Dollar Narrowly Mixed as Eventful Week Closes on a Quiet Note

  • The dollar is narrowly mixed as another eventful week winds down
  • Italy Deputy Prime Minister Salvini pulled his support and called for early elections
  • Trade tensions continue; CNY was fixed weaker overnight; China reported July CPI and PPI
  • The most important US data of the week is July PPI today
  • UK reported Q2 GDP, June IP, construction output, and trade
  • Japan reported firm Q2 GDP data; BOJ tweaked its bond buying program
  • Turkey central bank fired several high-ranking officials; Peru cut rates 25 bp to 2.5%

The dollar is narrowly mixed as another eventful week winds down.  Swissie and euro are outperforming, while Kiwi and sterling are underperforming.  EM currencies are mostly weaker.  RON and TRY are outperforming, while ZAR and CNY are underperforming.  MSCI Asia Pacific was up 0.2%, with the Nikkei rising 0.4%.  MSCI EM is down 0.1% so far today, with the Shanghai Composite falling 0.7%.  Euro Stoxx 600 is down 0.6% near midday, while US futures are pointing to a lower open.  10-year UST yields are down 3 bp at 1.69%, while the 3-month to 10-year spread has inverted 2 bp to stand at -31 bp.  Commodity prices are mixed, with Brent oil up 1.5%, copper down 0.3%, and gold up 0.1%.

The dollar is narrowly mixed as another eventful week winds down.  DXY is basically flat from Monday and is finding support near the 97.50 area.  Global equity markets are mostly lower today, but nothing like the panic selling seen earlier this week.  Global bond yields are mostly lower, with the major exception being Italy.

We take this quiet moment to underscore our broad macro calls.  That is, we believe the US rates markets continue to overstate the case for Fed easing, based on our call for no imminent US recession.  This underscores our bullish dollar call.  However, given ongoing global trade tensions, we remain bearish on EM.

Italy Deputy Prime Minister Salvini pulled his support for the ruling coalition and called for early elections.  This was long-rumored after his League did well in the European Parliamentary elections back in May.  Parliament is in summer recess and a date for a confidence vote hasn’t been set yet.  Recent Italian polls suggest League leads all parties with nearly 40% support and that the most likely result will be a center-right ruling coalition with Forza Italia and Fratelli d’Italia.

This all goes back to a major point about the dollar.  If investors don’t like it, there’s really nowhere else that looks any better.  Italy is a big reminder of why the euro remains unattractive, and the political intrigue may peak just as the government must submit its 2020 budget to Brussels by October 15.  Besides Italy, one can add in rising Brexit concerns too as a major negative factor for the euro.

Trade tensions continue.  The US held off on its decision to grant Huawei licenses in response to China halting its purchases of US agricultural goods.  Commerce Secretary Ross said his department has received 50 requests from US firms for licenses to do business with Huawei.   While President Trump agreed that some restrictions on Huawei would be lifted, it was contingent on a continued thaw that would see China ramp up its purchases of US farm goods.

The yuan was fixed weaker overnight.  While it was another new high for USD/CNY since 2008 at 7.0136, it was well within expectations.  Recent moves support our view that China is not weaponizing the yuan, but rather letting market forces drive its movements.  Both CNY and CNH are firmer than the cycle lows seen earlier this week, but we expect weakness to continue along with the rest of EM FX.

China reported July CPI and PPI.  CPI was a tick higher than expected at 2.8% y/y, while PPI was a couple of ticks lower than expected at -0.3% y/y.  No policy implications, as the PBOC is focused on growth, not inflation.  We expect further easing measures by the PBOC but not an outright rate cut.  This would tend to weaken the yuan and we do not think policymakers want to add any fuel to that trade.

The most important US data of the week is July PPI today.  Headline is expected to remain steady at 1.7% y/y while core is expected to remain steady at 2.3% y/y.  This will set the table for July CPI, to be reported next Tuesday.  Powell said that this most recent rate cut was meant to help push inflation higher.  There are no Fed speakers scheduled today.

UK reported Q2 GDP, June IP, construction output, and trade.  GDP shrank -0.2% q/q, dragging the y/y down to 1.2% vs. 1.4% expected and 1.8% in Q1.  Private consumption and government spending were firm but were offset by very week investment.  IP and construction output were also weaker at -0.1% m/m and -0.7% m/m, respectively.  The BOE delivered what we consider to be a dovish hold last week, but WIRP suggests odds of a cut at the September 19 meeting are only 7%.  Sterling remains under pressure and should make new cycle lows soon.

Japan reported firm Q2 GDP data.  Annualized growth was expected to slow to 0.5% from 2.2% in Q1.  Instead, growth came in at 1.8% while Q1 was revised up to 2.8%.  Private consumption was weaker than expected, while business spending was stronger than expected.  BOJ next meets September 19 and WIRP suggests 31% odds of a cut then.

The BOJ tweaked its bond buying program.  It reduced its purchases of 3- to 5-year and 10- to 25-year bonds and increased its purchases of 1- to 3-year bonds.  The signal is that the BOJ doesn’t want to see further curve flattening.  Otherwise, there are no policy implications.

RBA released its quarterly Statement on Monetary Policy.  The bank said that it’s prepared to cut rates again, as subdued household income and weak consumption means that it will take longer for inflation to return to target.  The bank cut its growth forecast for this year to 2.5% from 2.75% previously.  Next RBA meeting is September 3 and WIRP suggests nearly 50% odds of a cut then, up from 6% at the start of August.

Turkey central bank fired several high-ranking officials, including chief economist Hakan Kara.  Others that were fired include the central bank’s head of research, the banking department chief, and the risk management chief.  No reasons were given for the departures, which come about a month after the sacking July 6 of former Governor Murat Cetinkaya.  Who needs these senior positions when President Erdogan is making all the decisions?  This is a sad day for Turkey’s institutions.

Last night, Peru’s central bank joined the ranks of the easing and cut rates 25 bp to 2.5%.  The market was nearly split.  The bank said the cut does not imply additional cuts whilst noted that its inflation forecasts have a downward bias.  Brazil and Mexico reported soft CPI data yesterday that feeds into easing expectations.  Banco de Mexico meets next Thursday and is expected to cut rates 25 bp, while Brazil COPOM meets September 18 and is expected to cut rates 50 bp.