Dollar Firm as Data from Europe and Asia Disappoint

  • The dollar is getting some traction as data from Europe and Asia disappoint
  • Yesterday’s data support our view that the US economy is losing momentum; data highlight will be Markit preliminary August PMI readings
  • A group of former Fed officials came out in opposition to Judy Shelton’s nomination to the Board of Governors; Canada reports June retail sales
  • Eurozone preliminary August PMI readings disappointed; Brexit talks ended with officials sounding pessimistic; UK data came in better than expected
  • Japan data overnight was mixed; Australia reported preliminary August PMI and preliminary July retail sales; Korea reported trade data for the first 20 days of August

The dollar is getting some traction as data from Europe and Asia disappoint.  DXY is up modestly today for only the second time in the past eight trading days and has yet to break this week’s high near 93.238.  The euro trading just below $1.18, while sterling is testing the $1.3q area.  USD/JPY remains heavy after being unable to make a clean break above 106.  We look for the dollar to resume weakening, as recent US data support our view that the US economy will underperform in Q3, which should translate into continued dollar underperformance as well.



Reports suggest House Speaker Pelosi is coming under greater pressure to restart stimulus talks. The so-called moderate “Blue Dog” coalition is pushing for a deal. In a letter to be sent to day to Democratic leaders, the group writes “As the House prepares to vote this weekend on a bill to protect the United States Postal Service, we urge you to restart bipartisan, bicameral negotiations on a fifth Covid-19 relief package that is commensurate with the scale of this public health and economic crisis.” At this point, House Speaker Pelosi is adamant about not breaking up the stimulus package and feels the Democrats have already given enough by signaling a willingness to cut $1 trln off their demands. We should know more after the Saturday vote on helping the Postal Service.

Yesterday’s data support our view that the US economy is losing momentum. Initial claims rose to 1.106 mln vs. 920k expected, while continuing claims fell to 14.844 mln vs. 15.0 mln expected. Initial and continuing claims under PUA program also rose, so the overall picture is one of continued softness in the labor market. Of note, the initial claims data are for the BLS survey week containing the 12th of the month, suggesting a soft-ish NFP number. Elsewhere, the Philly Fed survey came in at 17.2 vs. 20.8 expected and 24.1 in July, and follows a softer than expected Empire survey earlier this week.

Data highlight will be Markit preliminary August PMI readings. Manufacturing is expected at 52.0 vs. 50.9 in July and services is expected at 52.0 vs. 50.0 in July. If so, the improvement would drag the composite higher from the 50.3 reading in July. July existing homes sales will also be reported and are expected to rise 14.6% m/m vs. 20.7% in June. There are no Fed speakers today.

A group of former Fed officials came out in opposition to Judy Shelton’s nomination to the Board of Governors. In an open letter, they wrote that “Ms. Shelton has a decades-long record of writings and statements that call into question her fitness for a spot on the Fed’s Board of Governors.” We cannot recall anything along these lines in nearly 35 years of following the Fed. Shelton was narrowly advanced by a party line vote by the Senate Banking Committee last month. A full Senate vote has not been scheduled yet but so far, two Republican Senators (Collins and Romney) have said they will vote no and one (Murkowski) expressed doubts but would not commit. Four Republicans voting no would scuttle Shelton’s nomination.

Canada reports June retail sales. Headline is expected to rise 24.5% m/m and ex-autos 14.9% m/m. Last week, June manufacturing sales rose a stronger than expected 20.7% m/m and so there may be some upside potential here. Despite the recovery, it’s clear from the change in Finance Ministers that the Trudeau government is still planning to unveil further stimulus in September. For now, the Bank of Canada will remain on hold.



