Dollar Firms Despite Absence of New Drivers

Dollar Firms Despite Absence of New Drivers

  • The dollar is broadly firmer today, despite the absence of any major new fundamental drivers
  • During the North American session, the US reports weekly mortgage applications, ADP employment, August ISM New York, and July factory orders
  • Australia reported soft Q2 GDP overnight, rising 2.0% y/y vs. 2.2% consensus
  • Polish and Brazilian central banks meet, with both expected to deliver steady rates; we see a chance of a hawkish surprise from Brazil

Price action:  The dollar is mostly firmer against the majors.  The Swiss franc and the yen are underperforming, while Kiwi and Nokkie are outperforming.  The euro is slipping to trade around $1.1275.  Sterling is trading near $1.5280, its lowest level since June 9 despite a firm construction PMI report.  Dollar/yen is trading back above 120, while Aussie is making new cycle lows below .70 on weak GDP data.  EM currencies are broadly weaker, with MYR, RUB, and KRW underperforming.  We saw another small bounce in CNY.  Besides CNY, INR is outperforming on the day.  MSCI Asia Pacific was down 0.8%, with the Nikkei down 0.4%.  Chinese stocks trimmed earlier losses, with the Shanghai Composite ending down only 0.2% and the Shenzhen Composite down 2%.  Euro Stoxx 600 is up 0.2% near midday, while S&P futures are pointing to a higher open.  The US 10-year yield is flat at 2.16%, while European bond markets are mostly firmer.  Commodity prices are mostly lower, with oil prices down another 1-2%, adding to yesterday’s big losses.

  • The dollar is broadly firmer today, despite the absence of any major new fundamental drivers.  One data point today was UK construction PMI, which came in firm at 57.1.  Yet sterling is weaker, trading near $1.5275, its lowest level vs. the greenback since June 9.  Sterling is outperforming the euro, however, and so EUR/GBP was turned back again from the .7400 area.
  • We seem to be back to some semblance of calm, with Chinese stocks recovering from early large-scale losses to end only slightly lower.  European stocks are up near midday, while S&P futures point to a higher US open.  US bond yields are flat, with the 10-year yield well north of 2%.  So what now?  While we have downplayed the importance of one single data series (NFP) for the Fed’s policy calculus, it’s clear that’s what markets are looking ahead to.
  • During the North American session, the US reports weekly mortgage applications, ADP employment (200k consensus), August ISM New York, and July factory orders (0.9% consensus).  ADP will be the highlight, and could steal some thunder from Friday’s jobs data.  We do note that the ISM manufacturing report Tuesday was disappointing, with the headline softening to 51.1 vs. 52.5 expected and 52.7 in July.  Orders and export orders components fell to multi-year lows, while the employment component fell too but remained above 50 (at 51.2).  Prices paid fell to 39 from 44 in July.  Overall, it was a disappointing report that will certainly feed into notions that Fed liftoff is unlikely this month.
  • On the other hand, August US auto sales came in stronger than expected.  This suggests retail sales will come in firm for that month.  We believe that the September 17 FOMC remains “live” and that the decision to hike or not hike won’t be made until that day.  But with the dollar back on track as global markets stabilize, the market may be signaling that despite the unknown timing of Fed lift-off, the divergence in monetary policies remains a big factor for FX markets.  We will put out a longer piece today about recent developments in the US-German 2-year interest rate differential.
  • Australia reported Q2 GDP overnight, rising 2.0% y/y vs. 2.2% consensus and a revised 2.5% (was 2.3%) in Q1.  Tomorrow, it reports July trade and retail sales.  The RBA kept policy steady this week, as expected, but flagged the possibility of lower rates in the future.  AUD is breaking lower this week, making fresh lows for this cycle below .70 today with further losses likely.
  • Singapore reports August PMI, and is expected at 49.4 vs. 49.7 in July.  Data have been coming in on the weak side, supporting our view that the MAS will loosen monetary policy at its October meeting with an adjustment to its S$NEER trading band.  Meanwhile, Prime Minister Lee has called for general elections on September 11, hoping to capitalize on an expected surge in good will stemming from the celebrations surrounding the 50th anniversary of independence.
  • Polish central bank meets and is expected to keep rates steady at 1.5%.  Policy has been steady since the last 50 bp cut in March, and the bank has said rates would remain low for some time.  We think mid-2016 is likely for the start of the tightening cycle.  The economic recovery remains robust, but inflation pressures remain low for now and should allow the bank to stand pat for the time being.
  • Brazil reports July IP, expected at -6.2% y/y vs. -3.2% in June.  COPOM also meets and is expected to keep rates steady at 14.25%.  A very small minority looks for a 25 bp hike.  The last move was a 50 bp hike in July, and it has hiked at every meeting since last October.  With inflation and inflation expectations still rising and the real still falling, we think there is a chance of a hawkish surprise today.  The fiscal outlook continues to darken, and we think the case for Brazil losing its investment grade rating keeps getting stronger and stronger.