Dollar Softens as Euro Leads the Way on EU Migrant Deal

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  • The euro is bid after EU leaders reached an agreement on the migrant issue in the early hours of the day
  • In Germany, Merkel’s coalition partner CSU reacted positively to the EU deal In Germany, Merkel’s coalition partner CSU reacted positively to the EU deal
  • The yuan remains in focus; China reports official June PMI Saturday
  • The US reports May personal income and consumption figures, which will inform Q2 GDP forecasts
  • Bank Indonesia delivered a larger than expected 50 bp to 5.25%; Colombia central bank is expected to keep rates steady at 4.25%

The dollar is mostly weaker against the majors, with the euro leading the way after an EU deal on migration was reached early this morning.  Kiwi and yen are underperforming.  EM currencies are mostly firmer.  KRW and RON are outperforming, while THB and CNY are underperforming.  MSCI Asia Pacific rose 1%, with the Nikkei rising 0.2%.  MSCI EM is up 2% so far today, with the Shanghai Composite rising 2.2%.  Euro Stoxx 600 is up 1% near midday, while US futures are pointing to a higher open.  The 10-year US yield is up 1 bp at 2.85%.  Commodity prices are mostly higher, with Brent oil up 1.8%, copper up 0.3%, and gold up 0.3%.

The euro is bid after EU leaders reached an agreement on the migrant issue in the early hours of the day.  This has led to broad dollar weakness, similar to the price action we saw last Thursday after the BOE’s hawkish hold send sterling higher and led to broad-based profit-taking on long dollar positions.  That correction lasted several days, and that is certainly possible now as well.  The euro needs to take out the 1.1720 high from this week to set up a test of the June 14 high near 1.1850.

The EU agreed to beef up border security, establish holding centers for asylum seekers, and to speed up the process of deciding on asylum status.  The EU also agreed to overhaul the rules for distribution of migrants.  Press reports suggest that French President Macron and new Italian Prime Minister Conte were instrumental in getting a compromise done.  Yet it would be naïve to think that this broad agreement will end the fissures within the EU on this thorny issue.

In Germany, Merkel’s coalition partner CSU reacted positively to the EU deal.  This is important, as it comes ahead of weekend talks between Merkel and CSU head and Interior Minister Seehofer.  The migrant issue has caused strains in the alliance, as the migrant issue looms large ahead of Bavarian elections in October.

German retail sales fell -2.1% m/m in May vs. -0.5% expected.  This led to a y/y contraction of -1.6% vs. +1.9% expected. On the other hand, German labor market data for June showed unemployment -15k vs. -8k expected.  Elsewhere, the eurozone reported preliminary June CPI data.  Headline rose 2.0% y/y while core rose 1.0% y/y, both as expected.  However, with the ECB rates on hold for another year, the high-frequency economic data in the near-term may not have much impact on the markets.

Tokyo June CPI was reported at 0.6% y/y vs. 0.4% expected.  CPI ex-fresh food rose 0.7% y/y vs. 0.6% expected.  This comes after national May CPI was reported at a higher than expected 0.7% y/y, so perhaps there is some upside risk to the June CPI when it is released July 19.  Japan also reported May labor market and IP data, with unemployment falling to 2.2% vs. 2.5% expected and IP -0.2% m/m vs. -1.0% expected.

The yuan remains in focus.  The PBOC fixed USD/CNY higher for the eighth straight day and at a 6-month high. However, the recovery in risk appetite saw both CNY and CNH strengthen modestly on the day.  We continue to believe that the yuan movements are largely reflecting EM FX movements, and are not a sign of a concerted effort to devalue.

China reports official June PMI Saturday, which is expected at 51.8 vs. 51.9 in May.  This will be the first snapshot for June, with most of the data deluge coming around the middle of this month.  The May data showed some slowing, and so markets will be keen on seeing if that weakness carried over into June.

The US reports May personal income and consumption figures, which will inform Q2 GDP forecasts.  The core PCE deflator, for which the Fed aims for 2%, is expected to tick up to 1.9% from 1.8%.  June Chicago PMI will also be reported, which is expected at 60.0 vs. 62.7 in May.

Canada reports April GDP, which is expected to be flat m/m vs. 0.3% in March.  This would translate into a 2.5% y/y gain, down from 2.9% in March.  There was some debate about what Poloz actually signaled in his speech this week, but markets ultimately took his stance as hawkish.  Next BOC meeting is July 11, and Bloomberg’s WIRP now shows odds of a hike then at nearly 70% vs. barely 50% at the start of the week.

Bank Indonesia delivered a larger than expected 50 bp to 5.25%.  Most analysts expected 25 bp, though a handful looked for 50 bp.  Though inflation remains low, the bank had hiked twice already to help support the rupiah.  Governor Warjiyo said “The decision to increase the interest rate is another of Bank Indonesia’s pre-emptive, front-loading and ahead-of-the-curve measures to maintain the competitiveness of domestic financial markets following changes in monetary policy in a number of countries and high uncertainties in financial markets.”  He added that the hikes are supported by intervention in the FX and bond markets to ensure sufficient liquidity.  We expect more hikes in H2.

Colombia central bank is expected to keep rates steady at 4.25%.  CPI rose 3.2% y/y in May, near the 3% target and within the 2-4% target range.  Even though the economy remains sluggish, we think the easing cycle is over now due to the weak peso.