Dollar Consolidates as Fresh Developments Awaited

The Greek drama is focused on the Syriza government as they attempt to secure parliamentary approval for the tentative agreement with European finance ministers.  In addition to Greece, the trajectory of US monetary policy has been another factor shaping the investment climate.

  • The Greek drama turns to the Syriza government attempting to secure parliamentary approval for the tentative agreement with European finance ministers
  • The trajectory of US monetary policy has been another factor shaping the investment climate
  • China reported a larger than expected rise in aggregate financing while PBOC reserves fell by about $40 bln in Q2, the fourth consecutive quarterly decline
  • Singapore’s advance Q2 GDP showed the largest contraction since 2012; Bank Indonesia kept rates steady, as expected; Chilean central bank meets and steady policy is expected

Price action:  The US dollar, stocks, and bonds are largely moving within yesterday’s ranges as investors wait for fresh developments.  A notable exception to this generalization is oil prices, down about 2% today.  News of a potential agreement with Iran weighs on prices as it is seen bringing new supply into an already oversupplied market.  The Scandies are underperforming on the day, while the Swiss franc and sterling are outperforming.  The euro is trading right above $1.10, while sterling is trading just below $1.56.  Dollar/yen is trading near 123.50.  EM currencies are mixed too, with TRY and ZAR outperforming.  KRW and RUB are underperforming.  MSCI Asia Pacific rose 0.7%, up for the fourth straight day.  The Nikkei rose 1.5%, while the Shanghai Composite posted a 1.2% loss.  Nearly 30% of Chinese stocks are still not trading.  MSCI EM is down 0.4%, breaking a three-day winning streak.  Euro Stoxx 600 is down 0.3% near midday, while S&P futures are pointing to a lower open.  The US 10-year yield is down 2 bp to 2.43%, while European bond markets are mixed.

  • The Greek drama turns to the Syriza government attempting to secure parliamentary approval for the tentative agreement with European finance ministers.   In essence, Europe has demanded that Tsipras implement everything the past governments promised to do but didn’t.  This includes the 50 bln euro privatization fund, where less than 10% of previous plans have been actualized.
  • The agreement with Europe will likely cost Tsipras his job and government.  The defections from this coalition means the government cannot survive.  The most likely scenario is for the President to appoint a technocrat interim Prime Minister, whose chief mission is to begin implementing the new/old program.  A cross-party cabinet would be created.  Elections, in this scenario, would likely take place later this year.
  • The Greek parliament will take up the legislation tomorrow.  In the meantime, we note that Greece has paid the remainder of the maturing samurai bond (~JPY11.7 bln or $94 mln), avoiding the potential default.  While Greece may move off of center stage, we have serious misgivings about the agreement, and suspect the challenge posed by Greece (debt and competitiveness) will eventually re-emerge.
  • In addition to Greece, the trajectory of US monetary policy has been another factor shaping the investment climate.  Yellen begins her Congressional testimony tomorrow (another reason for consolidation today).  She stuck to her script last week regarding scope for 1-2 rate hikes this year provided slack in the labor market continues to be absorbed.  There is no reason to expect a substantive change from her this week.
  • The US reports June retail sales today.  May’s 1.2% headline increase will not be repeated.  US retail sales have been stronger than appreciated.  The three-month average is 1.0%, which is the strongest since April 2014.  The consensus is for a 0.3% increase in June, which would match this year’s average.  The component used for GDP calculations is expected to be up 0.3%.  The Atlanta Fed’s GDPNow has been steadily rising and now estimates Q2 GDP at 2.3%.
  • The Swedish krona and Norwegian krone are the weakest of the majors today.  Sweden was pressured by the unexpectedly large fall in June CPI.  The headline fell 0.3%, bringing the year-over-year rate to -0.4%, twice what the consensus expected.  The underlying rate (uses fixed rate mortgage interest rates) fell to 0.6% from 1.0%.  This matches the lowest level of the year.  The euro is at the upper end of its nearly four-month trading range against the Swedish krona.  A convincing move above SEK9.40 would whet appetites for SEK9.50.  The Norwegian krone is being dragged by lower oil prices.  The euro is testing the NOK9.0 area and looks set to return toward last week’s high near NOK9.15.
  • The Canadian dollar is also being pushed lower, helped by the drop in oil prices, but also ahead of tomorrow’s Bank of Canada meeting.  The Bloomberg consensus has shifted toward a rate cut.  We suspect that the Canadian dollar could bounce on a rate cut on ideas that it is the last one.  Perhaps it would be partly “sell the rumor, buy the fact.”  On the other hand, the failure to deliver a cut would likely lead to renewed selling as the likelihood of easier policy still hangs over the market.
  • Sterling has rallied in the UK morning.  It was not due to the inflation report that saw headline CPI slip back to zero from 0.1%.  The core rate eased to 0.8%, its lowest level since 2001.  Rather BOE Governor Carney’s hawkish comments lifted sterling from below yesterday’s lows towards its highs just below $1.5600.
  • Chinese equities were narrowly mixed.  The Shanghai Composite slipped 1.2%.  It had rallied 13% over the past three sessions.  A little more than a quarter of the issues were still suspended, according to Bloomberg.  The Shenzhen Composite rose 1.4%.  Margin use rose yesterday for the second consecutive session.  On the Shanghai market margin use rose 0.2% on Monday to CNY934 bln (~$150 bln).  Separately, China reported a larger than expected rise in aggregate financing (CNY1.86 trillion).  
  • PBOC reserves fell by about $40 bln in Q2, the fourth consecutive quarterly decline.  The impact of valuation is difficult to determine.  The euro and other reserve currencies gained against the dollar in Q2, which would put upward pressure on the dollar value of reserves.  On the other hand, the slide in bond prices may have offset this.  Tomorrow, China will report Q2 GDP.  Growth is expected to be just below 7% y/y.  Given that June exports reported yesterday were stronger than expected, and today’s aggregate financing figures were above the most bullish forecasts, there may be scope for a small upside surprise.
  • Singapore’s advance Q2 GDP came in much lower than expected at 1.7% y/y and -4.6% q/q, the largest contraction since 2012.  The decline was largely driven by a contraction in the manufacturing sector.  Since Singapore is often viewed as a bellwether for the region, this report points to possible downside risks for regional growth.  Singapore reports May retail sales Wednesday, expected to rise 3.0% y/y vs. 5.0% in April.  It then reports June trade Thursday, with NODX expected to rise 2.0% y/y vs. -0.2% in May.  The economy is clearly losing momentum, which could push the MAS into a more dovish stance at its next policy meeting in October.
  • Bank Indonesia kept rates steady at 7.5%, as expected.  With inflation at 7.3% y/y well above the 3-5% target range, we think steady rates are likely for the time being even though the real sector is slowing.  One factor is the weakness of the rupiah, still trading around multi-year lows against the dollar.  Indonesia reports June trade Wednesday, with exports expected at -16.5% y/y and imports at -20.3% y/y.
  • Chile central bank meets late today and is expected to keep rates steady at 3.0%.  With inflation at 4.4% y/y well above the 2-4% target range, we think steady rates are likely for the time being even though the real sector is slowing.  Policymakers are under pressure to do something, as President Bachelet’s popularity is hitting all-time lows.