Eurozone preliminary August PMI readings disappointed. Headline manufacturing PMI fell a tick from July to 51.7 vs. 52.7 expected, services dropped sharply to 50.1 vs. 54.5 expected and 54.7 in July, and the composite sank to 51.6 vs. 55.0 expected and 54.9 in July. France was hit particularly hard, with manufacturing at 49.0 vs. 53.0 expected, services at 51.9 vs. 56.3 expected, and the composite at 51.7 vs. 57.0 expected. Germany fared a bit better, with manufacturing improving to 53.0 vs. 52.3 expected, services at 50.8 vs. 55.2 expected, and the composite at 53.7 vs. 55.0 expected.

The weakness in large part reflects the re-imposition of some lockdown measures due to the current flareup in the virus across parts of Europe. It really underscores how difficult the reopening process is, even for those countries that have crushed the curve. The ECB was right to remain cautious at its July meeting, and will have to recognize the deterioration at the next meeting September 10, when new staff forecasts will be released. We suspect the tone then will be more dovish, setting the stage for a potential expansion of its QE in Q4.

The latest round of Brexit talks ended with officials sounding pessimistic. Top EU negotiator Barnier said “At this stage an agreement between the U.K. and the EU seems unlikely. Too often this week it felt as if we were going backwards more than forwards.” Elsewhere, UK top negotiator Frost admitted “We have had useful discussions this week but there has been little progress.” However, he sounded a bit more optimistic than Barnier, saying  “Agreement is still possible, and it is still our goal, but it is clear that it will not be easy to achieve.”

UK data today came in better than expected. Headline retail sales were expected to rise 2.0% m/m in July but came in nearly double that at 3.6%, Preliminary August PMI readings were also reported. Manufacturing PMI rose two full points from July to 55.3 vs. 54.0 expected, while services PMI jumped to 60.1 vs. 57.0 expected and 56.5 in July. As a result, the composite rose unexpectedly to 60.3 from 57.0 in July. Lastly, the public sector net borrowing requirement excluding public sector banks came in at GBP26.7 bln vs. GBP28.6 bln expected, while the June figure was revised down by GBP6 bln to GBP29.5 bln. Still, net debt rose above GBP2 trln for the first time ever, representing 100.5% of GDP. This is likely to get even worse, especially if the job furlough program is extended beyond October.



Japan data overnight was mixed. July national CPI, preliminary August PMI readings, and July department store sales were all reported. Headline inflation rose a couple ticks to 0.3% y/y, as expected, while ex-fresh food remained steady at 0.0% y/y vs. 0.1% expected. Manufacturing PMI rose nearly a point and a half to 46.6, while services dropped a few ticks to 45.0 and kept the composite reading steady at 44.9. Lastly, sales fell -20.3% y./y vs. -19.1% in June, with Tokyo leading the way at -27.9% y/y. On a positive note, the government’s virus advisory panel said the current wave of infections is has peaked while warning of further outbreaks. If so, the data may start to improve but Japan’s performance so far in Q3 has been disappointing.

Australia reported preliminary August PMI readings, and preliminary July retail sales. Manufacturing PMI fell a tick to 53.9, while services dropped over ten points to 48.1. This dragged the composite reading down nine points to 48.8, Obviously, this is very disappointing and reflects in large part the renewed lockdown in the state of Victoria. On the other hand, retail sales jumped 3.3% m/m and 12.2% y/y. However, officials noted that some of the gains were likely driven by stockpiling as restrictions on movement were tightened again. Again, the data underscore just how difficult it is proving to reopen economies, even for those that did a great job suppressing the virus.

Korea reported trade data for the first 20 days of August.  Exports fell -7.0% y/y and imports fell -12.8% y/y, both better than the readings for the first 10 days of August. Exports fell -7.0% y/y in July and -10.9% y/y in June and we expect modest sequential improvement for all of August and the coming months as the regional recovery continues.  Still, at its last meeting July 16, BOK Governor Lee warned that the “exports recovery will be delayed.”  The bank warned that the growth outlook had deteriorated since its May forecast of -0.2% in 2020 and will be reflected in updated forecasts at its August 28 meeting.