Dollar Rides High
• The US dollar remains bid and has set new highs for the year against the dollar-bloc. The FOMC minutes seemed to provide encouragement for the market to push in the direction it was moving.
• Equities and commodities have tumbled. Covid-related demand concerns, Fed tapering later this year, China’s actions to curb steel output and its regulatory campaign have taken a toll.
• Despite a large central bank balance sheet, large deficit and debt, Japan continues to wrestle with deflation.
• UK retail sales unexpectedly fell and the 2.5% drop last month was the most since January.
• The US economic calendar is light today and the main report in North America will be Canada’s June retail sales. A strong bounce is expected after a dismal May report. The Canadian dollar has lost more than 3% this week. The exchange rate is more than three-standard deviations from the 20-day moving averaging, illustrating the extent of the five-day slide and that looks overdone.
Overview: Even shallow dollar dips appear to have been bought. The Federal Reserve’s confirmation that it most likely will begin tapering later this year has pushed the greenback further in the direction it was going. The contagion coupled with purposeful efforts to curb steel output in China saw industrial commodities slide. The currencies hardest hit were those whose central banks seemed to be ahead of the Fed, including the dollar bloc and Norwegian krone. US equities recovered smartly yesterday from gap lower openings but failed to help stabilize the Asia Pacific and European shares today. Hong Kong, China, and South Korea led today’s retreat, and the MSCI Asia Pacific Index fell for the fourth week in the past five. Europe’s Dow Jones Stoxx 600 is posting its first back-to-back daily loss in nearly a month, and it will record its first weekly loss in five weeks. US futures are under pressure. Benchmark 10-year yields are soft. The US yield is hovering around 1.23%, off about three basis points for the week. European core yields are off nearly as much while peripheral yields fell by less. The dollar remains king, though the yen and Swiss franc continue to show some resilience as funding currencies strengthen as the other assets weaken. Canada and Norway lead today’s move. On the week, the dollar-bloc currencies and the Norwegian krone have depreciated by more than 3% against the greenback. The JP Morgan Emerging Market Currency Index is off for the fifth consecutive session. Its loss of 1.4% for the week ahead of the Latam open would be the largest drop in two months. Gold is little changed on the day and week, while crude oil is extending its fall for the seventh consecutive session. September WTI is near $63.50, off a little more than 7% for the week. Recall it settled last month slightly below $74. China’s iron ore contract continued its plunge, off 8% this week to bring the five-week slide to around 25%. Copper is trying to snap a four-day slide, though, near $406, it is off over 7% for the week. The CRB Index also has a four-day decline in tow coming into today, nursing a 3.6% decline, for the week, which, if sustained, would be the largest since last October.
Despite a central bank balance sheet that has swelled to more than 100% of GDP and government gross debt of more than 200% of GDP, Japan continues to wrestle with deflation. The June head and core CPI readings of 0.2% were previously revised to -0.5%, each reflecting a technical adjustment to the basket. Today’s July report showed the headline rate at -0.3% and the core rate at 0.2%. When energy is excluded from the core measure, which drops fresh food prices, deflation pressures moderated to -0.6% from the decade-low -0.9% in June. Separately, we note that Japan’s vaccination efforts have stepped up after a frustratingly slow process, and more than 40% have been fully inoculated. Prime Minister Sugar wants to surpass the 50% mark by mid-September. Astonishingly, Japan could pass the US late next month or early October.
China kept its Loan Prime Rate steady as it has not activated this policy lever. Still, many expect another cut in reserve requirements in Q4. Beijing’s efforts to rein in domestic forces have seen new rules about handling personal user data. The National People’s Congress deferred its vote to impose anti-sanctions law on Hong Kong.
The dollar is trading quietly against the yen and has been confined to about 15 ticks on either side of the roughly JPY109.75 settlement. It is trading comfortably inside yesterday’s range. The week that has seen the US dollar trade broadly higher is practically flat against the yen. While the virus has spread in Japan, Australia, and New Zealand, the latter two currencies have been punished. Both are off 0.3%-0.4% today to bring the cumulative loss to over 3% for the week. The Aussie has been sold to almost $0.7100 today. The next important technical targets are in the $0.7000-$0.7050 area. The New Zealand dollar has approached $0.6800 today after finishing last week near $0.7040. The next significant target is around $0.6700. Today, the greenback edged higher against the Chinese yuan and is flirting with the upper end of its two-month range near CNY6.50. Above CNY6.5125, last month’s spiked high, there is little of importance until CNY6.55. The PBOC set the dollar’s reference rate at CNY6.4984 today, a smidgeon above the CNY6.4980 median estimate in Bloomberg’s survey.
