the month. One proposal sponsored by Democratic Senators Schumer and Wyden would tie jobless benefits to overall employment conditions. As the labor market improves, benefits would shrink, and vice versa. Other areas for discussion are aid to state and local governments, extending the Paycheck Protection Program, and another possible round of stimulus checks.

Canada reports June Ivey PMI. An improvement from 39.1 in May is likely, but the question is how big. Yesterday, the Bank of Canada’s Q2 business outlook survey showed business sentiment has fallen to its lowest level since the great financial crisis. The survey was taken between May 12 and June 5 and noted “Firms reported that, while capacity could resume quickly as the economy reopens and containment measures are lifted, the recovery in demand is expected to be more gradual.” Still, more than half of the firms responding expect sales and employment to return to near pre-pandemic levels within a year. Jobs are starting to come back, with 550k expected in June (data out this Friday) after 289.6k in May.


German May IP came in well below expectations, the second downbeat data point this week. Today’s readings were 7.8% m/m vs. 11.1% expected and -19.3% y/y WDA vs. -16.9% expected. All signs suggest the eurozone recovery got under way in Q2, with further improvement expected in Q3. Taken in conjunction with yesterday’s disappointing factory orders print, however, recent data not only suggest that the recovery in the Germany industrial sector could be slower than expected, but it is also a broader negative signal given Germany’s deep integration in global supply chains.

The European Commission cuts its 2020 forecast for the eurozone economy a full percentage point to -8.7%. It noted that risks remain “exceptionally high and mainly to the downside.” Note that the IMF forecasts -10.2% and the OECD forecasts -9.1%, and so the EC is basically playing catch-up with the other official institutions. Of course, all forecasts are subject to a high degree of variability given the still-unfolding pandemic.


Japan reported weaker than expected May real cash earnings and household spending. Earnings contracted -2.1% y/y vs. -0.8% expected and -0.7% in April, while spending contracted -16.2% y/y vs. -11.8% expected and -11.1% in April. Weak data persisted in May, though June offers some scope for recovery as the economy opened back up. That said, officials remain concerned about the pace and durability of the recovery. Bank of Japan decision is due July 15 and no change in policy is expected. The bank will publish its quarterly economic forecasts then and are likely to be tweaked modestly to the downside.

Reserve Bank of Australia kept policy unchanged, as expected. The cash rate and 3-year yield target remain at 0.25%. The bank noted that “The downturn has been less severe than earlier expected” and conditions have stabilized recently.” However, the RBA continued to underscore that policy will remain on hold for a long time given the high levels of uncertainty. To wit, an outbreak in Melbourne has led authorities there to announce a new 6-week lockdown. The bank said it remains ready to boost asset purchases as need to keep the yield curve under control. There was little discussion about the level of the currency, which has been range bound recently and now close to the levels it started the year against the US dollar.

Chinese equity markets continue to rally, while CNY briefly traded on the stronger side of 7.0 for the first time since mid-March. The off-shore currency is about 0.8% stronger over the last two sessions and is now over 2% stronger from its weakest level this year. Shanghai Composite was up 1.3% on the day and 13% on the month, bucking the global pullback as the excitement by local investors continues.

Philippines reported June CPI. Headline inflation rose 2.5% y/y vs. 2.2% expected and 2.1% in May. This was the first acceleration since January and the highest since March, but inflation still remains in the bottom half of the 2-4% target range. The central bank cut rates 50 bp to 2.25% at its last meeting June 25. Next policy meeting is August 20. While another cut is expected, the decision will be a bit trickier if inflation continues to accelerate. July CPI data will be reported August 5 and may be the deciding factor.

Bank Negara Malaysia cut rates 25 bp to 1.75%, as expected. it warned of lingering downside risks ahead “from both domestic and external factors.” CPI fell -2.9% y/y in both April and May, the worst deflation on record. While Bank Negara does not have an inflation target, deflationary conditions and a weak economy suggest scope for further easing. Indeed, Finance Minister Aziz said there is still room for stimulus from both the fiscal and monetary side. Next monetary policy meeting is September 10. While a lot can happen between now and then, we think it’s likely to cut rates again.