US Dollar Weighed Down by Dovish Fed Governors

Dollar Ends Eventful Quarter on a Soft Note

  • The dollar is closing out Q2 on a soft note; our upcoming FX Quarterly stresses that Q3 will be a waiting game
  • The G20 highlight is the Trump and Xi meeting Saturday morning at 1130 AM local time
  • During the North American session, the US has a busy data schedule
  • Eurozone reported preliminary June CPI steady at 1.2% y/y; Sweden reported weak May retail sales
  • Japan reported a slew of data; BOJ tweaked its bond purchase plans for July
  • Banco de Mexico delivered a dovish hold yesterday; South Africa reports May trade and budget data

The dollar is broadly weaker against the majors as the week and quarter draw to a close. Stockie and Swissie are outperforming, while Aussie and Nokkie are underperforming. EM currencies are mixed. THB and KRW are outperforming, while MXN and RON are underperforming. MSCI Asia Pacific was down 0.1%, with the Nikkei falling 0.3%. MSCI EM is up 0.1% so far today, with the Shanghai Composite falling 0.6%. Euro Stoxx 600 is up 0.3% near midday, while US futures are pointing to a higher open. 10-year UST yields are flat at 2.02%, while the 3-month to 10-year spread is up 1 bp and stands at -11 bp. Commodity prices are mostly higher, with Brent oil up 0.2%, copper flat, and gold up 0.3%.

The dollar is closing out Q2 on a soft note today. For the quarter, the greenback was mixed against the majors. The yen and Swissie outperformed, while sterling and the Antipodeans underperformed. The dollar was also mixed against EM this quarter. RUB and THB outperformed, while TRY and CNY underperformed.

Our upcoming FX Quarterly stresses that Q3 will be a waiting game. Will the US and China reach a trade deal? Will the Fed cut rates in July? Who will be the next UK Prime Minister and what form will Brexit take? The answers to these and other questions will be key in determining the direction of global markets. For now, we retain our broad macro calls.

The G20 highlight is the Trump and Xi meeting Saturday morning at 1130 AM local time. Ahead of that, Xi held his own series of meetings and his remarks support the view that a trade deal will remain difficult to reach. While critical of US policies, Xi refrained from actually mentioning Trump by name.

During the North American session, the US has a busy data schedule. It reports May personal income and spending, core PCE, June Chicago PMI, and final June Michigan consumer sentiment. Core PCE will be closely watched, as it is expected at 1.5% y/y vs. 1.6%. Chicago PMI is expected to drop to 53.5 from 54.2 in May, mirroring broad-based softness in the regional Fed manufacturing surveys. The Fed’s Daly speaks.

Elsewhere, Bank of Canada releases its Q2 senior loan officer survey. Next BOC meeting is July 10 and no change is expected then. WIRP shows 5% chance of a cut then, but odds pick up as we move into Q4.

Eurozone reported preliminary June CPI steady at 1.2% y/y. Earlier, France reported June CPI while Germany reported yesterday. Both accelerated from May and so the steady reading for the entire eurozone was a bit surprising.

The ECB is struggling with sluggish growth and low inflation, raising the odds that Draghi eases further before stepping down October 31. Next ECB policy meeting is July 25. WIRP suggests a nearly 30% chance of a cut then, with odds rising sharply as we move into Q4. We suspect the ECB will modify its outlook next month as preparation for a move at the September 12 meeting, when new staff forecasts will be released.

Sweden reported weak May retail sales. Sales fell -2.0% m/m, twice the expected drop. As a result, the y/y rate collapsed to -0.5% WDA from a revised +3.7% (was 3.9%). Riksbank meets next week and is widely expected to remain on hold. At its last meeting April 25, the bank pushed out its rate path to suggest the next rate hike would come late 2019 or early 2020. The bank is being more cautious, and today’s data support this.

Japan reported May labor market data, IP, and June Tokyo CPI. Unemployment was steady at 2.4%, as expected, while IP grew a stronger than expected 2.3% m/m. Lastly, headline Tokyo inflation was a tick higher than expected at 1.1% y/y, while ex-fresh food rose the consensus 0.9% y/y.

Elsewhere, the BOJ tweaked its bond purchase plans for July. The range for each buying operation for 1- to 3-year bonds was increased to JPY250-500 bln from JPY250-450 bln previously, while the range for 3- to 5-year bonds was decreased to JPY250-500 bln from JPY300-500 bln previously. There are no policy implications from this technical move.

Banco de Mexico delivered a dovish hold yesterday. There was one vote in favor a rate cut, as the bank noted that the balance of risks for growth became more uncertainty. Most are looking to early 2020 for the easing cycle, but there is a risk it starts earlier.

South Africa reports May trade and budget data. Earlier, it reported May M3 and private sector credit, with the former accelerating to 9.07% y/y and the latter decelerating to 7.66% y/y. The economy remains weak, increasing the chances that the SARB will start an easing cycle soon. Next policy meeting is July 18 and we see some chance of a rate cut then. Much will depend on the rand and external conditions.