Dollar Firms as Markets Await New Fundamental Drivers

Dollar Firms as Markets Await New Fundamental Drivers

  • The dollar is mostly firmer even as markets await new fundamental drivers
  • The UK reported July IP at -0.4% m/m vs. +0.1% consensus; Japan reported weak  August machine tool orders
  • During the North American session, the US will report weekly mortgage applications and July JOLTS job openings
  • Bank of Canada decision will come out at 10 AM EST
  • In the late North American afternoon, RBNZ decision will be announced
  • Czech Republic reported August CPI earlier at 0.3% vs. 0.4% consensus and 0.5% in July
  • Mexico reports August CPI, and is expected to rise 2.62% y/y vs. 2.74% in July

Price action:  The dollar is mostly firmer against the majors in narrow trading ranges.  The dollar bloc is outperforming, while the yen and the euro are underperforming.  CAD and NZD are rallying ahead of central bank meetings today.  The euro has been unable to get much traction, trading lower now near $1.1170.  Sterling was hurt by weaker than expected IP data, and continues to have trouble breaking above the $1.54 area.  Dollar/yen is moving further above 120 but ran out of steam at the 200-day MA near 120.80.  EM currencies are mostly firmer.  KRW, TWD, and MYR are outperforming, while CNY, THB, and the CEE currencies are underperforming.  MSCI Asia Pacific was up 4.4%, with the Nikkei jumping 7.7%.  Chinese markets continued to recover, with the Shanghai Composite up 2.3% and the Shenzen Composite up 3.3%.  Euro Stoxx 600 is up 2% near midday, while S&P futures are pointing to a higher open.  The US 10-year yield is up 4 bp to 2.22%, while European bond markets are narrowly mixed.  Commodity prices are mostly higher.

  • The dollar is mostly firmer even as markets await new fundamental drivers.  The 2-year US-German spread continues to move in the dollar’s favor, and yet the greenback has basically been trading sideways vs. the euro this week. At 97 bp, this premium is the highest since August 18, and yet the euro is not testing the $1.10 low from that period.  The next top tier data from the US won’t be seen until September 15, when August retail sales will be reported.  A 0.4% gain is expected, though we warn of upside risks after the strong auto sales that month.
  • This data will come just before the September 17 FOMC meeting.  Global equity markets continue to rally, suggesting markets are (for now) downplaying the risks of Fed lift-off this month.  The decision will be close.  Ironically, the improved market sentiment would seem to argue for lift-off sooner rather than later.
  • The UK reported July IP, which fell -0.4% m/m vs. a +0.1% consensus.  Manufacturing fell -0.8% vs. a +0.2% consensus.  UK also reported July trade data, which came in at -GBP3.37 vs. the -GBP1.95 bln consensus.  The weak data, coming ahead of BOE meeting tomorrow, suggests that more hawkish dissents are unlikely for now.  The IP data follows soft PMI readings for the month of August, so further weakness seems likely.  Sterling is lagging today, with cable again turned back from the $1.54 area.
  • Elsewhere, Japan reported August machine tool orders.  Orders contracted -16.5% y/y after rising 1.7% in July.  The yen is the worst performer in the majors again, though this seems to be more a function of the rise in general risk appetite than the Japan data itself.  Same goes for the Nikkei’s nearly 8% surge today, the biggest since 2008.  Dollar/yen pushed close to 121 before falling back, but is trading at highs not seen since September 1.  The 200-day MA near 120.80 may cap the upside near-term, but a break would target the late August highs near 121.75.
  • During the North American session, the US will report weekly mortgage applications and July JOLTS job openings.  There are no Fed speakers scheduled for the rest of this week, as the pre-FOMC embargo comes into effect.
  • Bank of Canada decision will come out at 10 AM EST.  With the recent rise in non-energy exports and a healthy jobs report, the Bank of Canada may feel it has seen the worst and that two rate cuts this year, the last being in mid-July, complete the mini-easing cycle.  The Canadian dollar has fallen about 27.5% against the US dollar since the end of H1 2011, and the decline does not appear to be over.  The divergence in monetary policy this year has been driven by the Canadian side of the equation.  Over the next year, it will likely be driven by the US side.  Ahead of the BOC decision, Canada reports August housing starts and July building permits.
  • In the late North American afternoon, the RBNZ decision will be announced.  A 25 bp cut in the cash rate is widely expected and would bring it down to 2.75%.  It would be the third consecutive cut.  We suspect there is scope for one more cut in the cycle, though some market participants look for an even deeper easing cycle.  This view will depend on the accompanying RBNZ statement today.  Next meeting after this one is October 29, so let’s see how the data come in before looking ahead of that.
  • We view the current EM bounce as a corrective move within the medium-term bear trend that remains in play.  A lot of it is positioning, with large-scale shorts having to cover as market sentiment improves.  We look for better levels to sell EM again, but this bounce may have some further room to go.
  • Czech Republic reported August CPI earlier at 0.3% y/y vs. 0.4% consensus and 0.5% in July.  Note foreign reserves rose to $61.8 bln in August from $56.4 bln in July.  A small portion of this is due to valuation effects, but the bulk of the rise reflects CNB intervention to protect the EUR/CZK floor “around” 27.  Recall that the bank is selling CZK and buying EUR, and so has unlimited firepower to protect the floor.  With the region still grappling with deflation risk (see Hungary CPI yesterday), we think current forward guidance from the CNB that current policies will be maintained until “at least” H2 2016 will be maintained for the time being.  No risk of early exit, in our view, and there is some risk of further extension if data weaken.
  • Mexico reports August CPI, and is expected to rise 2.62% y/y vs. 2.74% in July.  If so, inflation would move further below the 3% target.  The recovery remains weak, and so we do not think the central bank will be able to justify a rate hike this year, no matter what the Fed does.  ANTAD retail sales for August will also be reported today, and is expected to rise 6.0% y/y vs. 6.8% in July.  It then reports July IP Friday, and is expected to rise 0.5% y/y vs. 1.4% in June.  The peso is likely to remain hostage to generalized EM sentiment, as well as oil prices.