Dollar Mixed Ahead of FOMC Decision

Dollar Firm Ahead of Powell’s Jackson Hole Speech

  • The annual Fed symposium in Jackson Hole takes center stage
  • Powell will stick with his “mid-cycle adjustment” view; several Fed regional presidents are reluctant to cut rates again
  • The G-7 leaders meet this weekend in France; any sort of strong G-7 communique is unlikely
  • The ECB released a very dovish account of the last policy meeting; Japan reported July national CPI
  • USD/CNY made a new high for this move above 7.10; Singapore July CPI rose 0.4% y/y; Frontier central banks are easing

The dollar is broadly firmer against the majors ahead of Powell’s Jackson Hole speech.  The Antipodeans are outperforming, while Swissie and sterling are underperforming.  EM currencies are mostly weaker.  ZAR and THB are outperforming, while HUF and KRW are underperforming.  MSCI Asia Pacific was up 0.3%, with the Nikkei rising 0.4%.  MSCI EM is up 0.4% so far today, with the Shanghai Composite rising 0.5%.  Euro Stoxx 600 is up 0.5% near midday, while US futures are pointing to a higher open.  10-year UST yields are up 3 bp at 1.64%, while the 3-month to 10-year spread has steepened 3 bp to stand at -34 bp.  Commodity prices are mostly lower, with Brent oil down 0.2%, copper up 0.3%, and gold down 0.1%.

The annual Fed symposium in Jackson Hole takes center stage.  It will run through Saturday and features senior policymakers and academics from around the world.  The subject is “Challenges for Monetary Policy” and the agenda was finally released to the public.  Fed Chair Powell will give his opening address this morning at 10 AM ET, followed by BOE Governor Carney’s luncheon speech at 3 PM ET.  ECB President Draghi and BOJ Governor Kuroda will not be attending the event.

We continue to believe that Powell will stick with his “mid-cycle adjustment” view.  The FOMC minutes showed that most of the FOMC viewed the July cut in the same way.  Powell painted the Fed into a corner in July and we do not think he will repeat that mistake today.  Fed decisions are always data-dependent and Powell needs to remind markets that as of now, the data are solid.

We continue to think US rates markets are overstating the case for Fed easing.  While a third cut before year-end has been taken largely back, the Fed Funds futures strip is still pricing in slightly more than 50 bp of further easing this year and another 50 bp next year.  Bond and equity market positioning remains extreme and so we see risks of some pretty violent moves if Fed expectations are reset as we expect.

Several Fed regional presidents are clearly reluctant to cut rates again so soon.  Earlier this week, Boston Fed President Rosengren spoke up against imminent rate cuts.  Yesterday, it was Kansas City’s George and Philadelphia’s Harker turn to signal their reluctance.  All want to see more evidence of the need to cut before moving again.  These are important voices, as both Rosengren and George are voters on the FOMC this year and both dissented at the July 31 meeting.

Yet we don’t want to overplay the significance of the regional Fed presidents.  By and large, policy is dominated by the Board of Governors.  More specifically, by the Chair, Vice Chair, and the NY Fed President.  That is why today’s speech by Powell should really give the true signal in terms of the Fed’s policy stance.

It’s worth noting that the better than expected jobless claims (209k) for the BLS survey week suggest another solid jobs report for August.  This reading is below those for the May (212k), June (217k), and July (216k) survey weeks.  Consensus for NFP is currently 165k vs. 164k in July.

During the North American session, the US reports July new home sales where a 0.5% m/m gain is expected.  Canada reports June retail sales, with headline expected to fall -0.3% m/m and ex-autos to remain flat m/m.

The G-7 leaders meet this weekend in France.  Like most observers, we have very low expectations for this summit, as disagreements and discord are now standard for the world’s largest developed economies.  UK’s Johnson will attend the summit for the first time and will have to deal with the topic of Brexit.  France’s Macron has injected the Amazon fires into the mix, which is a touchy subject after the US pulled out of the Paris Climate Accord.  And of course, the global trade tensions remain the biggest risk to the global economy.

These issues and many more are quite contentious and will make any sort of strong G-7 communique unlikely.  Instead, we will probably get a weak, boilerplate statement for perhaps nothing at all.  As the global economy risks sliding into recession, we simply cannot imagine any sort of coordinated policy response emerging anytime soon from the G-7.  Perhaps this might change if the sense of crisis picks up in the coming months but for now, we expect little of consequence to emerge from this weekend.

The ECB released a very dovish account of the last policy meeting.  It noted that the prospects for global trade are likely to remain poor, and that downside risks have become more pervasive.  Quite frankly, we’re surprised that WIRP shows the perceived odds of a cut next month falling to around 80%.  At the start of the week, the odds were 100% and there were even 56% odds of a 20 bp move.  We think ECB easing next month is pretty much a done deal.

Japan reported July national CPI.  Headline dropped two ticks to 0.5% y/y vs. 0.6% expected while ex-fresh food was steady at 0.6% y/y as expected.  WIRP suggests 39% odds of a rate cut September 19 but rising to 67% October 31.  These odds have risen over the course of this week, and yet USD/JPY remains stuck in recent narrow trading ranges.  Given our view that downside risks to global growth and market sentiment remain strong, this pair is likely to trade with a downward bias.  107 should continue to cap any dollar rallies.

We saw a new high for this move in USD/CNY today above 7.10.  The fix was slightly below what the models suggested.  We continue to downplay the significance of recent yuan weakness, as it comes within the context of a broad-based selloff in EM FX.  In fact, CNY comes in right at the middle of the EM pack when it comes to YTD (-2.9%) and QTD (-3.0%) performances.  We remain bearish EM so that means we remain bearish CNY.  The next target for MSCI EM FX is the September 2018 low near 1575.  This would represent another -2%; if we extrapolate to CNY, this would target 7.20.

Singapore July CPI rose 0.4% y/y vs. 0.5% expected and 0.6% in June.  The MAS does not have an explicit inflation target.  However, low price pressures and weak growth should lead it to ease at its October policy meeting by adjusting its S$NEER trading band.

Frontier central banks are also easing.  Yesterday, Egypt surprised the markets with a larger than expected 150 bp cut that took the deposit rate to 14.25%.  Consensus saw a 100 bp move.  Overnight, Sri Lanka surprised with a 50 bp cut that took the lending rate to 8.0%.  No move was expected.  While the rates in Frontier countries remain generally high, we think global investors will remain risk-averse until the US-China trade war has ended.