Dollar Firms on Turnaround Tuesday

  • The dollar has gained some limited traction as the risk on euphoria is showing signs of letting up
  • China’s SAFE scrapped foreign investment limits in local stock and bond markets; China reported August CPI and PPI.
  • The UK bill forcing an extension to prevent a hard Brexit became law; UK reported firm July labor market data
  • The Scandies both reported lower than expected August CPI
  • South Africa July manufacturing production is expected to contract -1.5% y/y

The dollar is broadly firmer against the majors on Turnaround Tuesday.  Swissie and Kiwi are outperforming, while the Scandies and sterling are underperforming.  EM currencies are mixed.  ZAR and CNY are outperforming, while HUF and TRY are underperforming.  MSCI Asia Pacific was flat on the day, with the Nikkei rising 0.4%.  MSCI EM is down 0.2% so far today, with the Shanghai Composite falling 0.1%.  Euro Stoxx 600 is down 0.5% near midday, while US futures are pointing to a lower open.  10-year UST yields are down 2 bp at 1.63%, while the 3-month to 10-year spread has steepened 2 bp to stand at -28 bp.  Commodity prices are mostly lower, with Brent oil up 0.5%, copper down 0.6%, and gold down 0.3%.

The dollar has gained some limited traction as the risk on euphoria is showing signs of letting up.  DXY is up today after four straight down days in which key downside support held.  However, the upside will be a bit of a slog until we get some firmer US data towards the end of this week.  Of note, USD/JPY is trading at the highest level since August 2 and a break of the 107.45 would set up a test of the August 1 high near 109.30.

China’s SAFE scrapped foreign investment limits in local stock and bond markets.  The $300 bln limit on QFII and RQFII programs was removed.  That limit was not binding, as only $111 bln had been used.  Still, its removal is a clear signal that policymakers want to encourage capital inflows.  The corollary is that they are still very worried about capital outflows and so will make sure to avoid any steps that might increase them.  That means a relatively stable yuan will likely be maintained.

China reported August CPI and PPI.  Both came in a tick higher than expected, with the former rising 2.8% y/y and the latter falling -0.8% y/y.  Still, the PBOC is focused on growth, not inflation.  August money and loan data will be reported this week but no data has been set.  With the recently announced cuts in reserve requirements, money and loan growth should start to pick up in September.

The US 10-year yield of 1.63% is the highest since August 23, while the 3-month to 10-year curve inversion of -28 bp is the best since August 13.  Why isn’t the dollar benefiting more from higher US yields?  We think it’s because all this current relief rally in global markets is putting pressure on the haven currencies (USD, JPY, and CHF).  The missing piece for the dollar is firmer US economic data and so this correction may have room to run still.

The only US data today is July JOLTS data.  A reading of 7331 is expected vs. 7348 in June.  The higher the number, the tighter the job market.  JOLTS stands for Job Openings and Labor Turnover Survey and is meant to “serve as demand-side indicators of labor shortages at the national level. Prior to JOLTS, there was no economic indicator of the unmet demand for labor with which to assess the presence or extent of labor shortages in the United States.”

Yesterday, the US reported that consumer credit jumped $23.3 bln vs. $16 bln expected.  That rise and the $10 bln rise in revolving credit were both the largest since November 2017.  To recap, there are several things supporting US consumption right now:  a strong labor market, rising wages, and strong credit creation.  Yes, there are headwinds but for now, they are being offset by these other factors.  Friday’s retail sales data is very important, to state the obvious.

The UK bill forcing an extension to prevent a hard Brexit became law.  Parliament also prevented early elections again as the 293 ayes fell short of the 434 needed.  Parliament has now been suspended until October 14.  Prime Minister Johnson pledged to continue working on a Brexit deal ahead of the October 17 EU summit.

UK reported firm July labor market data.  Average weekly earnings rose 4.0% y/y vs. 3.7% expected (ex-bonus rose 3.8% y/y vs. 3.7% expected).  The unemployment rate fell to 3.8% vs. 3.9% expected.  This comes after a large round of firm real sector data reported yesterday.  Sterling feels heavy but the better than expected data has helped it stabilize a bit.  We believe the $1.24 level will be hard to breach in the absence of any positive Brexit development.

The Scandies both reported lower than expected August CPI readings.  Norway reported first, with headline inflation coming in at 1.6% y/y vs. 1.8% expected and underlying at 2.1% y/y vs. 2.2% expected.  Norges Bank last hiked rates 25 bp to 1.25% in June and expressed its intent to hike again before year-end.  It is likely on hold for now.  Next policy meeting is September 19, no change is expected then.

Sweden reported next, with headline coming in at 1.4% y/y vs. 1.7% expected and CPIF at 1.3% y/y vs. 1.5% expected.  The Riksbank surprised markets last week by maintaining its intent to hike rates again by late 2019 or early 2020.  Next policy meeting is October 24.  A hike then no longer seems likely but it will depend on large part on the global backdrop.  It last hiked rates 25 bp to -0.25% in December.

Both Nokkie and Stockie are taking it on the chin today.  As this recent risk on euphoria wears off, growth-sensitive currencies like the Scandies are likely to come under greater pressure.  For now, Stockie is underperforming and so the NOK/SEK cross is trading at the highest level since August 3.   A clean break of the 1.0860 area would set up a test of the July 29 high near 1.0985.

South Africa July manufacturing production is expected to contract -1.5% y/y vs. -3.2% in June.  The economy remains sluggish, while inflation is in the bottom half of the 3-6% target range.  Next SARB meeting is September 19 and another 25 bp cut to 6.25% is expected then.