Dollar Soft As US and Canada Return from Holiday

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  • The RBA was the first of four central banks from high income countries that meet this week
  • Although the BOJ meets later in a couple of weeks, it remains in focus
  • The UK’s BRC snapped the better-than-expected data streak with a 0.9% decline in same store sales in August
  • Investors over-responded to suggestions that Saudi Arabia and Russia may agree to freeze output later this month
  • During the North American session, US ISM non-manufacturing and composite PMIs will be reported for August
  • Brazil COPOM minutes will be released

The dollar is broadly softer against the majors as the US and Canada return from holiday. The antipodeans and the Scandies are outperforming while the euro and Swiss franc are underperforming. EM currencies are mostly firmer. ZAR, RUB, and INR are outperforming while MYR and PHP are underperforming. MSCI Asia Pacific was up 0.8%, with the Nikkei rising 0.3%. MSCI EM is up 1%, with Chinese markets rising 0.7%. Euro Stoxx 600 is up 0.1% near midday, while S&P futures are pointing to a higher open. The 10-year UST yield is flat at 1.60%. Commodity prices are mostly higher, with oil mixed, copper up 0.8%, and gold up 0.4%.

With the US and Canada returning from long holiday weekends, summer is officially over. Yet markets are still trading in familiar ranges, waiting for fresh trading signals. Below, we recap some of the events from the long weekend and also highlight some of today’s noteworthy developments.

The US dollar is trading heavily against most of the major and emerging market currencies. However, the losses are modest and the greenback remains within recent ranges. The Antipodean and Scandie bloc currencies are performing best.

The Reserve Bank of Australia was the first of four central banks from high income countries that meet this week. It left the cash rate at the record low 1.5%. It is Governor Stevens last meeting before his deputy Lowe takes the helm. Lowe inherits and economy that is still adjusting to the commodity shock and slowing of China. However, he is not inheriting a pre-commitment on policy. Next month’s Q3 inflation report is seen as an important for monetary policy in Q4. The central bank does not appear to be in a hurry to cut rates again this year, but could be forced by circumstances and data. Tonight, Australia reports Q2 GDP. Growth is expected at 3.2% y/y vs. 3.1% in Q1.

The Australian dollar is the strongest of the majors, gaining 0.75% against the US dollar. It has approached a technical target near $0.7655. Recall its recent peak was near $0.7750 on August 10 before sliding to $0.7490 at the end of August. With today’s advance, it has retraced 61.8% of the down draft. The next target is $0.7700. Support is seen in the $0.7600-0.7620 area.

Although the BOJ meets later in a couple of weeks, it remains in focus. The balance of speculation has shifted in recent days to the possibility the BOJ shifts the composition of its bond purchases to facilitate a steepening of the yield curve. This would ostensibly involve purchasing less long-dated JGBs. In anticipation, the yield curve (2 yr-30 yr/40yr) has steepened recently. On Thursday, the MOF will meet with investors to assess the demand for 40-year bonds. It is thought the MOF may increase its sales by around JPY400 bln to JPY2 trln. Between the MOF and BOJ, there appears to be a willingness to accept higher long-term yields.

The dollar’s momentum against the yen that had propelled the greenback above JPY104 last week has eased. It remains within yesterday’s range, which was within last Friday’s. Support is seen in the JPY102.60-102.80 band.

The UK’s BRC snapped the better-than-expected data streak with a 0.9% decline in same store sales in August. This offsets the 1.1% gain in July. Economists had shrugged off their Brexit blues and anticipated a 1.4% gain. Sterling eased on the news, but remained higher on the day. It is finding demand around $1.3320. On the topside, $1.35 is key. The short-term technicals suggest the market has not given up on it. A break of $1.3250 would suggest this attempt has failed.

The eurozone provided details of its Q2 GDP, which was left unchanged at the initial 0.3% q/q. Household consumption rose 0.2% q/q vs. 0.3% expected, government expenditure rose 0.1% q/q vs. 0.2% expected, and GFCF (investment) was flat q/q vs. -0.1% expected. Germany also reported July factory orders rose 0.2% m/m vs. 0.5% expected.

The euro was uninspired and has been confined to a little more than a quarter of a cent through the Asian session and European morning. Resistance is seen in the $1.1180-1.1200 area. The euro appears to be carving a shelf in front of $1.1100. In four of the past five sessions it has approached but not broken below the 200-day moving average, which is found just above $1.1130 today.

During the North American session, US ISM non-manufacturing and composite PMIs will be reported for August. The main feature today is the non-manufacturing ISM. The median guesstimate from the Bloomberg survey is 55.0, down from 55.5 in July. With a little more than half the data, economists remain confident that this quarter the world’s largest economy snaps a nine-month period of sub-2% growth. Recall that ISM manufacturing PMI was weaker than expected, falling to 49.4 from 52.6 in July. Labor market conditions for August will also be reported. The Fed’s Williams speaks on the economic outlook.

The Fed releases its Beige book tomorrow that was prepared for the September meeting. On Friday, the odds of a hike next week fell to 32% after the softer than expected jobs report, and that is where it stands currently. This falls short of the post-Jackson Hole high of 42% on August 26.

Investors over-responded to suggestions that Saudi Arabia and Russia may agree to freeze output later this month. At its best, the price of Brent was up by more than 5%, but as cooler heads prevailed, the gains were pared to less than 1%. As we have noted, assuming rational actors that embrace realpolitik values, we should expect output to increase ahead of serious negotiations to freeze production. And that is exactly what has happened.

An agreement to refrain from increasing output is also something smaller producers, many of whom are already producing near capacity, can agree to. They are not giving up anything. Iran is a different story. Its output has not returned to pre-embargo levels, in part due to continued obstacles in securing financing from US and European banks. A freeze on the part of the Saudis without Iran participation would be tantamount to a surrender of market share in a rivalry that extends well beyond oil policy.

Leaving the tarmac issues aside, the G20 meeting was successful, and the signing of the Paris Accords by the Presidents of the two largest economies is notable. Obama and Xi also pledged to avoid competitive currency devaluations, which continues to strike us as an arms control agreement of sorts, though one country has a current account surplus and the other a deficit.

South Africa reported Q2 GDP at 0.6% y/y (as expected) vs. a revised -0.1% (was -0.2%) in Q1. July manufacturing production will be reported Thursday, which is expected to rise 3.4% y/y vs. 4.5% in June. The economy remains sluggish, and so the SARB will be hesitant to hike rates further. The next policy meeting is September 22, and no change is expected then. Political risk is more important right now than the economic outlook.

Brazil COPOM minutes will be released. It left rates steady at 14.25% last week, as expected. August IPCA inflation will be reported Friday, which is expected to rise 8.97% y/y vs. 8.74% in July. Minutes will be scoured for clues about policy, but if inflation remains stubbornly high, then a rate cut at the next COPOM meeting October 19 will be hard to justify.