Dollar Firms as North Korea Provokes

Businessman looking at a nest egg marc

  • The dollar is ending the week on a firm note
  • Eurozone data came in weaker than expected
  • During the North American session, the US reports July wholesale inventories and trade sales
  • Canada reports August labor market data
  • EM is ending the week on soft note; BOK left rates steady, while North Korea tested a nuclear device

The dollar is mixed against the majors as the week winds down. The euro and the yen are outperforming while the dollar bloc is underperforming. EM currencies are mostly weaker. The CEE currencies are outperforming while ZAR, KRW, and TWD are underperforming. MSCI Asia Pacific was down 1%, with the Nikkei flat. MSCI EM is down 1.2%, with Chinese markets falling 0.6%. Euro Stoxx 600 is down 0.3% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is up 2 bp at 1.62%. Commodity prices are mostly lower, with oil down 1-2%, copper flat, and gold down 0.2%.

The dollar is ending the week on a firm note.  It has been helped by rising US rate, with the 10-year yield of 1.62% the highest since late August. With the September 21 FOMC meeting approaching, we believe markets will start to get a bit more jittery and defensive, despite the fact that tightening odds then remain low.  The fact that Pyongyang tested a nuclear device (see below) may have helped the dollar too.

The ECB kept policy steady.  Initial market disappointment took the euro higher to a new high for this move near $1.1325 before sellers emerged and drove it down to around $1.1245.  Draghi’s claims that the monetary transmission mechanism has never worked better and that ECB policy has been very effective have not been supported by recent data.

Germany reported July trade and current account data.  Exports fell -2.6% m/m vs. +0.4% expected, while imports fell -0.7% m/m vs. +0.5% expected.  The current account surplus was EUR18.6 bln vs. EUR24.5 bln expected.  Elsewhere, French IP fell -0.6% m/m vs. +0.3% expected.

The UK reported July trade and construction output.  The trade deficit came in wider than expected at –GBP11.76 bln, while construction output was flat m/m vs. -0.5% expected.  Sterling is trading heavily, with near-term targets seen around $1.3250 and $1.3200.  Break below $1.3200 would set up a test of the August 29 low near $1.3060.

Norway reported August CPI.  Headline CPI rose 4.0% y/y vs. 4.2% expected, while underlying rose 3.3% y/y vs. 3.4% expected.  Markets still see potential easing by the Norges Bank in the coming months.  It has been on hold since March.  Next policy meeting is September 22.

China reported August CPI and PPI overnight.  The former rose 1.3% y/y vs. 1.7% expected, while the latter came in at -0.8% y/y vs. -0.9% expected.  For now, China remains on the backburner.  Next week brings money and loan data, IP, and retail sales.

During the North American session, the US reports July wholesale inventories and trade sales.  The Fed’s Rosengren (voter) and Kaplan (non-voter) speak.  Fed tightening expectations are creeping higher from the week’s lows.  According to Bloomberg, the odds of a September hike are around 28%, up from the Wednesday low of 22%.  This still stands below the post-Jackson Hole high of 42%.

Canada reports August labor market data.  The unemployment rate is expected to rise to 7% even as the economy is expected to create 14k new jobs.  The mix between full- and part-time jobs will be important.  CAD has been the second worst major currency this week despite rising oil prices, hurt by a dovish tilt by the BOC.  Recent data have been weak, so a bad jobs report would fan market easing expectations.  The 1.30 area should provide near-term resistance for USD/CAD, but a clean break would target the September 1 high near 1.3150.

EM is ending the week on soft note.  Perhaps it was the North Korean nuclear test (see below).  Perhaps it was disappointment in the ECB or even rising Fed tightening odds.  Whatever the trigger was, EM FX weakness is carrying over from yesterday.  The global liquidity outlook still favors EM, in our view, but a correction may be underway.

Bank of Korea kept rates steady at 1.25%, as expected.  The decision was unanimous.  The bank expressed concerns about household debt as well as DM monetary policies.  The bank has been on hold since its surprise 25 bp cut back in June.  With the economy still sluggish, we believe that another cut in Q4 seems likely.

Meanwhile, North Korea detonated a nuclear device.  It was the fifth and largest test to date, setting off an artificial earthquake measuring 5.3 on the Richter scale.  China will formally protest the action, which is another sign that it is running out of patience with Pyongyang.

Brazil reports August IPCA inflation, which is expected to rise 8.98% y/y vs. 8.74% in July.  COPOM minutes set the stage for easing, but it’s conditional on falling inflation.  If inflation remains stubbornly high, then a rate cut at the next COPOM meeting October 19 will be hard to justify.