Dollar Mixed Ahead of ECB Decision

Dollar Mixed Ahead of ECB Decision

  • The ECB meeting will be the key event today
  • Sweden’s Riksbank met earlier today and kept rates steady
  • UK reported weak service sector PMI
  • During the North American session, the US reports Challenger job cuts for August, weekly jobless claims, July trade, and August ISM non-manufacturing PMI
  • Australia reported July trade and retail sales overnight
  • Turkey reported August CPI at 7.14% y/y; Brazil’s COPOM announced its decision late last night and kept rates steady at 14.25% as expected

Price action:  The dollar is mixed against the majors ahead of the ECB decision.  The Aussie and Nokkie are underperforming, while Stockie is outperforming after the Riksbank left rates steady.  The euro is flat on the day, trading around $1.1225.  Sterling was hurt by a weak service PMI and is trading near $1.5280, its lowest level since early June.  Dollar/yen is still trading just above 120, while Aussie has managed to stay above .70 despite weak retail sales data.  EM currencies are broadly weaker with MYR, ZAR, and KRW underperforming.  TRY is also underperforming after higher than expected CPI was reported.  TWD is outperforming on the day.  MSCI Asia Pacific was up 0.1%, with the Nikkei up 0.5%.  Chinese markets are closed for the rest of the week.  Euro Stoxx 600 is up 1.4% near midday, while S&P futures are pointing to a higher open.  The US 10-year yield is flat at 2.18%, while European bond markets are mostly firmer.  Commodity prices are mixed, though oil prices are flat.

  • The ECB meeting will be the key event today.  Updated staff forecasts will likely point to slower growth and less price pressures than had been expected in the June forecasts.  Rather than end early as some had previously speculated, the ECB’s asset purchases may be increased.
  • However, even with mild downgrades in the staff forecasts, it is unreasonable to expect the ECB to respond this week by increasing the quantity of assets being purchased, or extending the current program beyond September 2016.  A consensus must be forged to implement the former, and it is too early for this.  On the other hand, there is no urgency for the latter.  It can be used as a signal for the market, but the incremental advantage over Draghi noting this is a policy option may be minimal given the political capital likely needed to be expended.
  • As we have noted before, every central bank that has tried purchased assets to expand its balance sheet, to compliment near-zero interest rates or even negative deposit rates, has chosen to do more than one round.  ECB may break this pattern, but it is not yet a certainty.  ECB President Draghi is likely to emphasize the flexible nature of its asset purchases.  Draghi has often cautioned that the cyclical upswing would be contained by the lack of structural reforms.  Also, financial conditions have become somewhat less accommodative since the last ECB meeting.  Draghi may push back against this verbally at his press conference, which suggests downside risks to the euro today.
  • In related news, final August eurozone service and composite PMIs were reported.  Eurozone service and composite PMI came in at in at 54.4 and 54.3, respectively, and compare to consensus of 54.3 and 54.1, respectively.  Looking at the country breakdown, Germany’s came in at 54.9 and 55.0, respectively, and compare to consensus of 53.6 and 54.0, respectively.  France’s came in at 50.6 and 50.2, respectively, and compare to consensus of 51.8 and 51.3, respectively.  Eurozone retail sales for July were also reported at 0.4% m/m vs. 0.5% consensus and a revised -0.2% (was -0.6%) in June.
  • Sweden’s Riksbank met earlier today and kept rates steady.  Consensus was for steady policy, but a quarter of the analysts polled by Bloomberg were looking for either a 10 or 15 bp cut.  We suspect most observers were positioned for a potential dovish surprise.  The Riksbank said it was ready to boost stimulus if needed, adding that existing policies would continue to be positive for the economy.  We suspect further easing will be seen in Q4.  Minutes from this meeting will be reported September 16.
  • UK reported the third of its monthly PMIs, with service sector reading coming in at 55.6 vs. 57.7 consensus and 57.4 in July.  The composite reading fell to 55.1 from 56.6 in July as manufacturing and construction PMIs both came in a bit softer than expected at 51.5 and 57.3, respectively.  The BOE meets next Thursday.  While no change in policy is expected, the inflation report released at the same time could shed some light on the bank’s stance in light of softer economic data.  Governor Carney will also hold a press conference shortly after the decision that day.  Sterling is weaker on the day, with cable trading at its lowest level since early June.  Support seen near $1.52, but a break below $1.5085 is needed to set up a test of the April low near $1.4565.
  • Oil sold off Wednesday after a huge build in DOE crude inventories was reported, but then recovered and ended up 2% on the day.  Oil is flat so far today.  US stockpiles rose 4.67 mln instead of the expected 444k, a more than ten-fold miss.  We like to look at the y/y comparisons, and US inventories are now 27% higher than they were a year ago, a new cycle high.  On top of this data, press reports suggest Obama now has the votes to push the Iran deal through Congress.  So while oil prices are trying to find a bottom, the supply-demand dynamics suggest the downside will still be probed.
  • During the North American session, the US reports Challenger job cuts for August, weekly jobless claims, July trade, and August ISM non-manufacturing PMI.  ADP reading of 190k was slightly lower than the 200k consensus.  It’s worth noting that all three clues to the labor market this week were on the soft side (employment components in both Chicago and ISM PMIs, and now ADP).  BBG consensus for NFP Friday is currently at 218k vs. 215k in July, but markets may start to shade expectations a bit lower.  Still, we think a number close to 200k Friday will very much keep the September FOMC “live.”  Not that the Fed looks at any one data point, but the jobs data should confirm the Fed’s view that the labor market continues to improve.
  • Australia reported July trade and retail sales overnight.  The trade deficit was narrower than expected and there was a weaker than expected -0.1% drop in retail sales.  Consensus was looking for a 0.4% gain.  This comes after weaker GDP growth of 2.0% y/y vs. 2.2% consensus and a revised 2.5% (was 2.3%) in Q1.  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 yesterday.  It has been unable to build on that, and is trading back above .70.  We think further losses are likely.
  • Turkey reported August CPI at 7.14% y/y.  It had been expected to rise 6.86% y/y vs. 6.81% in July.  This is back above the 3-7% target range, and the acceleration is worrisome and likely due to the weak lira.  Core CPI rose 7.66% y/y vs. 7.5% consensus and 7.3% in July.  As it is, political uncertainty and the weak lira will likely keep the bank on hold until at least the November 1 elections.  The next policy meeting is September 22, and no change then is expected.
  • Brazil’s COPOM announced its decision late last night and kept rates steady at 14.25% as expected.  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.  COPOM said rates would remain at the current 14.25% for a “prolonged period” and stressed that past tightening will be enough to bring inflation down to the 4.5% target by the end of 2016.  With inflation and inflation expectations still rising, we are not convinced that we’ve seen the end of the tightening cycle.  Elsewhere, the fiscal outlook continues to darken, and we think the case for Brazil losing its investment grade rating keeps getting stronger and stronger.