Dollar Weakens Post-FOMC Minutes

Washington DC marc

  • FOMC minutes were balanced, disappointing those looking for a more hawkish stance
  • During the North American session, the US reports weekly jobless claims, August Philly Fed survey, and July leading index
  • The UK reported firm July retail sales
  • The ECB will release its account of the July 21 meeting
  • Japan reported July trade data; Australia reported firm July jobs data
  • Chile reports Q2 GDP and current account data

The dollar is broadly weaker against the majors in the wake of the FOMC minutes. Sterling and the Swedish krona are outperforming while the yen and the Loonie are underperforming. EM currencies are broadly firmer. ZAR and MYR are outperforming while IDR and TRY are underperforming. MSCI Asia Pacific was down 0.4%, with the Nikkei falling 1.6%. MSCI EM is up 0.7%, despite Chinese markets falling 0.3%. Euro Stoxx 600 is up 0.6% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is flat at 1.55%. Commodity prices are mixed, with oil narrowly mixed, copper up 1.7%, and gold flat.

FOMC minutes yesterday were balanced. Because markets were looking for a more hawkish slant after NY Fed President Dudley’s comments, the dollar sold off afterwards in disappointment. Dudley speaks again today. While we could see some more headline-generated volatility, we doubt he can say anything new that would dispel market perceptions of a dovish Fed.

Indeed, the dollar has mostly given up its Dudley-generated gains. The euro is making new cycle highs near $1.1330, and appears to be on track to test the June 24 high near $1.1430. Dollar/yen traded briefly below 100 again, but has since recovered to move back above that level.

During the North American session, the US reports weekly jobless claims, August Philly Fed survey, and July leading index. None are expected to make much of an impact on the negative dollar sentiment. The initial claims will be of interest, as the reporting week is the one where the BLS conducts its survey for the monthly jobs report. The 4-week moving average for initial jobless claims has been creeping higher and last stood at 263k.

The UK reported firm July retail sales. Headline retail sales jumped 1.4% m/m vs. 0.1% expected, while ex-auto fuel rose 1.5% m/m vs. 0.3% expected. Data may have been distorted by warm weather and a jump in tourism. Still, this was the first July real sector reading to suggest that the negative impact of the Brexit vote may have been overstated. Inflation readings reported Monday and labor market data reported Tuesday were muted. The next BOE meeting is September 15, and the lack of any significant negative economic impact yet should keep it on hold then.

Sterling has responded accordingly and rose to its highest level vs. the dollar since August 5. A break above $1.3180 would set up a test of the August 3 high near $1.3370.

The ECB will release its account of the July 21 meeting. Judging from Draghi’s post-meeting press conference, not much of interest was discussed. It has been clear that the ECB has entered a “watch and wait” mode as it implemented its new TLTRO and corporate bond buying program. New staff forecasts will be made available next month. A cut in growth and inflation forecasts in the wake of the UK referendum may allow Draghi to win support to extend the bond-buying program another six months (to September 2017). We suspect Draghi will not be too happy with further euro strength, which works to tighten monetary conditions.

Japan reported July trade data overnight. Exports came in at -14.0% y/y vs. -13.7% expected, while imports came in at -24.7% y/y vs. -20% expected. The adjusted balance came in at JPY317.6 bln, nearly double the JPY167.7 bln surplus that was expected. The improvement was surprising. Historically, June is regularly an improvement over May and the July balance typically worsens sequentially. This has been the case over the past four years and in seven of the past nine. Not this year.

Australia reported firm July jobs data overnight. Employment rose 26.2k vs. 10k expected, while the unemployment rate fell to 5.7%. The breakdown was not favorable, however, with full-time jobs fell 45.4k and part-time jobs rose 71.6k. The recent RBA minutes were pretty balanced, and markets are expecting no move at the next meeting September 6.

Philippine Q2 GDP grew 7.0% y/y vs. 6.6% expected and 6.9% in Q1. The central bank last week kept rates steady, but acknowledged that a cut in reserve requirements is being studied. The bank is likely waiting to see how loose fiscal policy will be under new President Duterte before deciding on further easing. The robust economy could also delay further easing. Next central bank meeting is September 22.

Chile reports Q2 GDP and current account data. Growth is expected to slow to 1.2% y/y from 2.0% in Q1. With CPI inflation at 4% y/y in July and likely to move back within the 2-4% target range in H2, we think the bank will tilt more dovish. A rate cut is possible towards year-end or in early 2017. The bank just left rates steady last week. Next policy meeting is September 15, and that’s probably too early to cut rates.