Dollar Soft as Asia Struggles to Limit Resurgence of COVID-19

  • The virus news stream remains negative; the dollar remains under pressure
  • White House and Senate Republicans are discussing a compromise on extending unemployment benefits; KC Fed manufacturing survey for July and weekly jobless claims will be reported
  • Chile’s Senate passed the main text of a bill allowing citizens to tap into their pension savings
  • Italy approved increased spending to the tune of EUR25 bln; UK admitted that a trade deal with the US was unlikely until next year
  • Turkey is expected to keep rates steady at 8.25%; South Africa is expected to cut rates 25 bp to 3.5%; Korea Q2 GDP came in weaker than expected; Singapore reported June CPI

The virus news stream remains negative. Asia was the first to feel the impact of the pandemic and the first to successfully bend the curve. However, that region is seeing a resurgence of virus cases as Hong Kong, Australia, and Japan are all seeing higher numbers. If countries that successfully bent the curve are having trouble reopening, what chance does the US have when it never bent the curve? We continue to believe that the US economy will underperform in Q3 due to the suspension or rollbacks of reopening across many large states.

The dollar remains under pressure. DXY traded at a new low for this move and is on track to test of the March low near 94.65. Break below that would set up a test of the September 2018 low near 93.814. The euro broke above the 2019 high near $1.1570, which sets up a test of the September 2018 high near $1.1815. Sterling is lagging and so the EUR/GBP cross is moving higher again. USD/JPY remains stuck near the 107 level and is going nowhere fast.

AMERICAS

Reports suggest the White House and Senate Republicans are discussing a compromise on extending unemployment benefits. The $600 weekly extra benefit is set to expire at the end of the month, and the extension will likely entail a lower amount. Now comes the hard part: negotiating with the House Democrats. We continue to believe that a deal will be struck, but it will be likely be seen at the eleventh hour after contentious negotiations. This most likely will be the last package ahead of November elections and so Republican lawmakers have an incentive to pass it. Otherwise, the optics of going on vacation in August with no deal and unemployment benefits running out would be truly bad. The House Democrats have already passed a package that dies in the Senate and this gives them more political cover.

The regional Fed manufacturing surveys for July will continue to roll out. Kansas City reports today and is expected at 5 vs. 1 in June. Last week, the Empire survey came in at 17.2 vs. 10.0 expected and -0.2 in June, while the Philly Fed survey came in at 24.1 vs. 20.0 expected and 27.5 in June while. Due to the media embargo, there are no Fed speakers until Powell’s post-decision press conference.

Weekly jobless claims will be reported. Initial claims are expected at 1.30 mln vs. 1.30 mln last week, while continuing claims are expected at 17.1 vs. 17.338 mln last week. Of note, these initial claims cover the BLS survey week containing the 12th of the month, while continuing claims are reported with a one-week lag. Despite the strong jobs report for June, the fact that initial claims are still coming in at over 1 mln every week suggests the labor market is still under some stress. June leading index comes out today and is expected to rise 2.1% m/m vs. 2.8% in May.

Chile’s Senate passed the main text of a bill allowing citizens to tap into their pension savings. The Pinera government has been fighting the proposal to allow withdrawals of up to 10% of total savings, which currently stands around $200 bln. Some modifications were made by the Senate and it now goes back to the lower house for a final vote. The biggest investment implications are likely sell-offs in local bonds and equities. Riskier overseas assets are also likely to be sold, which would likely strengthen the peso as those funds are repatriated onshore.

EUROPE/MIDDLE EAST/AFRICA

Italy approved increased spending to the tune of EUR25 bln. The cabinet agreed to a wider budget deficit this year and it now goes to parliament for approval. The government said that the extra spending will go to help businesses with temporary layoffs and to provide subsidies to local and regional governments. This spending would come on top of an expected windfall from the EUR750 bln EU recovery fund that was just approved. Prime Minister Conte told the Senate that Italy will likely receive total funding of around EUR209 bln from the fund.

The UK admitted that a trade deal with the US was unlikely until next year. There has never been a formal deadline for a deal, but the Johnson government had hoped to showcase an early success story as it leaves the EU. The talks have reportedly been stalled over disagreements in agriculture, particularly increased market access that the US is seeking. Indeed, USTR Lighthizer told Congress last month that there is “still a long way to go.” To be blunt, it’s clear that UK policymakers have too much on their plate right now due to the pandemic. If a simple bilateral deal with the US can’t be completed quickly, what chance is there that a much more complicated one with the EU can be finished by year-end?

Turkey central bank is expected to keep rates steady at 8.25%. The bank surprised markets last month with steady rates when a 25 bp cut was expected, but inflation has been accelerating. Since then, July CPI came in higher than expected at 12.62% y/y, the highest since August 2019. As much as we’re sure it pains Erdogan, the central bank is finally showing a modicum of conventional thinking here by keeping rates steady until the inflation outlook improves.

South African Reserve Bank is expected to cut rates 25 bp to 3.5%. However, the market is split. Of the 16 analysts polled by Bloomberg, 7 see no cut, 5 see a 25 bp cut, and 4 see a 50 bp cut. The bank cut 50 bp at the last meeting in May. Since then, inflation fell to 2.1% y/y in June, the lowest since September 2004 and below the 3-6% target range. With the rand relatively firm and the economy so weak, we see risks of a dovish surprise today from the SARB.

ASIA

Korea Q2 GDP came in weaker than expected. In y/y terms, GDP contracted -2.9% vs. -2.9% expected, while in q/q terms, it contracted -3.3% vs. -2.4% expected. This was the worst reading since the Asian crisis, but Finance Minister Hong said the worst has likely been seen and that the economy should pick up as exports and consumption recover. Yet trade data for the first 20 days of July show little improvement. Bank of Korea just left rates steady at 0.50% last week, whilst reiterating that it could add stimulus via asset purchases in the future, if needed. Next policy meeting is August 27.

Singapore reported June CPI. Headline fell -0.6% y/y, as expected and compares to -0.8% in May. Monetary Authority of Singapore does not have an explicit inflation target, but deflationary conditions should allow it to ease again. Last move was in March, when the MAS reduced the slope of the S$NEER trading band to zero and re-centered it at the prevailing level. Next semi-annual policy meeting is in October. June IP will be reported Friday and is expected to contract -2.6% y/y vs. -7.4% in May.