Dollar Softer as Calm Remains in the Markets

White House Postage

  • Markets remain calm as warnings of a Lehman moment appear overdone
  • We are in a consolidative market now as the foreign currencies claw back some of their recent losses
  • During the North American session, the US reports May personal income and spending, core PCE, and pending home sales
  • Another terrorist attack in Turkey has had limited impact on the markets
  • Elsewhere, Korea announced KRW20 trln ($17 bln) in fiscal stimulus

The dollar is mostly softer against the majors as the calm continues in the global financial markets. The Antipodeans are outperforming while the yen and the Swedish krona are underperforming. EM currencies are mostly firmer. ZAR and KRW are outperforming while PHP and RUB are underperforming. MSCI Asia Pacific was up 1.7%, with the Nikkei rising 1.6%. MSCI EM is up 1.4%, with Chinese markets rising around 0.5%. Euro Stoxx 600 is up 2.4% near midday, while S&P futures are pointing to a higher open. The 10-year UST yield is down 1 bp at 1.45%. Commodity prices are mostly higher, with oil up 1%, copper flat, and gold up 0.4%.

Last night, Fed Governor Powell spoke. Whilst sounding fairly upbeat about the US outlook, he did acknowledge that the Brexit vote had the potential to create new economic headwinds. Powell noted that financial conditions have tightened since the vote, but added that “we’re a long way from having another financial crisis.” Indeed, the Fed today will announce the results of the second part of its bank stress tests. While there may be some outliers, the global financial system is in better shape as a result of the Great Financial Crisis.

Perhaps it is this growing realization that has helped markets stabilize. Some Chicken Littles warned of another Lehman moment if Brexit passed, and markets seemed to be pricing this in on Friday and Monday. We disagree, and believe that the Great Financial Crisis is a (hopefully) once in a lifetime event.

Indeed, the Fed easing that had been priced into Fed Funds futures markets post-vote has now basically evaporated. Still, we are now at a juncture where markets are not pricing in any Fed tightening until 2017, and even that is a low odds event. It’s not until the end of 2018 that the market is fully pricing in the first rate hike.

We are in a consolidative market now as the foreign currencies claw back some of their recent losses. Yet it is premature to say that the worst is over for sterling. The timing and extent of actual Brexit is unknown, as are the economic repercussions. Until those become known, we think any bounce in the foreign currencies is likely to be limited.

The macro data seem pretty meaningless right now, but some prints are worth repeating. German GfK consumer confidence came in at 10.1 in July vs. 9.8 expected, but clearly does not reflect the impact of the Brexit vote. Germany also started reporting state CPI data for June, with the nationwide reading expected shortly at 0.3% y/y. Despite the risks from the Brexit vote, it seems unlikely that the ECB would consider any further stimulus until late in the year, perhaps Q4.

During the North American session, the US reports May personal income and spending, core PCE, and pending home sales. None of these are expected to be market-moving. Indeed, one could argue that the June jobs data next week may not have much impact on the markets either. Bloomberg median forecast is 180k vs. 38k in May, and one could argue that it will take more than one strong number to change the increasingly dovish take on the Fed.

Another terrorist attack in Turkey has had limited impact on the markets. President Erdogan blamed ISIS for the deadly attack, but so far no group has taken responsibility for it. Turkish stocks are down, with tourism-related sectors hit the most. The lira is up slightly on the day, however, and remains below the 2.90 level.

Elsewhere, Korea announced KRW20 trln ($17 bln) in fiscal stimulus. The government also cut its growth and inflation forecasts for 2016. The BOK surprised markets with a rate cut this month, which was clearly not a “one and done” move. The next policy meeting is July 2014, and odds of another cut then have risen. Indeed, we have noted that the Brexit risks are likely to keep most EM policymakers in dovish mode.

Brazil reports June IGP-M wholesale inflation, which is expected to accelerate to 12% y/y from 11.1% in May. With price pressures picking up, markets are rethinking the likely start of an easing cycle at the July 20 meeting. The next one after that is August 31, and the CDI market is now putting more stock in the August meeting rather than July. Brazil also reports consolidated budget data for May, with a primary deficit of –BRL17.1 bln expected. Note that the central government budget data yesterday came in close to expectations, while the 12-month total still rose to a record –BRL145.2 bln.