• The US dollar is narrowly mixed in quiet turnover after selling off ahead of the weekend following Fed Chair Powell’s effort to thread a needle by confirming tapering is likely before the end of the year, while separating the decision from a hike in rates.
• The pandemic appears to be undermining confidence in Europe, but also impacting high-frequency data in the US, including confidence, restaurant bookings, air travel, and consumption intentions.
• Japan’s retail sales surprised to the upside, but data starting tomorrow, including employment and industrial output, are expected to show that with areas covering more than 70% of the population in formal states of emergency, the economy remains hobbled.
• German August inflation appears in line with expectations, while Spain surprised to the upside. The aggregate figures are due tomorrow. The headline rate is expected to rise to 2.7% from 2.2%.
• The highlight for the week for US data is the monthly nonfarm payroll report on Friday. The median forecast in Bloomberg’s survey is for a 750k increase.
Overview: There has been some follow-through activity after Fed Chair Powell’s pre-weekend Jackson Hole comments, which confirmed the likely tapering ahead of year-end while underscoring the distinction between taking one’s foot off the accelerator gradually and stepping on the brake. The record closes in US benchmarks helped lift Asia Pacific equities today. The MSCI Asia Pacific Index rose 3.3% last week, the most in six months, and extended those gains today with several markets, including the Topix, Taiex, and benchmarks from India, Thailand, and Indonesia, rising more than 1%. European shares are edging higher, and the Dow Jones Stoxx 600 has risen for five of the past six weeks. US futures indices are posting small gains. The US 10-year yield is hovering around 1.30%, while European yields are slightly firmer. The dollar is mixed. Norway and Canada are trading a little higher while the other dollar-bloc currencies and the Swedish krona are softer. Disappointing Swiss confidence survey and signs that the SNB did not intervene last week (sight deposits little changed) is weighing on the franc against the dollar and euro. The JP Morgan Emerging Market Currency Index extended last week’s 1.4% gain, its most in three months. Gold poked through $1823 briefly before succumbing to selling pressure. Initial support may be seen near $1810. The Category 4 storm that has shut Gulf drilling and refining activity in the US sent crude higher initially, and the October contract reached almost $69.65 before reversing lower. Support may be in the $67.50. Iron ore in China continued to recover. It rose for the sixth consecutive session. It added 2.5% to last week’s 8.4% advance. Copper rallied 4.4% last week and is up around 0.8% near midday in Europe.
Japan’s July retail sales were stronger than expected. The 1.1% rise was nearly three times more than expected and comes on the back of the 3.1% gain in June. However, the data due in the next few days will serve to keep any optimism in check. Tomorrow, employment and industrial output reports will likely show more economic weakness, and the final August PMI will confirm sub-50 composite reading. The BOJ does not meet until late in September but is expected to downgrade its economic assessment in the wake of the extension of the formal state of emergency that covers more than 70% of the population.
China’s PMI reports are out tomorrow, and the world’s second-largest economy is expected to have slowed further. Beijing’s offensive extended to reining how businesses advertise financial services to households (consumer protection) and threatens to punish those who republish foreign commentary on domestic financial topics without taking a stance. It appears to also be tightening online game service rules for minors, limiting access to one hour a day for teenagers on Friday, Saturday, and Sunday.
Before the weekend, the dollar traded on both sides of Thursday’s range and closed below Thursday’s low. The outside down day saw minor follow-through selling that pushed the greenback to a three-day low near JPY109.70. It has not been above JPY109.90. The consolidative tone looks set to continue today. The Australian dollar posted an outside up day as well, and it too saw minor follow-through buying that lifted it to almost $0.7320, but it has been unable to maintain the upside momentum. It has drifted lower and is below $0.7300 near midday in Europe. An option for a little more than A$500 mln at $0.7300 is set to expire in North America later today. A break of $0.7280 may give $0.7260. The Chinese yuan reversed higher ahead of the weekend and edged higher today. The dollar fell to CNY6.4720 at the end of last week and reached CNY6.4655, its lowest level in three weeks today. The greenback has been with few exceptions in a CNY6.45-CNY6.50 range since the middle of June. The PBOC set the dollar’s reference rate at CNY6.4677 today. The Bloomberg survey showed a median expectation of CNY6.4658. The deviation is slightly wider than it has been, though Mondays may be tough to gauge.
