Dollar Bulls Trapped 

  • The Greek parliament handily approved the new reform measures that remove the last hurdle to the negotiations of a third aid package in five years
  • Sterling’s advance was stopped in its tracks by an unexpected fall in UK retail sales
  • The Reserve Bank of New Zealand cut the official cash rate 25 bp for the second time in six weeks but modified its statement
  • Chinese stocks have rallied for the sixth consecutive session, which is the longest advancing streak since May
  • Brazil cut its primary surplus target for this year; we think a rating downgrade is likely
  • South Africa Reserve Bank meets and the market is split – we favor no hike; Turkish central bank meets and is widely expected to keep rates steady

Price action:  The dollar is mostly softer against the majors.  The Kiwi is outperforming after the RBNZ cut rates 25 bp but dropped the phrase “unjustified” with regards to the exchange rate.  Sterling is underperforming after weaker than expected UK retail sales data.  The euro continues its bounce and is trading around $1.10.  Sterling is trading around $1.56, while dollar/yen is just below 124.  EM currencies are mostly softer, with the CEE currencies outperforming.  KRW and TRY are underperforming.  MSCI Asia Pacific rose 0.2%, with the Nikkei up 0.4%.  The Shanghai Composite posted a 2.4% gain, while the Shenzhen Composite rose 2.8% as China stocks rose for the sixth straight day.  Nearly 20% of Chinese stocks are still not trading, but the number is falling gradually.  MSCI EM is down 0.3%.  The Greek stock market still remains closed despite banks re-opening.  Euro Stoxx 600 is down 0.1% near midday, while S&P futures are pointing to a lower open.  The US 10-year yield is down 1 bp to 2.32%, while European bond markets are also firmer.  Gold is trading back above 1100, but further losses seem likely.  Oil prices are flat, but are likely to remain under pressure.     

