Dollar Firmer Ahead of Retail Sales

Dollar crisis

  • Australia reported that it lost 3.9k jobs in August
  • The UK reported August retail sales; the Bank of England decision is due out shortly
  • After a quiet few days in terms of US economic reports, a full slate of data will be released today
  • Swiss National Bank kept policy unchanged, as expected
  • Colombia reports July retail sales and IP; Chile’s central bank is expected to keep rates steady at 3.5%

The dollar is mostly firmer in narrow ranges against the majors ahead of US retail sales data. The Aussie and the yen are outperforming while the Kiwi and the Scandies are underperforming. EM currencies are mixed in narrow ranges. RUB and ZAR are outperforming while MYR and PHP are underperforming. MSCI Asia Pacific was down 0.3%, with the Nikkei falling 1.3%. MSCI EM is flat, with Chinese markets closed until Monday. Euro Stoxx 600 is up 0.3% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is flat at 1.70%. Commodity prices are mixed, with oil up 1%, copper down 0.1%, and gold down 0.2%.

Looking at the diary, today is the most important day of the week.  The Bank of England and the Swiss National Bank meet.  The UK reports retail sales.  EMU reports CPI figures.  The US reports retail sales, industrial output, and two September Fed surveys.  Yet the economic updates are unlikely to change sentiment ahead of next week’s FOMC and BOJ meetings.

The euro has been confined to a $1.1200-1.1285 range since the end of last week.  It is near the middle of that range as the North American session gets underway.  The dollar peaked yesterday near JPY103.35 and it is a big figure lower.  It has been capped near JPY102.50 in Asia.  Support is seen near JPY101.80.  Sterling is flat, though Asia initially took it through yesterday’s high before peaking near $1.3280.  Technically, there appears to be potential toward $1.3300-1.3330.  The dollar-bloc is little changed, with the US dollar trading near seven-week highs against the Canadian and Australian dollars.

MSCI Asia-Pacific was off about 0.3% in late dealings.  The loss is minor, but it extends the losing streak to the sixth session, which makes it the longest such streak since May.  Asian bond yields were mostly softer, though Australia bucked the trend as its 10-year bond yield was slightly firmer.  European bond yields are also beginning the day 1-2 bp firmer.  US 10-year Treasury is straddling the 1.70% level.

Australia reported that it lost 3.9k jobs in August.  The market expected a 15k increase.  However, full-time jobs grew 11.5k.  The unexpected decline in the unemployment rate from 5.7% to 5.6% was a function of the unanticipated decline in the participation rate to 64.7 (from 64.9).  The participation rate matches the lowest since November 2014.  The Australian dollar is flat as it continues to consolidate the large (1.3%) loss on Tuesday.  Since then, it has been unable to resurface above the previous support near $0.7500.

The New Zealand dollar is weakest of the majors so far today.  It is off 0.2%.  Some reports suggest there was disappointment that the economy only expanded 0.9% in Q2 instead of 1.1%.  The pace of growth would be the envy of most countries and minor loss hardly requires a unique fundamental explanation.

The Bank of England decision is due out shortly.  The BOE has provided low rate loans to banks, cut interest rates, resumed asset purchases (both Gilts and corporate bonds).  Most of the economic data in recent weeks has been reported above expectations.  There is no compelling reason to expect the BOE to take additional measures now.  It will likely keep the door open to additional action when or if needed.

The UK reported August retail sales.  Headline sales fell -0.2% m/m vs. -0.4% expected.  Ex-auto fuel, sales fell -0.3% m/m vs. -0.7% expected.  Some pullback was to be expected after the July gains, which were revised higher for both series.  The statistics office said there is some evidence that a weaker pound is boosting foreign demand for luxury goods, as sales of watches and jewelry rose.  Despite all the talk, Brexit has not yet taken place and the full impact of the referendum is still to come.

After a quiet few days in terms of US economic reports, a full slate of data will be released today.  The most important is retail sales, which account for about 40% of US personal consumption expenditures.  Softer auto sales and lower gasoline prices will weigh on the headline, but the GDP component, which also excludes building materials, is expected to show a 0.4% increase.  If true, it would match this year’s average, which is almost twice last year’s.

The US also reports producer prices (0.1% gain is expected on the headline month-over-month and year-over-year), which is not a market mover.  Nor will industrial output and manufacturing production figures for August draw much attention.  The risk is that after strong gains in July, a modest pullback was experienced last month.  Two Fed surveys (Empire and Philadelphia) cover the month of September.  These reports pose some headline risk, but they are both reported at the same time as retail sales (and Q2 current account balance) and may be lost in the shuffle.

It appears that the bond and equity markets have entered a new phase that is seeing yields trend higher, and equity prices move lower.  The pace of this adjustment may be more important than the economic data per se in driving the foreign exchange market.  The dollar-bloc currencies and the Scandies seem most vulnerable among the majors, while the freely accessible emerging market currencies, which mostly have current account deficits, are also under pressure.

Swiss National Bank kept policy unchanged, as expected.  It pledged to intervene in the FX market if needed, and noted that ““The vote for the U.K. to leave the European Union has caused considerable uncertainty and makes an assessment of the global economic outlook more difficult.”  The bank also noted that risks to the global outlook remain to the downside.

Sweden reported August unemployment.  The rate rose to a higher than expected 7.2% seasonally adjusted.  This comes just days after CPI came in lower than expected.  The Riksbank met last week and kept policy steady, but soft data will keep alive the notion that it will have to add more stimulus.  The next policy meeting is October 27. 

Colombia reports July retail sales and IP.  The former is expected at -0.2% y/y while the latter is expected to rise 3.2% y/y.  Central bank minutes will come out Friday.  At that meeting, it kept rates steady at 7.75% for the first time since it restarted the tightening cycle in September 2015.  Over that period, it hiked 11 times for a total of 325 bp, and it has taken a toll on the economy.  Inflation appears to have topped out (for now) and so the bank will likely keep rates steady near-term, with potential easing seen in 2017.

Chile’s central bank is expected to keep rates steady at 3.5%.  Inflation eased to 3.4% y/y in August, as expected but still the lowest since February 2014.  It’s also back in the 2-4% target range.  The tightening cycle is clearly over, and with the economy weak, we think markets should start thinking about potential easing in early 2017.