The In-Between Week
• The Delta variant and weather volatility appears to have dampened economic activity in recent weeks.
• The regional Federal Reserve GDP-trackers have picked this up faster than many economists have been able to adjust their forecasts.
• The US CPI may have stabilized at elevated levels, while retail sales may have fallen for the third time in the past four months.
• While the formal emergency has been extended until the end of September in Japan, the focus is on the LDP leadership challenge and the likelihood of a large supplemental budget in Q4.
• The base effect warns of more upward pressure on UK inflation. Labor market readings may not be “clean” until the furlough program ends on September 30.
The US dollar enjoyed a firmer bias last week despite the disappointing jobs growth reported on September 3. The Norwegian krone was the only major currency that gained against the greenback. Brent was less than a quarter of a dollar firmer, so the likelihood of the central bank raising rates later this month offers a more compelling explanation. The Australian dollar was the weakest, even though the Reserve Bank of Australia signaled it would proceed with plans to reduce its bond purchases this month. The JP Morgan Emerging Market Currency Index fell by nearly 0.5%, its first decline in three weeks.
The macro highlights are the rash of US and Chinese data. For the US, the releases include CPI, retail sales, and industrial production. For China, the data includes retail sales, industrial production, capex, and unemployment. Canada and the UK also report their latest inflation figures. The UK also sees an employment update and retail sales. Australia reports August jobs data as well. There are no major central bank meetings next week, but the following week, several major central banks meet (the Fed, BOJ, BOE, and Sweden and Norway’s central bank) and several emerging market central banks (Hungary, Turkey, South Africa, and Brazil) are in play.
Norway heads to the polls on Monday, September 13. Erna Solberg, who has led the Conservative Party since 2004 and has been Prime Minister since 2013, will likely be denied a third term. Instead, voters look to allow the Labour Party to forge a coalition. Although Solberg was given high marks on handling the pandemic (Norway has one of the lowest mortality rates related to Covid-19 in Europe), she has fallen afoul of a backlash against economic disparities and unpopular public sector reforms. Labour is running on a platform calling for tax relief for the low and middle class, an end to the privatization of public services, and more funds for public health. In addition, it calls for an income tax hike on the top 20% of incomes.
We suspect that the dollar will trend higher in the run-up to the FOMC meeting, where a clear signal of the Fed’s tapering intentions is expected. The seven Fed officials who in June thought a hike may be appropriate next year may have persuaded a colleague or two.
Dollar Index: The Dollar Index recovered from the brief dip below 92.00 but stalled last week at the (50%) retracement of the down move near 92.85 that began on August 20 from slightly above 93.70. A break of the 92.30 area could signal a retest on the recent lows. The MACD has flatlined, while the Slow Stochastic turned up from oversold territory. It probably requires a move above 93.20 to truly signal a breakout. For a little better than two months, the bulk of the time, the Dollar Index has been in a 92.00-93.00 range, and it finished last week near the middle of it.
Euro: The single currency pulled back to almost $1.1800 last week after briefly poking above $1.19 in the immediate response to the US jobs data. This met the (38.2%) retracement objective of the euro’s recovery since the year’s low was recorded on August 20 near $1.1665. The next retracement (50%) is around $1.1785, which is also where the 20-day moving average is found. Below there is a band of support in the $1.1725-$1.1750 area. On the upside, we note that the $1.19-area did not just hold last week, but it held in late June/early July on several attempts. It also held in the first half of July. The euro has not closed above $1.19 since June 28. And days ahead of when the FOMC could announce it will begin tapering in Q4, it does not seem like the time to play an upside break out. In recent days it has struggled at $1.1850. The MACD is flat, and the Slow Stochastic has curled lower.
Japanese Yen: The dollar-yen rate often seems to be a rangebound creature, and when it looks like it is trending, it frequently is moving to a new range. The five-, 50-, and 100-day moving averages converge between JPY109.80 and JPY110.00, which is the middle of the JPY109-JPY111 range that has dominated since late May. Most recently, it has hardly moved more than half a yen away from the middle of the range that centers on JPY110.00. The momentum indicators are not particularly helpful here. The prospect of a Fed tapering announcement may encourage dollar buying on pullbacks. This could provide a higher floor for the dollar, but the markets react more to surprises, and the market has been primed for greater guidance on the pace of the Fed’s bond purchases.
