Dollar Mixed as Markets Search for Direction

road in the wilderness marc

  • The UK political outlook remains in flux
  • Markets were a little spooked by a newswire report that the PBOC is willing to let the yuan weaken this year to 6.8 per dollar
  • During the North American session, the US reports weekly jobless claims and the June Chicago PMI
  • Taiwan’s central bank cut rates 12.5 bp to 1.375%, as expected; Czech National Bank is expected to keep policy steady; Banco de Mexico is expected to hike rates 25 bp to 4.0%

The dollar is mixed against the majors as markets ponder the next move. The Swiss franc and the euro are outperforming while the Loonie and the Swedish krona are underperforming. EM currencies are also mixed. KRW and THB are outperforming while RUB and IDR are underperforming. MSCI Asia Pacific was up 0.9%, with the Nikkei rising 0.1%. MSCI EM is up 1.1%, with Chinese markets basically flat. Euro Stoxx 600 is up 0.1% near midday, while S&P futures are pointing to a flat open. The 10-year UST yield is up 1 bp at 1.52%. Commodity prices are mixed, with oil down 1%, copper up 0.2%, and gold down 0.1%.

The UK political outlook remains in flux.  Labour’s deputy labor Tom Watson urged Corbyn to step down, joining similar calls by former party leader Ed Miliband and former PM Gordon Brown.  Yet Corbyn shows no sign of capitulation and he is right to say that any rivals should issue an official leadership challenge.

On the other side of the aisle, the so-called “Brexit Bromance” between Gove and Johnson is over, with the former calling the latter basically unfit to become PM.  For now, leadership of the Tories is race will be contested by many.  Besides Gove and Johnson, Home Secretary Theresa May, Energy Minister Andrea Leadsom, Work and Pensions Secretary Stephen Crabb, and former Defence Secretary Liam Fox have all thrown their hats into the ring.  Not that the bookmakers have any great insight (Bremain, anyone?), but a major one has May as the favorite, followed by Gove in second place and Johnson in third.

UK GfK consumer confidence came in at -1 in June vs. -2 expected.  However, the impact of the Brexit vote wouldn’t be fully reflected in this monthly reading.  Daily trackers of sentiment have fallen to their lowest levels in over two years.  Ongoing uncertainty should see these falls sustained, if not deepened.  Final UK Q1 GDP growth was unchanged from the 2.0% y/y preliminary reading, while Q1 current account gap came in at –GBP32.6 bln vs. –GBP28 bln expected.  But this is all backward-looking.  What’s more important is how the Q3 data come in.

Indeed, it will likely take a few weeks before the shock feeds into economic reports.  Expectations for a BOE rate cut as early as next month (July 14) have risen.  From the high point last week to the low point at the start of this week, the implied yield of the September short-sterling (three-month deposit) fell 20 bp.  They have recovered about 5 bp.  Many economists are projecting a UK recession.

Markets were a little spooked by a newswire report that the PBOC is willing to let the yuan weaken this year to 6.8 per dollar.  The report cited unidentified sources.  With the yuan trading around 6.65, that would imply another 2.2% move.  As it stands, the yuan has weakened about 2.3% against the dollar and so the implied depreciation for H2 would simply match what we’ve seen in H1.  Hardly earth-shattering.  If the dollar rallies in H2, we would expect the yuan to reflect this.

Elsewhere, German retail sales rose 0.9% m/m in May vs 0.6% expected, while French consumer spending fell -0.7% m/m vs. an expected flat reading.  German unemployment was also reported for June at  6.1%, as expected.  Eurozone CPI rose 0.1% y/y vs. expectations for a flat reading, while core CPI rose 0.9% y/y vs. 0.8% expected.  Overnight, Japan reported much weaker than expected IP data for May, at -2.3% m/m vs. -0.2% expected.

During the North American session, the US reports weekly jobless claims and the June Chicago PMI.  Canada reports April GDP, which is expected to grow 1.4% y/y vs. 1.1% in March.  The Fed’s Bullard speaks today in London.

Taiwan’s central bank cut rates 12.5 bp to 1.375%, as expected.  The economy is basically in recession, and so policymakers are likely to use both monetary and fiscal stimulus in the coming months to boost the economy.

The Czech National Bank meets and is expected to keep policy steady.  This will be the last meeting under outgoing Governor Singer.  Deflation persists, but we do not think that incoming central bank Governor Rusnok will be in any hurry to ease policy again.  However, we suspect that any significant negative fallout from Brexit could delay the exit from the koruna cap, which is currently slated to end around mid-2017.

Banco de Mexico meets and the median forecast is for a 25 bp hike to 4.0%.  However, the market is split.  Of the 25 analysts polled by Bloomberg, 9 see no change, 11 see a 25 bp hike, and 5 see a 50 bp hike to 4.25%.  We think it will stand pat, especially with the peso firming from the post-Brexit lows.