Dollar Mixed as Markets Await Fresh Drivers

Dollar Mixed as Markets Await Fresh Drivers

  • The political situation in Greece is becoming ever more tenuous ahead of the September 20 vote
  • Reports suggest that the PBOC will impose a 20% reserve requirement on financial institutions trading FX forwards
  • Unemployment and PMI data for August were released all over Europe

Price action:  The dollar is mixed on the day.  The yen is outperforming, trading back below 120 vs. the dollar.  The euro rose to over $1.13 overnight but has since fallen back to $1.1250.  The pound also erased earlier gains, in part following weaker August PMI data.  The Australian dollar is underperforming, testing the cycle low near $0.7050.  There were no surprises out of the RBA meeting but the current account balance was considerably worse than expected, at -A$19 bln.  In the EM space, the picture looks mixed as well.  KRW, TWD, and even MRY (despite weaker oil) are outperforming, while RUB, MXN and ZAR are underperforming.  Asian indices closed in the red with the Shanghai Composite closing down 1.2% and the Shenzen Composite down 4.6%.  The Nikkei fell 3.8%, in part driven by the strong yen but also due to poor capital spending data and stock specific news.  Euro Stoxx 600 is off 2.4% near midday, while S&P futures are pointing to a sharply lower open.  Oil prices are down around 2%, recovering a bit from being down over 3% earlier in the session.  Also of note, US Treasury yields are 5 bp lower, with the 10-year trading at 2.17%, roughly where it has been over the last few sessions.

  • The political situation in Greece is becoming ever more tenuous ahead of the September 20 vote.  In the latest development, Syriza Youth Wing made it clear that it won’t support Tsipras in the elections.  Instead, they will continue to fight against the bailout agreement and austerity measures.  This just highlights the growing tensions ahead for the country.  Recent polls show a significant decline in both Tsipras’ popularity and the margin by which Syriza is expected to win the elections.  So the party will almost certainly need to form a coalition, which could open the door for yet more uncertainty.
  • In the latest regulatory development in China, reports suggest that the PBOC will impose a 20% reserve requirement on financial institutions trading FX forwards.  The 20% figure refers to the past month’s sales, which will be kept for a year at no interest.  The measure should take effect on October 15.  This macroprudential policy is aimed at reducing systemic risk by making life more difficult for speculators.  The yuan spot had its third consecutive relatively large appreciation today, gaining 0.2% against the dollar, roughly 0.7% since the middle of last week. The USD/CNY fix dropped 0.2%, the largest since November.
  • RBA met overnight and left rates steady at 2%, as expected.  The bank also kept the language on the Australian dollar and its adjustment to the moves in commodity prices.  Q2 current account was also reported, and came in at wider than expected deficit of –AUD19 bln vs. –AUD15.9 bln consensus.  Q1 deficit was also revised wider.  Australia reports Q2 GDP Wednesday (2.2% y/y consensus) and then July trade (-AUD3.2 bln consensus) and retail sales (0.4% m/m consensus) Thursday.  AUD is nearing a test of the cycle low near .7050 from last month, and losses are likely to be extended.
  • Unemployment and PMI data for August were released all over Europe.  The eurozone unemployment rate surprised on the low side, falling to 10.9% from 11.1% in July, now at the lowest level since early 2012.  German unemployed for August came in at -7K vs. -4k consensus.  More broadly speaking, eurozone final manufacturing PMI for August came in at 52.3 vs. the flash reading of 52.4.  France’s final reading was a bit lower than expected at 48.3, Germany’s was a touch higher at 53.3, Italy’s was considerably weaker than expected at 53.8, Spain’s was on the weaker side at 53.2 and Greece’s reading rose to 39.1 from 30.2 in July.  In the UK, manufacturing PMI fell to 51.5 in August from 51.9 in July, compared with expectations for slight increase to 52.0.  In contrast, mortgage approvals in the UK rose more than expected as net mortgage lending reached levels not seen since mid-2008.
  • China reported official August PMI overnight.  Manufacturing component came as expected at 49.7, a three-year low and down from 50.0 in July.  Final Caixin August PMI was also reported, and the manufacturing component came in close to expectations at 47.3, above the 47.1 flash reading.  Both measures have not been below 50 simultaneously since January, and that was only for that one month.  We expect further weakness in the economy and also further stimulus measures ahead.
  • In South Korea, CPI came in as expected but trade disappointed by a wide margin.  August CPI came in at 0.7% y/y, the same as in July. The trade balance, however, shrank to $4.3 bln from $7.7 bln in July.  Both imports and exports were lower than expected, but exports fell -14.7% y/y, compared with forecasts for a fall of just -5.9%.  Exports to China fell -8.8% y/y in August, but declines to the EU and Japan fell even more, over 20%.  Still, the miss was probably due to weaker demand from China which is by far the largest destination of Korean exports, especially intermediary goods.  Clearly the weaker won is not yet making a big difference.  Indeed, this may be a manifestation of the “J-Curve” effect.
  • During the North American session, the US reports July construction spending (+0.6% expected) and August ISM manufacturing PMI (52.5 expected).  The Chicago PMI was reported Monday at 54.4 vs. 54.7 in July, and the employment component was in contractionary territory.  Ahead of the Friday jobs report, the employment component in the ISM today and the ADP tomorrow will be the final clues.  Consensus is currently at 218k vs. 215k in July.  US August auto sales will also be reported, with consensus at a 13.7 mln annualized pace.  Elsewhere, Canada reports Q2 GDP, with consensus at -1.0% annualized vs. -0.6% in Q1.
  • Mexico reports August PMI.  Manufacturing component is expected at 53.1 vs. 52.7 in July.  It then reports August consumer confidence on Friday, which is expected at 92.3 vs. 92.2 in July.  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.
  • Brazil reports August trade, with exports seen at -24% y/y and imports -34% y/y.  Brazil then reports July IP Wednesday, expected at -6.3% y/y vs. -3.2% in June.  COPOM meets Wednesday 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.  The fiscal outlook continues to darken, and we think the case for Brazil losing its investment grade rating keeps getting stronger and stronger