Dollar Mixed as PBOC Moves to Stabilize the Yuan

  • US-China relations have deteriorated further; markets have calmed after the PBOC took steps to stabilize the yuan
  • During the North American session, only June JOLTS job openings will be reported
  • Four former Fed chairs wrote an op-ed piece for WSJ
  • RBA kept rates steady at 1.0%, as expected; New Zealand reported firm Q2 jobs data ahead of RBNZ meeting tomorrow
  • EM will likely remain under severe pressure; Philippines July CPI rose 2.4% y/y, as expected; Brazil COPOM minutes will be released

The dollar is mixed against the majors as markets calmed after PBOC moved to stabilize the yuan.  Aussie and sterling are outperforming, while the yen and Swissie are underperforming.  EM currencies are also mixed.  TRY and RUB are outperforming, while PHP and MYR are underperforming.  MSCI Asia Pacific was down 0.8%, with the Nikkei falling 0.7%.  MSCI EM is down 0.3% so far today, with the Shanghai Composite falling 1.6%.  Euro Stoxx 600 is up 0.6% near midday, while US futures are pointing to a higher open.  10-year UST yields are up 4 bp at 1.74%, while the 3-month to 10-year spread has steepened 5 bp to stand at -24 bp.  Commodity prices are mostly higher, with Brent oil up 0.3%, copper up 0.6%, and gold flat.

US-China relations have deteriorated further.  China was just named a currency manipulator by the Treasury Department, despite being cleared in the most recent semiannual judgment back in May.  China was kept on the watchlist then, but we believe an intra-report designation is unprecedented.  The penalties involved are quite limited when taken alongside the tariffs and other moves already taken against China.  However, the symbolic move pours gasoline on an already raging conflagration.

That a somewhat objective process has become so obviously politicized is not a good development.  That thin veneer of objectivity came from the three criteria that needed to be met in order to be labeled a currency manipulator.  That veneer has been ripped off, leaving a clearly politicized, mercantilist worldview in clear sight to dominate US policymaking.  We will be writing a MarketView piece later today discussing our outlook for US-China relations.  A trade deal is now seen as unlikely this year. Even 2020 will be problematic now.

However markets have calmed after the PBOC took steps to stabilize the yuan.  The yuan was fixed at a level stronger than what was expected.  The bank also sold yuan-denominated bonds in Hong Kong, a move which would mop up liquidity and support offshore CNH.  To us, this is a clear signal that China is not “weaponizing” their currency.   Rather, policymakers are taking steps to prevent excessive yuan weakness whilst allowing for a somewhat greater degree of market influence.

US rates markets have reacted to the deteriorating global outlook.  The implied yield on the January 2020 Fed Funds futures contract is now at 1.48% from 1.80% last week.  That means three more cuts are pretty much priced in this year, with two more nearly priced in next year.  WIRP suggests 100% odds of a cut at the next meeting September 18, with 29% odds of a 50 bp move.  All these measures seem way too dovish.

The dollar is stabilizing today as markets calm.  When US rates adjust higher as we expect, the greenback should get some more traction.  The $1.1265 area should cap the euro upside near-term, while sterling has been unable to capitalize on dollar weakness and remains near the cycle lows.  USD/JPY appears to be on track to test the January flash crash low near 104.85.

During the North American session, only June JOLTS job openings will be reported.  A reading of 7326 is expected, up from 7323 in May.  The US labor market remains in solid shape, as evidenced by the 164k rise in NFP in July.  In terms of Fed speakers, only Bullard is scheduled today.  His remarks will be of great interest, as he has emerged as one of the most dovish members of the FOMC.

Four former Fed chairs (Yellen, Bernanke, Greenspan, and Volcker) wrote an op-ed piece for WSJ.  It read: “We are united in the conviction that the Fed and its chair must be permitted to act independently and in the best interests of the economy, free of short-term political pressures and, in particular, without the threat of removal or demotion of Fed leaders for political reasons.”  Well said.

Japan reported firm June household spending and labor cash earnings data overnight.  Spending rose 2.7% y/y vs. 1.1% expected, while cash earnings rose 0.4% y/y vs. -0.6% expected.  Real cash earnings fell -0.5% y/y vs. -1.5% expected.  Yet the data is likely to do little to change the BOJ’s intent to add stimulus later this year.  WIRP suggests 28% odds of a rate cut at the next meeting September 19.

Reserve Bank of Australia kept rates steady at 1.0%, as expected.  The bank said an extended period of low rates will be required, adding that will ease further if needed.  It will release its Statement on Monetary Policy Friday, which may provide clues about timing of the next cut.  WIRP suggests 52% odds of a cut at the next meeting September 3.  The odds rise as we move into Q4, with 71% chance of a cut October 1 and 83% November 5.  Ahead of the decision, Australia reported June trade data.

New Zealand reported firm Q2 jobs data.  Employment rose 1.7% y/y vs. 1.2% expected, while the unemployment rate fell to 3.9% vs. 4.3% expected.  Earnings and wages rose more than expected.  Reserve Bank of New Zealand meets Wednesday and is expected to cut rates 25 bp to 1.25%.  Data have remained fairly soft and so markets are looking for another cut after this week.

EM will likely remain under severe pressure.  The less dovish than expected Fed, renewed trade tensions, and broad-based risk off sentiment have conspired to absolutely crush EM FX and equities.   MSCI EM has broken below the May low near 982 and is on track to test the January low near 945.50 and then the October low near 930.  Likewise, MSCI EM FX has broken below the May low near 1609 and a break of the 1607 area sets up a test the September low near 1575. 

Philippines July CPI rose 2.4% y/y, as expected and down from 2.7% in June.  Inflation is the lowest since December 2016 and near the bottom of the 2-4% target range.  The central bank meets Thursday and is expected to cut rates 25 bp to 4.25%.  Q2 GDP will also be reported Thursday, with growth expected at 5.9% y/y vs. 5.6% in Q1.

Brazil COPOM minutes will be released.  The SELIC rate was cut 50 bp to 6.0% and the door left open to further cuts.  July IPCA inflation will be reported Thursday and is expected at 3.29% y/y vs. 3.37% in June.  If so, inflation would move closer to the bottom of the 2.75-5.75% target range and support another rate cut at the next COPOM meeting September 18.