Dollar Firm Ahead of Jobs Data as US-China Tensions Rise

  • Rising US-China tensions are adding to a risk-off vibe; the dollar has clawed back some of its recent losses but remains vulnerable
  • Today is the ostensible deadline for stimulus talks; July jobs data will be the data highlight of the week
  • Weekly jobless claims yesterday offer a glimmer of hope as we move into August; Canada also reports jobs data
  • Germany posted a strong set of export and IP numbers for June but imports disappointed; the situation in Turkey remains tenuous
  • Japan reported firm June real cash earnings and household spending; RBA released its quarterly Statement on Monetary Policy; Chinese exports surprised on the upside

Rising US-China tensions are adding to a risk-off vibe. The Trump administration banned US companies from doing business with the Chinese social media companies TikTok and WeChat. Shares of Tencent, owner of WeChat, fell 5.3% in Hong Kong. On top of this, the US is reportedly tightening disclosure requirements for Chinese companies listed in its exchanges. China has complained and threatened retaliation but so far has not taken any concrete measures. We doubt this will last and expect retaliation in the coming days.

The dollar has clawed back some of its recent losses but remains vulnerable. DXY is up for the first time since Monday but despite this bounce, remains on track to test the May 2018 low near 92.23. The euro was unable to make a clean break above last week’s high near $1.1910 and is now testing support near $1.18. Similarly, sterling is lower today after the post-BOE bounce ran out of steam just below the March high near $1.32. Lastly, USD/JPY remains stuck below 106 in its new near-term range of 104-106. As nothing fundamental has changed, we see resumed losses for the greenback.

AMERICAS

Today is the ostensible deadline for stimulus talks. Meetings yesterday ended with little tangible progress on the key issues and so the finger-pointing has begun again. Indeed, the tone has shifted so badly that the four main players (Pelosi, Schumer, Mnuchin, and Meadows) would not guarantee that talks would resume today. Mnuchin said he would consult with President Trump and hold phone talks with the Democratic leaders before deciding whether it made sense to meet again in person. Note that Trump is considering executive orders to address the eviction moratorium and payroll tax cut, but the overall impact would be limited. The power of the purse belongs to Congress and so any package of significance would need its approval.

July jobs data today will be the data highlight of the week. Consensus for July jobs has worsened from nearly 3 mln a week ago to the current 1.48 mln vs. 4.8 mln in June, while unemployment is expected to fall to 10.6% from 11.1% in June. Overall, the clues point to a soft reading. Both initial and continuing claims rose in the BLS survey week containing the 12th of the month. ADP private sector jobs came in at 167k vs. 1.2 mln expected while the employment component for ISM services PMI fell to 42.1 from 43.1 in June, which means jobs are contracting at a faster rate. July consumer credit will help round out the picture for consumption.

Weekly jobless claims yesterday offer a glimmer of hope for the labor market as we move into August. Traditional initial claims for the week ending August 1 fell to 1.186 mln vs. 1.4 mln expected and 1.434 mln the previous week, while initial claims for the temporary Pandemic Unemployment Assistance (PUA) program fell to 656k. Both are the lowest since the pandemic hit. Traditional continuing claims are reported with a one week lag but also fell to 16.107 mln vs. 16.9 mln expected and 17.108 mln the previous week, also the lowest since the pandemic.

Canada also reports jobs data. A gain of 390k jobs is expected vs. 952.9k in June. Unemployment is seen falling to 11.1% from 12.3% in June. Ivey PMI will also be reported. The Bank of Canada has acknowledged the improved outlook but remains cautious and unlikely to shift policy anytime soon. Next policy meeting is September 9 and no change is expected then.

EUROPE/MIDDLE EAST/AFRICA

Germany posted a strong set of export and IP numbers for June but imports disappointed. Exports accelerated to 14.9% m/m (14.4% expected) but imports grew only 7.0% m/m (10.6% expected). As a result, the trade and current account surpluses rose sharply after several months of shrinkage. IP rose 8.9% m/m vs. 8.2% expected, puling the y/y rate up to -11.7% y/y from a revised -19.5% in May. The improvement was broad-based with construction activity one of the highlights (+11.1% m/m). Yesterday, June factory orders rose 27.9% m/m vs. 10.1% expected and 10.4% in May. Germany has been a bit of a laggard within the eurozone economy due to its reliance on exports, but the orders data is very encouraging. Along with data from China overnight (see below), hard data is increasingly pointing to robust post-lockdown global recovery.

The situation in Turkey remains tenuous with the lira down another 1% on the day. As we noted yesterday, the country looks to be moving towards another cycle of mini-crisis with rapid devaluation then, when things start to look desperate, surprise rate hikes. But given the strong preference towards lower rates, authorities may very well opt towards pursuing more heterodox or regulatory measures first. Today, authorities rolled back some of the credit expanding measures, providing some backhanded tightening. The real problem will come when locals start to withdraw capital from the country. At this point, we believe that this is only happening on the margin. This can be in part because of (1) the country’s well managed banking system – which reassures locals – and (2) the fact that dollarization has been going on for a long time – so much of the population is partially hedged against lira weakness.

ASIA

Japan reported June real cash earnings and household spending. Earnings fell -1.9% y/y vs.-2.0% expected and a revised -2.3% (was -2.1%) in June, while spending fell -1.2% y/y vs.-7.8% expected and -16.2% in June. While spending has recovered to nearly pre-pandemic levels, the recovery has been uneven and so for now, the Bank of Japan is on hold. We do see scope for further fiscal stimulus if the recent lockdowns hurt the growth outlook.

Reserve Bank of Australia released its quarterly Statement on Monetary Policy. The bank said its current stance is appropriate but stands ready to adjust policy if needed. It has discussed FX intervention and negative rates but sees the latter as very unlikely. The RBA laid out three possible scenarios. The baseline scenario assumes the Victoria restrictions are in place for no more than six weeks while those in other parts of the country are gradually lifted. Here, GDP is seen contracting -6% this year and growing 5% next year, with unemployment peaking around 10% by year-end and declining to around 7% over the next couple of years. The stronger scenario assumes faster progress in controlling the virus, leading unemployment to peak at a lower rate and fall faster. The downside scenario assumes longer periods of outbreaks and heightened restrictions, leading unemployment to remain close to its peak through next year.

Chinese exports surprised on the upside, suggesting global demand is recovering rapidly. The July figure rose 7.2% y/y, far higher than the 0.9% expected. Interestingly, the rebound came largely from exports to the US and Asian countries, not the EU. Imports unexpectedly contracted by- 1.4% y/y, implying lagging domestic demand. Also of note, imports of agricultural items, including soybeans, slowed down significantly, which may have a political element to it. The trade balance jumped to $62.33 bln from $46.42 bln in the previous reading. Also, foreign reserves rose to $3.154 trln, a m/m rise of $42 bln, while the Q2 current account moved back into surplus of $119.6 bln after a rare deficit in Q1 of -$33.7 bln.