Dollar Steadies but Further Losses Expected

  • The dollar is stabilizing after broad-based losses last week; ahead of jobs data Friday, we will get other important clues to the health of the US economy
  • Democrats and republicans still seem to be far apart in the stimulus bill negotiations; late Friday, Fitch moved the outlook on its AAA rating for the US from stable to negative
  • The UK government is reportedly considering re-instating some form of lockdowns in London should infection rates worsen; eurozone reported firmer final manufacturing PMIs
  • Japan final Q2 GDP remained steady at -2.2% SAAR vs. -2.8% expected; Caixin July China manufacturing PMI came in stronger than expected

The dollar is stabilizing after broad-based losses last week. DXY traded Friday at new lows for this move near 92.546 but closed higher on the day and is building on those gains today. The euro traded above $1.19 for the first time in over two years Friday but reversed and is now testing $1.17. Likewise, sterling traded as high as $1.3170 Friday but has reversed and testing $1.30. USD/JPY has also rebounded nearly two big figures from the Friday low to trade above 106 today. Nothing fundamental has changed and so we view this dollar bounce with skepticism and continue to believe that further losses are in store for the greenback.

AMERICAS

Ahead of jobs data Friday, we will get other important clues to the health of the US economy. July ISM manufacturing PMI will be reported today and is expected at 53.5 vs. 52.6 in June. July auto sales will also be reported and are expected at a 14.0 mln annualized rate vs. 13.05 mln in June. With the FOMC media embargo over, there are several Fed speakers this week. Bullard, Barkin, and Evans all speak today.

Democrats and republicans still seem to be far apart in the stimulus bill negotiations. After the added jobless benefits expired Friday, the so-called income cliff cannot be ignored. The Republican proposed its HEALS Act calling for about $1 trln of funding compared to the $3 trln HEROES Act proposed by the Democrats. The two differ on the formula for the next stimulus check to individuals, on whether to keep unemployment insurance at $600 per week, as well as provisions for rental assistance and child care, amongst others. We remain confident that a bill will be passed, and it will probably come in somewhere between those numbers, which seems to be what markets are expecting. That said, this might be the last major legislation before the elections, so it’s an important campaign opportunity for legislators to position themselves for their respective constituencies. It also means that Trump can’t afford to let this flop.

The Fed made it clear that more fiscal stimulus is needed. We continue to think that the Fed will not add stimulus until there has been more done on the fiscal side. By standing pat, the Fed is putting subtle (or perhaps not too subtle) pressure on Congress and the White House to strike a deal.

Late Friday, Fitch moved the outlook on its AAA rating for the US from stable to negative. the agency cited ongoing deterioration in public finances and the absence of a credible fiscal consolidation plan as the main driver, adding “High fiscal deficits and debt were already on a rising medium-term path even before the onset of the huge economic shock precipitated by the coronavirus.” We concur. In our most recent sovereign ratings model, we noted that “we do think that the significant deterioration in its credit metrics means that the US stands a strong chance of losing its Aaa and AAA ratings from Moody’s and Fitch, respectively.” Yet US yields continue to edge lower. Back in 2011, US yields barely budged when S&P downgraded the US to AA+, and this seems to be playing out again.

EUROPE/MIDDLE EAST/AFRICA

The UK government is reportedly considering re-instating some form of lockdowns in London should infection rates worsen. We think these headlines are getting more airtime than they deserve, as they seem self-evident to us. Governments across the world have moved to a case-by-case strategy and will (and should) react to local infections. As long as we don’t hear anything about nation-wide policies again, nobody should be surprised by targeted regional policies. The Covid-19 situation remains comparatively worse in the UK than in Continental Europe, however, but nowhere near as serious as it was in April in May. For example, last week the UK had 449 deaths compared with a death rate between 3,000-6,000 during the worse of the pandemic.

Final UK manufacturing PMI came in at 53.3 vs. 53.6 preliminary. Services and composite PMIs will be reported Wednesday, followed by construction Thursday. The Bank of England meets Thursday. Given the recent spike in virus numbers, the UK outlook has gotten cloudier since the June meeting, when it sounded relatively upbeat. We believe the BOE will have to acknowledge this with a stance closer to Fed Chair Powell’s more sober outlook.

Eurozone reported firmer final manufacturing PMIs. As expected, Spain and Italy improved sharply from June to 53.5 and 51.9, respectively. France and Germany improved from the preliminary readings to 52.4 and 51.0, respectively, which led the headline eurozone number to improve to 51.8 from 51.1 preliminary. Final services and composite PMIs will be reported Wednesday, with Spain and Italy again expected to improve sharply from June.

Manufacturing PMIs across CEE countries also continued to improve in July. Poland, in particular, posted a 52.8 reading, well above expectations and a healthy bounce from the 47.2 reading in June. This bodes well for the EU recovery as a whole given the export-side improvement, implying a better outlook for German industrial demand as well. Hungry remained in expansionary territory (50.8). Czech Republic disappointed with a reading for 47.0 vs. expectations for a 48.8 print, but it’s still on an improving trend.

ASIA

Japan final Q2 GDP remained steady at -2.2% SAAR vs. -2.8% expected. However, final July manufacturing PMI came in at 45.2 vs. 42.6 preliminary. The recovery remains uneven. For now, the Bank of Japan is on hold but we see scope for further fiscal stimulus if the recent lockdowns hurt the growth outlook.

Caixin July China manufacturing PMI came in stronger than expected. It was expected to drop a tick to 51.1 but instead jumped to 52.8. The underlying components also looked good, indicating a recovery in domestic and some external demand, though the latter remains weaker. Note that official manufacturing PMI came in last week at 51.1 vs. 50.8 expected. Caixin reports services (57.9 expected) and composite readings Wednesday. Here, the official non-manufacturing PMI came in last week at 54.2 vs. 54.5 expected.