Dollar Comes Under Pressure Again

  • US-China tensions are heating up again; the dollar is under pressure again
  • Talks on the next stimulus package may have made some limited progress; stalled talks have led Trump and some of his advisors to consider the use of executive decrees
  • US Treasury said it expects to issue $947 bln in debt in Q3; there is not much in the way of US data
  • CFTC data show speculative investors increased their short positions; Turkey reported July CPI; dislocations in Turkey’s money markets continue to rise
  • Japan July Tokyo CPI came in higher than expected; RBA kept policy unchanged, as expected

US-China tensions are heating up again. After the US gave TikTok an ultimatum to sell its US operations, state media said that China won’t accept such theft.” As President Trump demanded part of the proceeds from the sale, China said it would respond to this “planned smash grab.” As we’ve written before, Trump is taking a gamble that his anti-Chinese rhetoric will play well to the US electorate. That assumes that the benefits will offset any retaliatory moves, which is perhaps too optimistic. China knows that Trump is facing a difficult election and could easily halts its agricultural purchases from the US to make a statement. We would be very surprised if China did not take some sort of retaliatory action soon.

The dollar is under pressure again. DXY failed to break above 94.0 yesterday and has given up all of this week’s gains already. The euro found support yesterday near $1.17 and is now testing the $1.18 area. Likewise, sterling found support near $1.30 and is edging higher. However, it is underperforming the euro and so the EUR/GBP cross is moving higher off of support near .90. USD/JPY rally ran out of steam near 106.50 and is back testing the 106 figure today. Nothing fundamental has changed and so we viewed this recent dollar bounce with skepticism. With today’s reversal, this confirms our call for further losses for the greenback.

AMERICAS

Talks on the next stimulus package may have made some limited progress. Treasury Secretary Mnuchin said “We made a little bit of progress” in talks yesterday, which are set to continue today. Top Democratic Senator Schumer said there were still many differences but added “I think there is a desire to get something done as soon as we can.” The improvement in tone is a good development and supports our view that a deal will eventually be struck. It’s just taking longer than it should.

The stalled talks have led President Trump and some of his advisors to consider the use of executive decrees. One would reportedly restore the eviction moratorium, while another would suspend the payroll tax. The latter is a non-starter for legal reasons, and also would do nothing to help the tens of millions that just lost the extra $600 jobless benefit.

In related news, the US Treasury said it expects to issue $947 bln in debt in Q3. This is $270 bln higher than what is estimated back in May. The Treasury added that its estimate includes an estimated “additional borrowing need in anticipation of additional legislation being passed.” Given that is perceived as the floor for the next package and $3 trln as the ceiling, the risk is clearly to the upside in terms of issuance ahead. Treasury also sees $1.216 trln issuance in Q4. The news comes ahead of the Quarterly Refunding Announcement Wednesday, and days after Fitch moved the outlook on its AAA rating for the US from stable to negative.

There is not much in the way of US data today. Only June factory orders will be reported and are expected to rise 5.0% m/m. Yesterday, July ISM manufacturing PMI came in at 54.2 vs. 53.6 expected and 52.6 in June and suggests continued recovery in that sector. Of note, the employment component only rose to 44.3 from 42.1 in June, suggesting manufacturing employment is still shrinking. ISM services PMI out tomorrow will provide another look at the US economy. July auto sales were also reported yesterday and came in at a 14.52 mln annualized rate vs. 14.0 mln expected and 13.05 mln in June. This is a good sign for consumption.

Canada reports July Markit manufacturing PMI. Ivey PMI will be reported Friday, along with July jobs data. At its last meeting, the Bank of Canada has acknowledged the improved outlook but remained cautious and so is unlikely to shift policy anytime soon. Next policy meeting is September 9 and no change is expected then. USD/CAD has been unable to break below the 1.33 area but if USD weakness picks up again as we expected, the pair should eventually break below and test the February low near 1.32.

EUROPE/MIDDLE EAST/AFRICA

Despite the continued rally in sterling, CFTC data show speculative investors increased their short positions. Net non-commercial shorts rose to -25K contracts, up about 10K for the week ending last Tuesday, and has been net short since mid-April. This suggest that this slice of FX investors remains skeptical of sterling’s recent rally. We sympathize to some extent. There are plenty of reasons to bet on sterling underperformance between the relatively poor management of the pandemic and the small space for an upside Brexit negotiation surprise. That said, we still think the broad dollar trend will win out in the end and prefer to express short sterling views against the euro.

Turkey reported July CPI. Headline came in at 11.76% y/y vs. 12.0% expected and 12.62% in June. This was the first deceleration since April but inflation remains well above the 3-7% target range. Next policy meeting is August 20 and no change is expected then. However, the central bank’s updated inflation forecasts in its latest quarterly inflation report were very optimistic and we think this signals an underlying desire to eventually restart the easing cycle.

Meanwhile, the dislocations in Turkey’s money markets continue to rise. The implied yield in the USD/TRY forward has increased to 37% for the 1-month and to near 300% for the overnight. The proximate cause for the spike seems to be a shortage of TRY liquidity after the huge dollar sales undertaken by state banks last week to prevent currency depreciation. But the bigger issue here is the excessive interference in financial markets and shunning of foreign investors against a backdrop of weak fundamentals.

ASIA

Japan July Tokyo CPI came in higher than expected. Headline and ex-fresh food y/y rates accelerated to 0.6% and 0.4% vs. 0.3% and 0.1% expected, respectively. Officials said inflation was boosted by rising costs of extra schooling and a recovery in overseas tour prices. It seems that last month’s reopening has had some impact on prices, which suggests that some of the efforts to fight the resurgent virus this month will dampen prices in the coming weeks. For now, the Bank of Japan is on hold but we see scope for further fiscal stimulus if the recent lockdowns hurt the growth outlook.

Reserve Bank of Australia kept policy unchanged, as expected. However, it restarted its bond purchases “to keep yields consistent with the target.” With the 3-year yield trading above the 0.25% target for several weeks, the restart should not have been a big surprise. The RBA acknowledged the negative impact that will come from the renewed lockdown in Victoria but added that “the downturn is not as severe as earlier expected and a recovery is now underway in most of Australia.” The RBA will issue its Statement on Monetary Policy Friday. Australia reported mixed June trade and retail sales. Exports and imports rose 3% m/m and 1% m/m, both weaker than expected with May revised down as well. On the other hand, retail sales rose 2.7% m/m vs. 2.4% expected.