Dollar Firm Ahead of US Holiday Weekend

  • The dollar remains bid as optimism on US-China trade is still running high
  • China reports official August PMI readings Saturday local time; Hong Kong reported weak retail sales; Hong Kong protests show no sign of ending
  • US data highlight today is Chicago PMI, which is expected at 47.5 vs. 44.4 in July
  • Eurozone reported preliminary August CPI; Japan reported a huge raft of data
  • Bank of Korea delivered a dovish hold

The dollar is mostly firmer against the majors ahead of the US holiday weekend.  Yen and Nokkie are outperforming, while Stockie and Swissie are underperforming.  EM currencies are mostly firmer.  ZAR and KRW are outperforming, while RON and CZK are underperforming.  MSCI Asia Pacific was up 1.2%, with the Nikkei rising 1.2%.  MSCI EM is up 1.2% so far today, with the Shanghai Composite falling 0.2%.  Euro Stoxx 600 is up 0.8% near midday, while US futures are pointing to a higher open.  10-year UST yields are up 3 bp at 1.52%, while the 3-month to 10-year spread has steepened 3 bp to stand at -46 bp.  Commodity prices are mostly lower, with Brent oil down 0.1%, copper flat, and gold down 0.1%.

The dollar remains bid ahead of the US holiday weekend.  DXY is up for the third straight day and in four of the last five, trading at the highest level since August 1.  It has now recouped all of its post-Jackson Hole losses and is on track to test the cycle high near 98.932 from August 1.  EUR broke below last Friday’s low near $1.1050 and is edging lower towards the August 1 low near $1.1025.  Below that, there aren’t any major chart points until the May 2017 low near $1.0840.

Optimism on US-China trade is still running high.  President Trump claimed that the two sides are scheduled to talk today but gave no further details.  China officials have yet to confirm the phone calls that reportedly took place last weekend, but markets are just happy that things haven’t gotten worse.

China reports official August PMI readings Saturday local time.  Manufacturing PMI is expected to fall a tick to 49.6.  Continuation of the US-China trade war is likely to keep the manufacturing sectors in both countries under pressure.  The yuan has stabilized, helped by efforts by the PBOC to limit recent weakness.  This supports our widely held view that China policymakers will not weaponize the yuan with regards to trade tensions.

Hong Kong reported weak retail sales data for July.  In volume terms, sales contracted -13.0% y/y vs. -12.5% expected and -7.6% in June.  It was the sixth straight month of y/ contraction and reflects weakness from the trade war as well as the impact of the ongoing local protests.  A recession is becoming more likely, but we still see no threat to the HKD peg.

Hong Kong protests show no sign of ending as Chief Executive Carrie Lam continues her hardline stance.  More protestors have been arrested even as she refuses to meet any of their demands.  Press reports that the mainland government dismissed a proposal by Lam to withdraw the controversial extradition bill, which is one of the key demands.  This hardline stance is worrisome, to put it mildly.

The US data highlight today is Chicago PMI, which is expected at 47.5 vs. 44.4 in July.  Regional Fed manufacturing surveys for August have come in mostly firmer than expected so far.  Empire was 4.8 vs. 2.0 expected, Philly Fed was 16.8 vs. 9.5 expected, Kansas City was -6 vs. +1 expected, Dallas was 2.7 vs. -4.7 expected, and Richmond was 1 vs. -4 expected.

Other data today include July personal income and spending, core PCE, and final August Michigan sentiment.  The key reading here will be core PCE, which is expected to remain steady at 1.6% y/y.  There are no Fed speakers scheduled today.  WIRP still suggests 100% odds of a cut September 18, with 7% odds of a 50 bp move.

Eurozone reported preliminary August CPI.  Headline fell a tick as expected to 1.0% y/y, while core was steady too at 0.9% but had been expected to rise a tick to 1.0% y/y.  WIRP suggests 100% odds of a cut September 12, with 45% odds of a 20 bp move.  That’s up from 86% odds of a cut and zero odds of a 20 bp move seen at the start of this week.

Yesterday, markets were treated to some conflicting statements on ECB policy.  Incoming President Lagarde said the ECB hasn’t reached the lower bound on rates and has a broad tool-kit to work with, while Dutch central banker Knot said resumption of QE is not yet warranted.  We believe Lagarde has the prevailing view and will continue Draghi’s efforts to stimulate the economy.  The move in WIRP this week suggests the market believes this too.

Japan reported a huge raft of data.   August Tokyo headline inflation fell to 0.6% y/y from 0.9% in July, as expected while ex-fresh food fell a tick more than expected to 0.7% y/y from 0.9% in July.  July retail sales were expected to fall -0.9% m/m but instead plunged -2.3%, while IP was expected to rise 0.3% m/m but instead jumped 1.3%.  Lastly, the unemployment fell a tick to 2.2% even as the jobs-to-applicant ratio fell from 1.61 to 1.59.

Given the mixed data, markets have pushed back their expectations of BOJ easing.  WIRP suggests only 7% odds of a cut September 10, down from 53% at the start of this week. However, the odds rise 76% for October 31 from 66% at the start of this week.  USD/JPY remains stuck in recent trading ranges, unable to move above 107 but finding support below 106.

Bank of Korea delivered a dovish hold.  It kept rates steady at 1.50%, as expected, but the 5-2 vote showed two dissents in favor of an immediate cut.  Governor Lee noted it has room to respond if necessary.  BOK just cut rates last month so a pause was expected.  Ahead of the decision, Korea reported July IP, which rose 0.6% y/y vs. -3.2% expected.  August trade data will be reported Sunday local time.  If the data remain weak, we think BOK will cut at its next policy meeting October 16.