Dollar Mixed as Markets Consolidate

  • Consolidative trade prevails as the two-day FOMC meeting gets under way
  • The rout in Chinese equities continued
  • The gains in the dollar bloc seem largely about position adjustments; the proximate spur may be RBNZ Governor
  • Wheeler’s speech later today (Wednesday in New Zealand)
  • The preliminary estimate for UK Q2 GDP growth came in at 0.7%
  • The Turkish lira is rebounding nicely today; NATO is holding a rare emergency meeting at Turkey’s request
  • Commodity prices continue to break down, and this is weighing on the EM exporters; RUB weakness ahead of the central bank meeting Friday complicates matters

Price action:  The dollar is mixed against the majors.  The antipodeans and sterling are outperforming, while the yen and the euro are underperforming.  Kiwi is firmer ahead of RBNZ Governor Wheeler’s speech later today, while sterling has benefitted from a firm Q2 GDP reading.  The euro had trouble sustaining its move above $1.11, and is now trading below $1.1050.  Sterling is trading back around $1.56, while dollar/yen is edging up towards 124.  EM currencies are mixed too, with TRY and ZAR outperforming.  The Turkish lira is firming as NATO holds an emergency meeting about ISIS at Turkey’s request.  RUB and the CEE currencies are underperforming.  The ruble is being hurt by falling oil prices, with USD/RUB trading above 60 for the first time since March.  MSCI Asia Pacific fell 0.5%, with the Nikkei down 0.1%.  The Shanghai Composite fell 1.7%, while the Shenzhen Composite fell 2.2% despite China officials underscoring that equity support measures remain in place.  Euro Stoxx 600 is up 1.3% near midday, while S&P futures are pointing to a higher open.  The US 10-year yield is up 4 bp to 2.25%, while European bond markets are also mostly softer. 

  • The US dollar is mixed.  It is recouping some of yesterday’s losses against the euro and yen but is heavier against the other major currencies.  Short-covering in the dollar bloc that began yesterday has been extended, and sterling was aided by the 0.7% preliminary increase in Q2 GDP.
  • The rout in Chinese equities continued.  Although trading was volatile, the immediate selling may have exhausted itself.  The Shanghai Composite initially fell 5% before recovering in full and managed to turn 1% higher before finally closing 1.7% lower.  The financial sector, led by brokerages, was firmer.  Margin usage yesterday fell by the most in two weeks (~$3.4 bln or about 2%) while the securities regulator reaffirmed the government’s support for the equity market, contrary to market rumors.
  • Another encouraging sign is the index of Chinese companies that trade in Hong Kong fared better, losing only about 0.5%.  Also, the Hang Seng itself and the larger bourses in the area (like Korea’s Kospi and Taiwan’s Taiex) managed to eke out minor gains.
  • The gains among the dollar bloc currencies seems largely about position adjustments, and partly driven by the crosses.  The New Zealand dollar is leading this week’s move by the bloc.  It has gained 1.5% since the end of last week.  The Aussie has gained a third and the Canadian dollar a fifth as much as the Kiwi.
  • The proximate spur may be RBNZ Governor Wheeler’s speech later today (Wednesday in New Zealand).  The shorts are concerned that Wheeler may build on the recent RBNZ statement that had dropped references to the need for currency depreciation.  He may recognize that the past currency depreciation may boost price pressures.  This would be understood as a signal that there may be less rate cuts in the pipeline than many suspect.  The RBNZ has unwound half of its mini-tightening cycle.
  •  The New Zealand dollar is moving above its 20-day moving average.  It has not finished the North American session about  above this average since the end of April.  It is just below $0.6650 today.  That said, a move above last week’s high near $0.6700 would further lift the tone.  The Australian dollar made a marginal new multi-year low (a little below $0.7260) but rebounded to flirt with yesterday’s high.  A close above there (~$0.7325) could signal a potential key reversal.  With oil prices still under pressures, the Canadian dollar is simply consolidating within yesterday’s ranges.
  • In a fairly light economic calendar, the UK stands out.  The preliminary estimate for Q2 GDP was 0.7%.   This is in line with expectations and represents an acceleration of growth after 0.4% in Q1.  Business services and finance contributed while oil output soared.  Business services and finance were flat in Q1, but in Q2 accounted for a 0.5 percentage point increase in GDP.  The mining/quarrying/drilling sector rose 7.8% in Q2, the strongest increase since Q3 1989.
  • Manufacturing, on the other hand, contracted by 0.3% and construction was flat.  Manufacturing does not appear to be off to a good start in Q3.  CBI noted yesterday that its measure of manufacturing orders fell to a two-year low this month and export growth remains weak.
  • Sterling traded almost a cent higher in response to the news.  It recorded last week’s low before the weekend near $1.5470 and made it up to almost $.1560 yesterday before falling back to about $1.5530 before the data.  It is now holding above yesterday’s high.  Last week’s highs in the $1.5630-70 band may provide a cap until tomorrow’s FOMC statement.
  • For its part, the euro is in about a half cent range in the upper end of yesterday’s ranges.  The market awaits fresh impulses.  However, the recent gains have been sufficient to turn the five-day moving average above the 20-day, for the first time in a month.  The euro appears vulnerable to further slippage, with the $1.1000-20 area providing support.
  • The dollar has bounced smartly off the JPY123 area tested yesterday.  It has approached yesterday’s highs near JPY123.85.  Higher US stocks and bond yields could lift the dollar into the JPY124.00-20 area in North America.  US data includes the CaseShiller house price index, where a firmer number is expected (20-city 5.6% year-over-year from 4.91% in April), Markit preliminary services PMI (expected 55.0 vs 54.8), and consumer confidence (softer).
  • The Turkish lira is rebounding nicely today.  NATO is holding a rare emergency meeting at Turkey’s request.  This is only the fifth such meeting in NATO history, and concerns the ISIS threat.  NATO will reportedly discuss the establishment of a safe zone near Turkey’s border with Syria.  Markets are taking NATO’s involvement as a positive step, although we would caution against any sort of quick resolution to the building problem.  We remain negative on TRY, and expect USD/TRY to make new all-time highs above 2.81 in the coming weeks.
  • Commodity prices continue to break down, and this is weighing on the EM exporters.  WTI oil is making new lows for this move, and is on track to test the March low near $42.  Likewise, Brent oil is on track to test the January low near $45.19.  The ruble has been hit particularly hard, with USD/RUB trading above 60 for the first time since March.  The Russian central bank meets Friday, and the renewed ruble weakness makes for a tough decision.  Consensus sees a 50 bp cut to 11%, but there is risk of a hawkish surprise if ruble weakness intensifies.
  • The most recent round of our EM and Frontier ratings models shows significant deterioration in the fundamental credit metrics for many of the commodity exporters.  These are concentrated in Latin America and Africa, along with some in EMEA (Russia, Kazakhstan, South Africa).  With commodities set to take another leg lower, this suggests that downward pressure on many sovereign ratings will continue in H2.