Dollar Firms After NY Fed Clarifies Williams Comments

  • Comments from US officials have led to volatile markets this week
  • Treasury Secretary Mnuchin said that there is no change in dollar policy “as of now.”
  • Unexpectedly dovish remarks from NY Fed President Williams were later “clarified” by the NY Fed
  • The Fed has painted itself into a corner, tilting dovish just as the US data is turning more positive
  • Japan reported June national CPI overnight; Fitch raised the outlook on Thailand’s BBB+ rating from stable to positive

The dollar is broadly firmer against the majors as the week draws to a close. Sterling and Loonie are outperforming, while euro and Stockie are underperforming. EM currencies are mostly weaker. KRW and THB are outperforming, while TRY and ZAR are underperforming. MSCI Asia Pacific was up 1.3%, with the Nikkei rising 2%. MSCI EM is up 0.7% so far today, with the Shanghai Composite rising 0.8%. Euro Stoxx 600 is up 0.1% near midday, while US futures are pointing to a higher open. 10-year UST yields are up 2 bp at 2.04%, while the 3-month to 10-year spread has risen 1 bp to stand at +1 bp. Commodity prices are mixed, with Brent oil up 1.6%, copper up 1.9%, and gold down 0.6%.

Comments from US officials have led to volatile markets this week. While the dollar has seen choppy trading conditions, it has remained largely rangebound. EUR has traded between $1.12-1.13 since the June jobs report, and sterling between $1.24-1.26. Not surprisingly, DXY has largely traded in a 96.50-97.50 range this month. Where we go from here will depend crucially on the US economy and the resulting market expectations for Fed policy. We remain dollar-positive.

Treasury Secretary Mnuchin said that there is no change in dollar policy “as of now.” However, he added that a change “is something we could consider in the future.” This is a big shift in thinking, but certainly not that surprising given the administration’s policies and comments. From Rubin up until now, the standard response has always been “A strong dollar is in the best interests of the US.” Full stop. It’s clear that this current administration will continue with its mercantilist, zero-sum trade and FX worldview.

We’d also add that a weak dollar policy would hinge critically on Fed interest rate policy. Yes, exchange rate policy is run by the Treasury, not the Fed. But as long as interest rate differentials favor the dollar, it will be difficult for the Trump administration to weaken the dollar by jawboning alone.

In that regard, it’s worth noting that unexpectedly dovish remarks from NY Fed President Williams yesterday helped push down USD yields. He advocated a quick monetary policy response when there are signs of distress in the current era of low rates. He added that the Fed should be “aggressive” when confronting an adverse situation.

The dollar initially suffered as a result but has since rebounded. Why? The NY Fed took the highly unusual step of clarifying Williams comments. It noted that his speech was academic in nature and “not about potential policy actions.” Equity markets have liked his comments.

Despite the clarification, these comments have had a bigger impact than we would have thought. WIRP suggests the odds off a 50 bp cut rose to 56% yesterday from 20% last Friday and 18% at the beginning of July. These odds have since fallen to 44% today. Looking through all the recent noise, we still think the Fed will cut 25 bp July 31 and then will wait to see how things pan out for the economy in H2 rather than rushing into another rate cut.

During the North American session, preliminary July Michigan consumer sentiment will be reported. Fed’s Bullard and Rosengren speak today. Bullard also gave an interview to the WSJ published today in which he said that a 50 bp cut is not warranted right now and that he favors a 25 bp cut.

The Fed has painted itself into a corner, tilting dovish just as the US data is turning more positive. It’s worth noting that initial jobless claims data reported yesterday are for the BLS July survey week. At 216k, the claims reading suggests another solid jobs report for July. Claims for the May and June survey week came in at 212k and 217k, respectively. In addition, the Philly Fed employment component jumped to 30.0 in July from 15.4 in June, adding to the positive jobs picture.

Elsewhere, the headline Philly Fed index came in at 21.8 vs. 5.0 expected and 0.3 in June. Recall this is a diffusion index, calculated by subtracting the percentage of respondent reporting worse conditions from those reporting improved conditions. Two of the regional Fed manufacturing surveys for July are now out, both beating to the upside. Next week, we get Richmond Tuesday (5 expected) and Kansas City Thursday. On Monday July 29, we get the final one from Dallas.

Canada reports May retail sales. Headline is expected to rise 0.3% m/m while ex-autos is expected to rise 0.4%. For now, markets see very little chance of a cut at the next policy meeting September 4. However, those odds rise to around 36% as we move into Q4.

Japan reported June national CPI overnight. As expected, headline inflation remained steady at 0.7% y/y, while ex-fresh food slowed a couple of ticks to 0.6% y/y. Inflation remains muted but policymakers are likely on hold until after the October consumption tax hike. Next BOJ meeting is July 30 and no change is expected then. After that, the next meetings in 2019 are September 19, October 31, and December 19.

Fitch raised the outlook on Thailand’s BBB+ rating from stable to positive. It cited greater resilience to macro shocks as a major factor, which in turn was due to strong external and budgetary positions. Fitch did express some concern about the stability of the new coalition government. Our own sovereign ratings model shows Thailand’s implied rating fell a notch to A-/A3/A-, reversing last quarter’s gain. Still, there remains upgrade potential for actual ratings of BBB+/Baa1/BBB+.