Dollar Consolidates as Markets Limp Into the Weekend

August 18, 2023
  • The recent data out of the U.S. suggest that a September skip is very likely; weekly jobless claims were solid
  • The ECB will reportedly send a complaint to the Italian government regarding the planned windfall tax on banks; U.K. reported weak July retail sales
  • Japan reported July national CPI; RBNZ Deputy Governor Silk sounded hawkish; reports suggest China is mulling measures to boost equity market sentiment; Taiwan cut its forecasts for growth and exports this year

The dollar is consolidating ahead of the weekend. DXY is trading lower near 103.409 after six straight up days that saw it trade at a new high near 103.598 yesterday. Clean break above the July 6 near 103.572 sets up a test of the May 31 high near 104.699. The euro is trading flat near $1.0865 but remains on track to test the July low near $1.0835. Sterling is trading slightly lower near $1.2730 after weak U.K. retail sales data but remains on track to test the late June low near $1.2590. USD/JPY is trading lower near 145.50 after it traded at a new high for this move near 146.55 yesterday. The pair remains on track to test the 150 area. We believe the relative fundamental story continues to move in favor of the greenback. As we expected, the recent FOMC, ECB, and BOJ decisions as well as the ongoing economic data underscore the divergence theme and so further dollar gains seem likely.


The recent data out of the U.S. suggest that a September skip is very likely. However, there are clearly some underlying inflation concerns and so we still don't think the Fed is done hiking. The market seems to agree with us as WIRP suggests 10% odds of a hike in September, rising to nearly 35% in November. Those odds should rise if the data continue to come in strong. There are no U.S. data reports nor Fed speakers today. Attention now moves to the Kansas City Fed’s Jackson Hole Symposium next weekend. We will be sending out a preview early next week.

Weekly jobless claims were solid. That’s because initial claims will be for the BLS survey week containing the 12th of the month. Those came in at 239k vs. 240k expected and a revised 250k (was 248k) last week. The 4-week moving average rose to 234k vs. 231k last week. This is close to the readings for the July (238k) and June (232k) survey weeks, which suggests a NFP number just below 200k. There isn't an official Bloomberg consensus yet but the whisper number stands at 173k. Continuing claims are reported with a one-week lag and came in at 1.716 mln vs. 1.700 mln expected and 1.684 mln last week.


The European Central Bank will reportedly send a complaint to the Italian government regarding the planned windfall tax on banks. Apparently, the ECB was not informed about the tax plan. While the ECB doesn’t have any say over eurozone fiscal policy, a banking sector tax falls in that gray area of financial stability. Of course, the Italian government will not take too kindly to the criticism from the central bank and is likely to step its own complaints about the impact of tight monetary policy on the economy. Peripheral spreads have held in very well given the negative global backdrop that is intensifying and we suspect these spreads will eventually widen out when the eurozone recession hits in earnest.

Market expectations for ECB policy remain subdued. WIRP suggest odds of a 25 bp hike stand near 50% September 14, rise to 70% October 26 and top out near 75% December 14. These odds will rise and fall with the data but Madame Lagarde clearly accentuated the negative last week and that’s what markets should focus on. What’s very interesting to us is that the ECB may stop hiking before the Fed does and we don't think the markets have priced this risk in yet.

U.K. reported weak July retail sales. Headline came in at -1.2% m/m vs. -0.6% expected an a revised 0.6% (was 0.7%) in June, while sales ex-auto fuel came in at -1.4% m/m vs. -0.7% expected and a revised 0.7% (was 0.8%) in June. The y/y rates worsened for the first time since March as the run of strong data seems to have ended. The June GDP and IP data reported last week were strong but the July retail sales data show a weaker picture as Q3 started. Yet the Bank of England is expected to continue hiking. WIRP suggests 25% odds of a 50 bp hike September 21, while 25 bp hikes in November and December are priced in that would see the bank rate peak near 6.0% vs. 5.75% at the start of this week and 6.5% at the start of last month.


Japan reported July national CPI. Headline came in steady as expected at 3.3% y/y, while core (ex-fresh food) fell two ticks as expected to 3.1% y/y. Core ex-energy picked up a tick as expected to 4.3% y/y, underscoring that much of the improvement in inflation has been from energy. Core inflation is the lowest since March and supports the Bank of Japan’s wait-and-see stance as the most recent forecasts show it falling back below the 2% target in both FY24 and FY25. Next policy meeting is September 21-22 and no change is expected then.

Reserve Bank of New Zealand Deputy Governor Silk sounded hawkish. She warned that “Near term, there are still some risks on the upside to inflation. The OCR track is slightly higher and we’re saying potentially retaining rates at a higher level for longer. Probably the biggest driver of that is really housing.” Even though it just kept rates steady at 5.5% this week, it’s expected rate path showed some risks of another hike. It also signaled it’s in no hurry to ease as the policy rate is seen steady until early 2025. WIRP suggests 10% odds of a hike October 4, rising to 45% November 29 and then topping out around 55% February 28.

Reports suggest China is mulling measures to boost equity market sentiment. Regulators may extend trading hours for A shares and bonds but no further details were given. In addition, reports suggest handling fees on stock transactions will be cut and rules on share buybacks will be relaxed. In the long run, these are measures that would help boost market liquidity and functioning but over the short run are unlikely to turn around negative market sentiment. Similarly, recent moves to support the yuan are unlikely to have any lasting impact when monetary policy divergences continue to widen.

Taiwan cut its forecasts for growth and exports this year after final Q2 GDP came in soft. The government’s statistics bureau revised its 2023 growth forecast to 1.61% vs. 2.04% in May and was the third straight cut to the outlook. If so, it would be the slowest since 2015. Officials also cut the export forecast to -9.51% in 2023 vs. -7.27% previously, while CPI inflation is expected at 2.14% in 2023 vs. 2.26% previously. Of note, Q2 GDP came in at 1.36% y/y vs. 1.45% preliminary. While this represents a sharp pick-up from -3.31% in Q1, the downgraded full-year forecasts suggest that outlook for H2 remains weak. We concur.

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