  • The US dollar is under pressure today.  There are many small triggers but the news stream itself is relatively mild.  Ultimately, the inability to extend last week’s momentum left the dollar bulls vulnerable.  As we noted, the momentum the dollar enjoyed took place without the backing up of short-term US interest rates needed to support the dusted-off divergence narrative as  the Greek situation returned to chronic from acute and the Chinese stock markets stabilized.
  • The Greek parliament handily approved the new reform measures that remove the last hurdle to the negotiations of a third aid package in five years.  There are three issues to note.
    First, the banking measures that were approved allow for the bailing in of depositors and senior creditors starting January 1.  Greece’s Finance Minister reaffirmed yesterday that bank recapitalization, for which the new package will earmark 25 bln euros, will be done later this year.  There has been much debate about this, and some observers have suggested that it could still prove to be causa belli for a Grexit.  So many observers thought that a Grexit was imminent a couple of weeks ago.  Often the first reaction in such a situation is simply to push the forecast out in time rather than admit to being wrong.
  • Second, the bills passed did not include ending the tax break for farmers, which is reportedly subject to widespread abuse.  The official creditors had insisted on this.  The failure to include it may have been driven by political considerations as it would have fueled more Syriza dissents.  It is expected to be included in new measures later.
  • Third, Greece’s next payment to the ECB is due on August 20.  It does not have the funds.  The idea is that if the new aid package can be agreed to in early August, it would give the national parliaments time to approve it in time for the first tranche that would cover the ECB payment.  The EU’s Moscovici said that negotiations could stretch out a bit more.  If this does happen, and provided there is progress, another bridge loan facility is possible.
  • The euro reacted positively to actions by the Greek parliament.  The euro traded to about $1.1005, just shy of the 50% retracement of the drop since the July 10 high near $1.1215.  Reports that a group of mostly non-European investors will buy Germany’s LeasePlan for four bln euros ostensibly added to the euro demand.  Support is likely seen near $1.0950 ahead of tomorrow’s flash eurozone PMI.  On the upside, the 20-day moving average, which the euro has not closed above since June 22, is near $1.1025.  Beyond that, the 61.8% retracement objective is found at $1.1065.
  • Sterling’s advance was stopped in its tracks by an unexpected fall in UK retail sales.  A rise was expected and would have fanned rate hike speculation.  Retail sales were forecast to have risen 0.4% but instead fell by 0.2% in June.  Although the May series was revised up a notch, it was insufficient to offset the disappointment.  Sterling was already lagging behind the euro, and the poor data saw sterling sell off against the greenback, allowing the euro to extend its cross gains.  Sterling was turned back from nearing the recent highs above $1.5670.  It quickly fell to $1.5580 before finding a decent bid.  The implied yield of the June 2016 short-sterling futures fell four basis points.
  • However, in the bigger picture, the tighter labor market and upward pressure on wages are the factors spurring rate hike expectations.  While the retail sales data was disappointing, it is unlikely to have lasting impact on the expectations of the timing of the BOE’s lift off.
  • The Reserve Bank of New Zealand cut the official cash rate 25 bp for the second time in six weeks.  It stands at 3.0% now.  The RBNZ has now unwound two of last year’s four hikes, and it says further easing is likely.  The growth outlook has deteriorated since June.  This is not surprising, but what is unexpected is that the RBNZ dropped its previous characterizations of the New Zealand dollar as being “over-valued” or “unjustifiably high.”  This omission spurred a short-covering rally as well as a “sell the rumor, buy the fact” type of activity.  The Kiwi is easily the best performing currency today, gaining 1.5% against the US dollar.  This has brought a little beyond its 20-day moving average (~$0.6680).  This is the first time since late April that it has touched this average.
  • During this period, the New Zealand dollar has depreciated by about 16.2%.  However, today’s rally seems exaggerated.  A September rate cut still looks likely, and that may not prove to be the end of the easing cycle.  This bounce in Kiwi has over-extended short-term technical indicators and may provide a new selling opportunity for the bears.
  • Despite the biggest jump in exports in five months (9.5% year-over-year), Japan reported a small deficit (JPY69 bln) instead of a small surplus (consensus was JPY46 bln).  Most of the increase in the value of exports was due to price.  Volumes are flat.  Imports fell 2.9% and have been contracting for six months.  Exports to the US were up 17.6% while shipments to Europe were up 10.8%.  Exports to Asia were up 10.1%, and to China up 5.9%.  Japan’s imports from the US rose 14.9%, from Europe, 6.5% and 7.0% from Asia (China 6.9%).
  • The dollar has been confined to yesterday’s range against the yen.  It is in a near-term of JPY123.60-JPY124.15.  The greenback tested the lower end of that range in early Europe, but with the help of cross rate pressure on the yen, the dollar recovered to the middle of the narrow range.
  • Chinese stocks have rallied for the sixth consecutive session, which is the longest advancing streak since May.  The Shanghai Composite rose 2.4%, and the Shenzhen Composite rose 2.8%.  SAFE noted that capital outflows have slowed.  Margin use continued to rise yesterday (reported with a day lag), and the number of shares suspended (mostly small cap issues) continues to gradually fall.  Tomorrow, Caixin flash manufacturing PMI (formerly sponsored by HSBC) for China will be reported.  It is expected to tick up from June’s 49.4 reading but remain below the 50 boom/bust level.
  • The North American session features the US weekly initial jobless claims and leading economic indicators.  Outside of some headline risk, these are not the reports that typically move the markets.  Canada reports May retail sales.  They are to rise by 0.6% after falling by 0.1% in April.  The contraction in April GDP (after a negative Q1 GDP print) helped spur the Bank of Canada’s recent rate cut.  A firm retail sales report today will help bolster confidence that Canada may be experiencing sluggish growth, but it is not in a recession.
  • The US dollar rose to new multi-year highs against the Canadian dollar near CAD1.3055 but has been pushed down by nearly a big figure in amid the generally heavier tone.  Support is seen in the CAD1.2905-20 band, and a break would likely trigger stop-loss dollar selling.
  • Brazil markets sold off yesterday after the government cut the primary surplus target for 2015 to 0.15% of GDP.  We think a rating downgrade to sub-investment grade remains likely.  The prior target was 1.1% of GDP, which was clearly out of reach now.  Much of the budgetary shortfall can be traced to the economy, which is contracting more than expected even as interest rates head higher.  On that note, after the sharp move in local markets this week, implied rates are now pricing in only 26 bp of hikes for the July meeting, down from nearly 50 bp at the start of the month.  Many observers have changed their forecast to one more 25 bp hike to end the cycle. We are less convinced.
  • Turkey central bank announces its decision shortly and is expected to keep rates steady.  With political uncertainty picking up (potential for fresh elections and terrorist attacks), we think the central bank will maintain a cautious stance and keep rates steady for now.   Inflation has been moderating, but at 7.2% y/y in June, remains above the 3-7% target band.  Political risk is rising again, with chances of fresh elections rising as the main parties are failing to form a workable coalition.
  • South Africa Reserve Bank meets and the market is split.  Of the 31 analysts polled by Bloomberg, 17 see a 25 bp hike to 6% while the rest see steady rates at 5.5%.  We do not think a rate hike is the right call now.  June CPI came in at 4.7% y/y vs. 5.0% consensus and 4.6% in May, while core eased to 5.5% from 5.7% in May.  Inflation is just not coming from the demand side, and will instead likely be driven by a weak rand and external developments.  And now with oil prices coming off again, there is one less argument for early tightening.