Dollar Softness Continues Ahead of FOMC Meeting

  • The FOMC begins its two-day meeting today; Fed manufacturing surveys for September will start to roll out; Canada reports July manufacturing sales and August existing home sales
  • UK Internal Market Bill was approved in its second reading in Parliament yesterday, as expected; UK data today was a mixed bag
  • Israel reports August CPI; Poland is expected to remain on hold
  • Relatively upbeat RBA minutes showed little concern over the exchange rate; August data out of China continues to point towards a robust recovery

Downward pressure on the dollar continues ahead of the FOMC decision.  DXY is edging lower for the third straight day and is trading back below 93.00.  A clean break below the 92.50 area is needed to set up a test of the September 1 low near 91.746.  Similarly, the euro is up for the fifth straight day but needs to break above the $1.1910 area to set up a test of its recent high near $1.2010.  We remain negative on the dollar, as Powell’s dovish message from Jackson Hole is likely to be reiterated at the FOMC meeting this week.  Sequentially weaker US data this week should also fit into the weak dollar narrative.



The FOMC begins its two-day meeting today. While no policy changes are expected when the decision is announced tomorrow, we expect a dovish hold, with Powell underscoring the ultra-dovish message he sent at Jackson Hole. We will be sending out an FOMC preview later today. One key takeaway is that the dollar tends to weaken on FOMC decision days.  DXY has fallen on each one dating back to October 2019.  Including emergency meetings, that’s a streak of nine.

Fed manufacturing surveys for September will start to roll out.  Empire survey will be reported today and is expected at 6.8 vs. 3.7 in August.  Philly Fed business outlook will be reported Thursday and is expected at 15.0 vs. 17.2 in August.  These are the first snapshots for September and will help set the tone for other manufacturing data.  August IP will also be reported and is expected to rise 1.0% m/m vs. 3.0% in July. Lastly, August import and export prices (0.5% m/m and 0.4% m/m expected, respectively) will also be reported today.

Canada reports July manufacturing sales (9.0% m/m expected) and August existing home sales (8.0% m/m expected).  August CPI will be reported Wednesday, with headline expected to rise 0.4% y/y vs. 0.1% in July and common core expected to rise 1.4% y/y vs. 1.3% in July.  July wholesale trade and retail sales (3.5% m/m and 0.7% m/m expected, respectively) will be reported Friday.  Last week, the Bank of Canada delivered a somewhat hawkish hold.  No, it wasn’t threatening to hike rates anytime, but instead removed language about adding more stimulus if needed.



The UK Internal Market Bill was approved in its second reading in Parliament yesterday, as expected, despite a sizable rebellion. The government won with a comfortable majority of 77 (340 to 263), including support from 7 North Ireland MPs. Two Tories voted against the bill and several notable abstentions, including former chancellor Javid. Insiders place the rebel numbers at about 30. The next test will be the Neill Amendment, expected to hit the floor next week. The amendment would allow parliament to veto any change to the Withdrawal Agreement. The House of Lords could also amend the bill, passing it back to the House of Commons for further discussion. In short, there is still a long way to go before this bill becomes law.

The UK data today was a mixed bag. Headline unemployment rose a couple of ticks to 4.1% in July, as expected, but this is in large part due to a low participation rate and the soon-to-expire furlough scheme. However, the adjustment to the scheme in July (allowing workers to return part time) seems to be helping contain the damage for now. Jobless claims rose 73.k in August vs. a revised 69.9k (was 94.4k) in July, while 3-month employment fell -12k in July vs. -118k expected and -220k in May. All told, some 2.7 mln workers are collecting jobless benefits while 700K jobs have been lost due to Covid-19 and there is rising pressure on Chancellor Sunak to extend the furlough scheme beyond October.

Israel reports August CPI. Headline inflation is expected to remain steady at -0.6% y/y.  If so, it would remain well below the 1-3% target range.  The nation will enter a second nationwide crackdown due to resurging virus numbers, with a full lockdown to be seen for two weeks, followed by two more weeks with strict limits on mobility and activity.  After that, restrictions will be applied only to communities with large outbreaks. The economic outlook has clearly weakened as a result of a haphazard reopening in which citizens apparently threw caution to the wind. Reports suggest a relief program will be announced later this week to help deal with the economic fallout.

Poland central bank is expected to remain on hold.  CPI rose 2.9% y/y in August, the lowest since May and in the bottom half of the 2.5-4.5% target range.  For now, the bank is likely to remain in wait and see mode while continuing its asset purchases.  August industrial output and PPI will be reported Friday.  The former is expected to rise 3.1% y/y vs. 1.1% in July, while the latter is expected to fall -1.0% y/y vs. -0.6% in July.



Relatively upbeat RBA minutes showed little concern over the exchange rate. This saw AUD climb back above 0.73. At that meeting, the RBA left rates steady but expanded its Term Funding Facility for banks.  The Board again noted that the cash rate target won’t be adjusted any time soon. The economic shock looks less severe than earlier expectations, though the Victoria situation is still very much a headwind. The RBA’s willingness to ease further was mentioned again, but the resilience of the banking system and public balance sheets, and fiscal policy are providing support. There was a line where the RBA noted a lower AUD would support the recovery, but no real attempt to talk it down; they accept that the recent appreciation is in line with commodity (iron ore) price action.

August data out of China continues to point towards a robust recovery. Today’s data were better than expected, with IP (+5.6% y/y vs 5.1% expected) and retail sales (+0.5% y/y vs 0% expected) coming in firm. Money and loan data reported last week was much stronger than expected and supports our view that the recovery is likely to pick up even more as we move through H2.  We also got some positive on the trade front with China deciding to extend existing tariff exemptions on several US items by a year, a good-will gesture, even as export targets to the US will not be met. This reinforces our view that both sides are shift away from the commercial/trade part of the conflict, at least until the elections.  USD/CNH traded to a session low 6.7829 following the PBOC fix at 6.8222, the strongest levels since May 2019.