The focus is on tomorrow’s preliminary EMU August CPI and the final PMI reading later in the week. Today, the eurozone reported confidence numbers. Some softening had been expected, but the decline was more than expected and across the board. It appears that the main driver is the spread of the delta variant of covid.
German states are reporting August inflation ahead of the national figure that will be released shortly. The key takeaway is that the states are seeing a flat to 0.1% increase, which is in line with expectations that the EU harmonized rate will rise by 0.1%, and due to the base effect, rise 3.4% from a year ago (3.1% in July). Separately, in the first debate yesterday, the SPD’s Scholz appeared to do well, and the SPD’s standing in the polls edged higher. Bookmakers are seeing the odds that Scholz is the next Chancellor rise above 50%. The election is on September 26.
Spain reported an unexpected jump in its August CPI. Economists had expected a flat report, and instead, prices rose by 0.4% on the month. The year-over-year pace rose to 3.3% from 2.9%. Spain also reported July retail sales. They look soft, with the year-over-year rate falling to 0.1% from 1.4% (initially 1.8%) in June. Spain does not have a flash PMI, and while softer figures are expected, the composite is forecast to hold above 60.
The euro reached $1.1810 in Europe, its highest level since August 6. However, trading has been quiet (low is about $1.1790), and there is little enthusiasm in either direction. There is an option for nearly 615 mln euros at $1.1800, but it appears to have already been neutralized. We note that the $1.1815 area corresponds to a (61.8%) retracement objective of this month’s decline. The next target is near $1.1850, but we suspect it may be too far away to be seen ahead of the eurozone inflation data, and especially the US ADP private-sector jobs estimate in the middle of the week. Sterling has been unable to rise through its pre-weekend high slightly above $1.3780. Instead, it is consolidating quietly above $1.3745. A push lower could see the $1.3700-$1.3720 area. The euro is inside its pre-weekend range against sterling and looks poised to try the GBP0.8600 cap again.
Hurricane Ida is wreaking havoc. More than 90% of the production and refining capacity has been shuttered. Estimates warn of $40 bln or more in damages. It usually takes 10-14 days after the storm passes for the oil and gas recovery to be complete. The storm hits as a plethora of reports show that the virus is slowing economic activity in the US. This is seen in consumer sentiment readings and spending plans, restaurant reservations, air travel, and the return to offices. In addition, illness and hospitalization rates have increased. Many observers are looking at highly vaccinated countries, like Israel and Ireland, and drawing parallels.
Today’s US data pales compared to the midweek ADP jobs estimate and the national figures at the end of the week. Pending July, home sales may have ticked up after a 1.9% decline in June. The Dallas Fed manufacturing survey is due, as well. The Fed regional surveys have been weaker than expected. Tomorrow, the focus shifts to house prices with the FHFA and Corelogic estimates due. Canada reports Q2 current account figures today. Canada has benefitted from favorable terms of trade shock during the pandemic. The four-quarter moving average is at its best level since 2009. The highlight of the week is the Q2 GDP print out tomorrow. A 2.5% annualized pace is expected after 5.6% in Q1. Mexico’s calendar is light today, ahead of tomorrow’s Banxico’s inflation report. Wednesday sees the important worker remittances and the IMEF surveys and PMI. Brazil reports Q2 GDP figures in the middle of the week alongside trade and PMI figures. Lastly, Chile is expected to raise rates by 50 bp tomorrow (to 1.25%).
The US dollar has marginally extended the pullback seen before the weekend against the Canadian dollar. The CAD1.2600 area, which holds the 20-day moving average, remains intact. An option for about $615 mln struck there is set to expire today. Last week’s low was set near CAD1.2580, and a break suggests a retest on CAD1.2500. The greenback has held the pre-weekend low against the Mexican peso (~MXN20.1735) and is straddling MXN20.20 near midday in Europe. The broad and choppy trading range between roughly MXN20.15 and MXN20.45 looks set to persist. Note that the dollar has fallen against the peso for the past five months but is set to snap the losing streak. It settled last month near MXN19.8675. The dollar traded below BRL5.20 before the weekend for the first time in around 2.5 weeks. However, it may have been premature. Initial resistance is seen near BRL5.27.
Bannockburn Global Forex