Dollar-Bloc Tumbles, Euro and Yen Little Changed

forex screen marc

  • New Zealand announced new lending limits on property purchases, which frees up monetary policy that can be used to support the economy
  • Minutes from the recent RBA meeting reinforce ideas that a soft Q2 CPI report next week could see the a rate cut delivered next month as well
  • Slightly firmer than expected UK CPI did not impact interest rate expectations and did nothing for sterling
  • The North American session features US June housing stands and permits
  • Turkey’s central bank meets and no change in the 7.5% benchmark rate is expected; Moody’s put Turkey’s Baa3 rating on review for a downgrade

 

The dollar is broadly firmer against the majors. The yen is outperforming while the Antipodeans are underperforming. EM currencies are mostly weaker. CNY and KRW are outperforming while MYR and ZAR are underperforming. MSCI Asia Pacific was flat, even with the Nikkei rising 1.4%. MSCI EM is down 0.2%, with Chinese markets down around 0.4% and Turkish equities up 1%. Euro Stoxx 600 is down nearly 1% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is down 3 bp at 1.55%. Commodity prices are mixed, with oil down modestly, copper flat, and gold up 0.3%.

The US dollar is sporting a firmer profile today, but it is not the driver. Heightened speculation that Australia and New Zealand may cut interest rates next month is pushing those respective currencies more than 1% lower today. The Canadian dollar is being dragged lower (~0.5%) in what looks to be primarily sympathy, but it had seemed vulnerable to us in any event.

Sterling is trading heavily as well, and it was even before the inflation gauges were reported, which were a little firmer than expected. Despite today’s slippage, sterling is trading within yesterday’s range, which is within last Friday’s.

The euro and yen are little changed. The consolidation evident in sterling is also manifest in the euro. The single currency is within yesterday’s range, and that was inside last Friday’s range. The greenback initially ticked higher in Asia, and the Nikkei bucked the regional fall to extend its recent nearly 1.4%. The performance of Japanese stocks seemed to be a little catch-up after the Monday holiday, but also the anticipation of new fiscal and monetary support has seen sentiment toward Japanese equities improve.

European stocks are moving lower, with the Dow Jones Stoxx 600 off 1% near midday in London after setting a three-month high yesterday. All the main industry groups are lower, with the materials and financials off the most. European bond yields are 1-2 bp lower, and the US 10-year Treasury yields are 3 bp lower at 1.54%.

There are five macro-developments to note today ahead of the North American session:

  1. New Zealand announced new lending limits on property purchases, which frees up monetary policy that can be used to support the economy. The new measures (including a 40% deposit on new purchases) go into effect 1 September. Investors understand that this macro-prudential step increases the risk of a rate cut (from about 40% a week ago to around 75% now) at the August 11 RBNZ meeting.
  2. Minutes from the recent Reserve Bank of Australia meeting reinforce ideas that a soft Q2 CPI report next week could see the a rate cut delivered next month as well. Indicative pricing in the derivatives market imply about a 60% chance of a 25 bp cut, up from 45% last week. The $0.7490 area, which the Australian dollar has tested in the European morning, represents a 50% retracement of the post-UK referendum bounce, while $0.7475 is a 38.2% retracement of the larger rally since late-May.
  3. Slightly firmer than expected UK CPI did not impact interest rate expectations and did nothing for sterling, which was already trading with a heavier bias within the ranges of the past couple of sessions. The headline CPI rose 0.5% from a year ago. Most expectations had been for a 0.4% increase after 0.3% in May. A key factor was the 11% increase in airfare, which also helped lift the core rate to 1.4% (from 1.2%). The data was mostly collected before the referendum and the Europe 2016 football may have been a distorting factor. Sterling reached a high yesterday, as the London markets were closing, near $1.3315. Today’s low was set in early European turnover just ahead of $1.3170. The middle of that range, roughly $1.3240, may offer intraday resistance.
  4. The German ZEW measure of investor confidence deteriorated in July by more than expected, and the UK referendum is the likely culprit, though the news about the country’s largest bank may not have been helpful. The assessment of the current situation tumbled to 49.8 from 54.5. It is the lowest since April. The larger impact was seen in terms of forward looking expectations. It fell to -6.8 from 19.2. Many expected to have only been halved. Expectations are at their lowest level since Q4 12. Perhaps what illustrates the magnitude of the swing in sentiment is the fact that the June read was the highest in nearly a year.
  5. The ECB bank lending survey was reported. The survey was conducted between June 14 and June 29, so a few days after the referendum were captured. It reported that loan terms improved and demand increased. It did not seem to find much impact from the UK referendum and cited competitive pressures as the main factor behind the easing of credit standards to companies and households. The new TLTROs were seen by the banks as bolstering their profitability and translating into more relaxed lending terms. However, moving forward, banks anticipated that the regulatory/supervisory requirements would have a net tightening impact in H2. For its part, the euro seems to be comfortable in the range seen before the weekend between $1.1025 and $1.1150, with the ECB meeting on Thursday looming.

The North American session features US June housing stands and permits. A small increase in both (0.2% and 1.2%, respectively) is expected. It is unlikely to have much market impact. If the report is as anticipated, it will be part of a string of recent reports that show the US economy finished Q2 on a firm note. This is consistent with the NY Fed GDP tracker that has the US economy accelerating in Q2 and Q3 after a two-quarter slow patch. The Dollar Index is at the upper end of the range seen in Q2. A move above 97.25, if sustained, would lift the medium-term outlook.

Turkey’s central bank meets and no change in the 7.5% benchmark rate is expected. However, it may cut the overnight lending rate by 25 bp to 8.75%. Yet markets are split here. Of the 21 analysts polled by Bloomberg, 7 see no change in the overnight lending rate, 7 see a 25 bp cut, and 7 see a 50 bp cut. New CBT Governor Cetinkaya will be under pressure to ease more aggressively. However, lira weakness stemming from the coup attempt complicates matters since it will likely push inflation higher in Q3.

Meanwhile, Moody’s put Turkey’s Baa3 rating on review for a downgrade. The agency cited the failed coup as a major factor, noting that it would likely “exacerbate challenges” already in place.   We believe a downgrade is long overdue, as our own sovereign ratings model shows Turkey as a BB/Ba2/BB credit. Both Moody’s and Fitch were premature in upgrading Turkey to investment grade, but even S&P’s more conservative BB+ rating seems at risk. Deteriorating fiscal and external balances coupled with worsening political risk are likely to be the triggers for a downgrade this year.