British Pound: Perhaps encouraged by BOE Governor Bailey’s revelation that four of the eight MPC members last month thought the minimum (though not sufficient) conditions for a rate hike existed, sterling recovered from the $1.3730 area to test $1.39 ahead of the weekend. The implied yield of the June 2022 short-sterling futures contract (three-month deposit rate) rose 4.5 bp last week. The MACD is gently rising, while the Slow Stochastic has flatlined before getting over-extended. The $1.3900 area has proved formidable, and cable has not moved above it in a month. Even if it were to break, the proximity of the more important cap at $1.40 would keep momentum traders cautious. Despite a poor July GDP report ahead of the weekend, initial support around $1.3825 held.
Canadian Dollar: It is not Canada’s fault that its currency lost a little more than 1% against the US dollar last week. The Bank of Canada said the right things. The economy is stronger than the optics of the unexpected contraction in Q2. Final domestic demand (excludes trade and inventories) points to underlying strength. It stuck with its anticipation that the output gap would close around the middle of next year. The data was good. The Ivey PMI jumped to 66.0 from 56.4. The employment report ahead of the weekend showed 68.5k full-time positions were created, and the unemployment rate fell to 7.1% from 7.5%. Instead, after falling to a three-day low near CAD1.2585, the US dollar rebounded to new session highs in the last few hours of the week’s activity. Time ran out before the greenback could establish a hold above CAD1.2700. If it does, it could target the CAD1.2775-CAD1.2800 area. The Slow Stochastic turned higher. The MACD has turned higher from the middle of the range, but the angle of ascent is flattish. The short-term rate differentials barely moved, oil edged up with the October WTI contract rising for the third consecutive week and knocked on the $70-level ahead of the weekend. It was the sharp sell-off in stocks that prevented the Canadian dollar from getting any traction. The S&P 500 begins the new week with a five-day drop in tow. The weekly loss of 1.7% was the largest in 2.5 months.
Australian Dollar: The Aussie posted an outside down day last Tuesday and consolidated Wednesday and Thursday. The attempt to recoup the $0.7400-threshold was rebuffed ahead of the weekend. The bears took it from $0.7410 back to $0.7360. Last week’s low was near $0.7345, which was a little shy of the (38.2%) retracement (~$0.7335) of the rally since the August 20 low ahead of $0.7100. A break would target the $0.7290-$0.7300 area and then $0.7250. A particularly poor August jobs report due first thing on September 16 in Australia or the positioning ahead of it could be the catalyst. The momentum indicators are moving lower. It fell by about 1.3% last week after rising by about 4.5% in the previous two weeks.
Mexican Peso: For the past five sessions, the dollar has been confined to the range set on September 3 (~MXN19.8500-MXN19.9850). Still, the dollar has only risen in one of the past 11 sessions. It is not surprising then that the momentum indicators are stretched while the greenback posted its lowest close over a month ahead of the weekend. Ironically, the peso’s 0.25% gain last week put it in the top four emerging market currency performers and the only one in the region to rise. A break of MXN19.85 may spur a test on MXN19.80. A push below MXN19.80 could be an opportunity to buy dollars. Rising commodity prices have done little for the other Latam currencies, where political considerations appear more salient. Trendline support for the dollar near BRL5.1450 held ahead of the weekend. It could signal a retest on the BRL5.31-BRL5.33 area.
Chinese Yuan: Before the weekend, the dollar settled at its lowest level against the yuan since mid-June near CNY6.4445. Is this a breakout? We suspect it is a head-fake. With mounting evidence that the growth impulses have faded (and more in the coming days), now does not appear to be the ideal time to embrace currency appreciation. An appreciating currency might help blunt the cost of imports (+33% year-over-year in August), but the existence of long-term contracts reduces the sensitivity, and it is a blunt instrument in any event. Reinvigorating the expansion is more important than leaning against inflation, where the CPI rose by less than 1.0% year-over-year in August. China’s CSI 300 rose by 3.5% last week, while Hong Kong’s Hang Seng, where many mainland companies are listed, rose by almost 2%, and the NASDAQ Golden Dragon China Index fell 2%. For the first time in 4-5 months, the dollar fell for the third consecutive week. We expect the dollar to move back into the CNY6.45-CNY6.50 band.
Bannockburn Global Forex