US Dollar Weighed Down by Dovish Fed Governors

Dollar Remains Under Pressure Post-Powell

  • The dollar remains under pressure after Powell’s testimony last week
  • The first of the regional Fed manufacturing surveys for July will be reported today
  • There are some signs that US recession fears are receding
  • China data have come in mixed for June; Colombia reports May manufacturing production and retail sales

The dollar is narrowly softer against the majors as the new week begins. Kiwi and Swissie are outperforming, while Loonie and sterling are underperforming. EM currencies are mostly firmer. IDR and RUB are outperforming, while KRW and HKD are underperforming. MSCI Asia Pacific ex-Japan was up 0.3%, with Japan closed for a holiday. MSCI EM is up 0.5% so far today, with the Shanghai Composite rising 0.4%. Euro Stoxx 600 is flat near midday, while US futures are pointing to a higher open. 10-year UST yields are flat at 2.12%, while the 3-month to 10-year spread is flat to stand at -1 bp. Commodity prices are mixed, with Brent oil up 0.5%, copper flat, and gold flat.

The dollar remains under pressure after Powell’s testimony last week. While he seems to have cemented a 25 bp cut on July 31, we continue to believe that markets are overestimating Fed dovishness for the rest of the year. The implied yield on the January 2020 Fed Funds futures contract is currently around 1.71%, which nearly prices in three cuts in total for H2. The Fed’s Williams speaks today.

DXY is sitting on the 200-day moving average near 96.78 today. The 50% retracement objective of the June-July bounce is just below that at 96.715. However, a break of the 62% objective near 96.51 is needed to signal a deeper move towards the June 25 low near 95.843. we remain bullish on the dollar but acknowledge that further near-term losses are likely until the market recalibrates Fed easing expectations.

The first of the regional Fed manufacturing surveys for July will be reported today. The Empire survey is seen rebounding to 2.0 from -8.6 in June. Philly Fed reports Thursday and is expected to rebound to 5.0 from 0.3 in June. While a recovery from the weak June readings is certainly welcome, US manufacturing remains vulnerable to the ongoing US-China trade tensions.

There are some signs that US recession fears are receding. The US 10-year yield stands near 2.12%, the highest since mid-June. More importantly, the 3-month to 10-year spread is nearly flat, reversing the deep inversion to -25 bp earlier this month. As we have long suspected, the spread is likely to move back into positive territory on signs that the US economy remains in solid shape. Higher than expected CPI and PPI readings for June didn’t hurt either.

China data have come in mixed for June. Exports contracted -1.3% y/y and imports by -7.3% y/y, while aggregate finance rose CNY2.26 trln vs. CNY1.9 trln expected. IP rose 6.3% y/y vs. 5.2% expected, while retail sales rose 9.8% y/y vs. 8.5% expected. Lastly, Q2 GDP slowed to 6.2% y/y, as expected.

Weak June data from emerging Asia support the notion that the ongoing US-China trade war will continue to weigh on global growth and trade. That is clearly negative for EM, though for now, the dovish Fed stance is supportive of risk assets in general. We remain cautious on EM as more weak data is expected this week and especially given our less dovish take on the Fed.

Colombia reports May manufacturing production and retail sales. The former is expected to rise 4.2% y/y and the latter by 5.0% y/y. While inflation remains in the top half of the 2-4% target range, the sluggish economy should keep rates on hold in H2. Next central bank meeting is July 26, no change is expected then.

Israel reports June CPI, which is expected to rise 1.2% y/y vs. 1.5% in May. If so, inflation would move closer to the bottom of the 1-3% target range. Next central bank meeting is August 29, no change is expected then.