UK July retail sales were sorely disappointing. As economists expected, rather than rising by 0.2%, they tumbled by 2.5%, the biggest decline since January. And, adding insult to injury, the June series was revised lower to 0.2% from 0.5%. Of course, such a large miss is looked at with jaundiced eyes. Some suggest that the end of some social restrictions allowed the consumption of services that are not picked up in retail sales and blame the inclement weather for the depressed high street sales. That said, internet retail sales fell by about 0.5%, the fourth consecutive month they have slowed and are off about 15% over the period. Others tried to cushion the sting by looking forward to improved sales this month as employees may have updated their wardrobe ahead of ostensibly returning to the office next month.
The euro made a marginal new low for the year against the Swiss franc yesterday, and as European markets opened, it began recovering. The euro reached almost CHF1.0740 in North America. In fact, the recovery was nearly complete by the time that US equity markets opened and before they managed to fill their opening gaps. The euro was sold back to CHF1.07 today in Asia but again bounced in early European activity. It would not be surprising to learn that the Swiss National Bank had a hand in it. Recall that during the cross drifting in March and April, the sight deposits slipped, but as pressure on the cross mounted, sight deposits rose every week in May and June. The euro fell by 2% in July, the biggest monthly decline since May 2019, but sight deposits fell slightly. In the first two weeks in August, Swiss sight deposits have jumped by the most since May, and our guess is that when this week’s series is reported on Monday, another strong increase will be shown. The six-year lows were set in April and May 2020 slightly above CHF1.05. Also, when the SNB intervenes by buying euros, it later is understood to sell some of the euros for dollars.
The euro is barely holding above yesterday’s low, near $1.1665. It is shaping up to be the first session since November 2 that it has not traded above $1.17. Large option expirations there yesterday made for a bit of a battle over it, but today, it has not been above $1.1690. There are another set of options for around 880 mln euros at $1.17 that will be cut today. Although the pace of the euro’s decline is surprising, the next key chart points are clearer: $1.1650 and then $1.1600. Sterling has approached $1.3600. Last month, on an intraday basis, it reached a low near $1.3570. The year’s low was recorded on January 11 near $1.3450. Initial resistance is now seen around $1.3650.
The US economic diary is light today. Next week’s high-frequency data include the preliminary August PMI, new and existing home sales, another look at Q2 GDP, and an initial estimate of July durable goods orders, and July personal income and consumption figures. The FOMC minutes showing that most Fed officials see tapering likely later this year may steal a little thunder from Fed Chair Powell’s virtual presentation there. Like those private-sector economists use, the Fed’s models may show that non-farm payrolls may be rising by around 750k this month.
Canada reported June retail sales data today. A strong recovery is expected after sales fell by 2.1% in May. However, it may not offer the Canadian dollar much help, given the deterioration of risk sentiment. We usually identify three drivers for the exchange rate: risk appetites, for which we use the S&P 500 as a proxy, commodity prices, for which we use oil as a proxy, and interest rate differentials, where we rely on the two-year differentials. Equities and oil have headed south, and the two-year differential is virtually flat this week. This week, the Canadian dollar’s nearly 3.2% loss will be the largest weekly loss since March 2020 if sustained.
Mexico and Brazil’s economic calendars are quiet ahead of the weekend. In Mexico, President AMLO insists on using the $12 bln of the IMF’s SDR allotment to pay down the country’s debt. Central bank Governor Dia de Leon, whose term ends will be replaced by the previous finance minister early next year, is balking at AMLO’s proposal. He insists that the government must buy the SDRs (reserves) from the central bank. Meanwhile, the income tax reform bill in Brazil is stalling. The lower house is expected to vote on it next month, but many lawmakers reportedly are seeking changes given the strong opposition. Many fear that the election, which is still 13-months away, will also limit the legislative initiatives going forward.
The Canadian dollar is falling for the fifth consecutive session. The greenback finished last week near CAD1.2515 and has approached CAD1.2950 today. This puts the US dollar at slightly more than three standard deviations from the 20-day moving average. The Bollinger Band is set at two standard deviations, illustrating the magnitude of the overshoot. Today’s advance has lifted the US dollar to its best level of the year. The next technical objective is the CAD1.3000-CAD1.3025 area, which houses the (38.2%) retracement of the US dollar’s sell-off since the pandemic high in March 2020 near CAD1.4670. The Mexican peso is also off for its fifth consecutive session. The dollar has pushed above MXN20.27 after settling last week slightly below MXN19.88. The next important chart point is seen closer to MXN20.35 and then MXN20.50. We had suggested the dollar could head toward BRL5.50, and it seems to still be a reasonable near-term target.
Bannockburn Global Forex