Dollar Soft as HK and UK Boost Market Sentiment

  • The dollar rally has seen a bit of a setback since the weaker than expected ISM manufacturing PMI yesterday
  • Risk on sentiment is being boosted by signs that Hong Kong tensions are easing and by signs of success in avoiding a hard Brexit
  • BOE Governor Carney appears before the Treasury Committee; UK reported weak August services and composite PMIs
  • BOC is expected to keep rates steady at 1.75%; Australia reported Q2 GDP
  • Late last night, Chile cut rates 50 bp to 2.0%, as expected

The dollar is broadly weaker against the majors as risk on sentiment takes hold from HK and UK developments.  Sterling and the Scandies are outperforming, while yen and Loonie are underperforming.  EM currencies are broadly firmer.  ZAR and TRY are outperforming, while THB and TWD are underperforming.  MSCI Asia Pacific was up 0.9%, with the Nikkei rising 0.1%.  MSCI EM is up 1.4% so far today, with the Shanghai Composite rising 0.9%.  Euro Stoxx 600 is up 0.8% near midday, while US futures are pointing to a higher open.  10-year UST yields are up 3 bp at 1.49%, while the 3-month to 10-year spread has steepened 3 bp to stand at -460 bp.  Commodity prices are mostly higher, with Brent oil up 0.5%, copper up 1.9%, and gold down 0.7%.

The dollar rally has seen a bit of a setback since the weaker than expected ISM manufacturing PMI yesterday.  We believe this setback is temporary.  Even if the US economy is at risk, what are the alternatives to the dollar?  Please see our recent piece “Latest Thoughts on the US Economic Outlook” for our outlook on the US economy and its investment implications.

Risk on sentiment is being boosted by signs that Hong Kong tensions are easing.  Chief Executive Lam agreed to formally withdraw the extradition bill, one of the key demands from the protestors.  This is a good first step but we suspect the protestors will not be placated so easily by something that should have been done much earlier.  Still, Hong Kong stocks rallied on the news and this fed into improved market sentiment.  Safe haven currencies are underperforming.

Sentiment is also being helped by signs of success in avoiding a hard Brexit.  UK Prime Minister Johnson lost his parliamentary majority with the defection of Phillip Lee yesterday to the opposition Liberal Democrats.  Shortly thereafter, Johnson lost by a large margin of 328-301 as Parliament voted to take control of the Brexit process.  21 members of his own party voted against Johnson.

A bill will now be presented today in Parliament that aims to prevent a hard Brexit if a deal is not reached in October.  Fresh elections may take place after Johnson’s defeat, which will be complicated by the fact that any Tory MPs that voted to delay Brexit were ejected from the party.  Two thirds of Parliament must vote for fresh elections and so uncertainty is still running high.

In light of the weak ISM reading, the US data have become more important ahead of the September 18 FOMC meeting.  During the North American session, US August auto sales and July trade will be reported.  Because of the US holiday Monday, ADP August jobs data will be reported tomorrow instead of today.  The employment component in ISM manufacturing fell to 47.4 in August and was the first sub-50 reading since September 2016.

After a quiet August, the Fed speaking schedule picks up temporarily.  Williams, Bowman, Bullard, Kashkari, and Evans all speak today.  With the media blackout ahead of the FOMC meeting going into effect next week, these speaking engagements will be very important.  Yesterday, FOMC voter Rosengren said he saw no immediate need for policy action.  This was not surprising given he and George both dissented in favor of steady rates July 31.

Bank of Canada is expected to keep rates steady at 1.75%.  Data came in firm last week, leading market to push out BOC easing expectations.  WIRP suggests 10% odds of a cut this week, rising to 60% at the October 30 meeting.  Right before the decision, Canada reports July trade.  August jobs data and Ivey PMI will be reported Friday.

BOE Governor Carney appears before the Treasury Committee today.  While the BOE next meets September 12, today is likely to be one of the last times he will publicly address Parliament before the October 31 Brexit deadline.  The BOE may present its updated Brexit scenarios, which were first released late last year.

UK reported weak August services and composite PMIs.  They came in at 50.6 and 50.2 vs. expectations of 51.0 and 50.5, respectively.  Earlier this week, construction PMI came in at 45.0 vs. 46.5 expected and manufacturing PMI came in at 47.4 vs. 48.4 expected.  Yet fundamentals have become secondary as Brexit risks intensify.  After making new lows for this move yesterday below $1.20, sterling is seeing a bounce and trading just below $1.22.

Eurozone reported final services and composite PMI readings for August.  Both rose a tick from the preliminary readings to 53.5 and 51.9, respectively.  Spain and Germany composites improved to 52.6 and 51.7, as did France to 52.9.  Of note, Italy composite fell to 50.3 from 51.0 in July.  For now, solid services PMIs are helping to offset weaker manufacturing PMIs.  Eurozone also reported July retail sales, which fell -0.6% m/m.

Data come ahead of the ECB meeting September 12.  WIRP suggests 100% odds of a cut then, with 50% odds of a 20 bp move.  Like sterling, the euro traded at a new low for this move yesterday near $1.0925 but is seeing a bounce and trading back above $1.10.

Australia reported Q2 GDP.  Growth came in at 1.4% y/y, as expected.  This is down from 1.8% in Q1 and is the weakest since Q3 2009.  While the RBA sounded upbeat this week as it kept rates on hold, we think headwinds are growing and will push the bank into cutting sooner rather than later.  WIRP suggests 59% odds of a cut at the next policy meeting October 1.

Late last night, Chile cut rates 50 bp to 2.0%, as expected.  The bank said that further easing may be required but this would be evaluated at the upcoming meetings.  Next policy meetings are October 23 and December 6, and further easing seems likely given this latest leg down in copper prices.