Dollar Consolidates Gains as RBNZ Surprises

August 18, 2021
  • July retail sales data are worth discussing; the U.S. economy should continue to post strong growth in Q3; FOMC minutes will be released; Canada reports July CPI
  • U.K. reported soft July CPI data; inflation in South Africa came in near expectations at 4.6% y/y
  • Japan reported July trade data and June core machine orders; RBNZ delivered a dovish surprise and kept rates steady at 0.25%; NZD is making new cycle lows today on the dovish outcome

The dollar is consolidating yesterday’s big gains. DXY is stabilizing above 93 after having fully retraced Friday's drop. It is poised to test the recent high from August 11 near 93.192 and then the March high near 93.437. EUR is testing the $1.17 area and a break below would set up a test of the November low near $1.16. Sterling is finally playing catch-up and a clean break below $1.3730 sets up a test of the July 20 low near $1.3570. Of note, AUD is trading at new lows for this cycle just below .7240. The November 2020 low near .7225 is nearby but after that, there really isn't much else until that month's low near .6990. AUD is typically the canary in a coal mine for a drop in risk appetite and so it bears watching.

July retail sales data are worth discussing. Headline sales fell -1.1% m/m vs. -0.3% expected and a revised 0.7% (was 0.6%) in June, while sales ex-autos fell -0.4% m/m vs. 0.2% expected and a revised 1.6% (was 1.3%) in June. The so-called control group used for GDP calculations fell -1.0% m/m vs. -0.2% expected and a revised 1.4% (was 1.1%) in June. The upward revisions to June were not enough to cover the big downside misses in July. While we said we would not be too concerned about a modest drop in July, they were anything but modest. Some believe that weakness in retail sales is due to a shift to spending on services. This may be wishful thinking but we won't know until personal spending data comes out August 27. Core PCE will be reported at the same time.
The U.S. economy should continue to post strong growth in Q3. Despite the weak sales data, Atlanta Fed GDPNow model was just updated to 6.2% SAAR vs. 6.0% previously. That's down slightly from the 6.5% reported for Q2 but is still well above the NY Fed's Nowcast reading of 3.79% SAAR for Q3, which will be updated Friday. BBG consensus is 6.0% for Q3 but this is likely to edge lower after yesterday’s retail sales miss. Growth is seen picking up to 6.3% in Q4, then slowing next year to 5.8% in Q1 and 4.9% in Q2. Of note, IP came in much stronger than expected in July, up 0.9% m/m vs. 0.5% expected, driven by continued strength in manufacturing production (1.4% m/m vs. 0.7% expected). Today, July building permits (1.0% m/m expected) and housing starts (-2.6% m/m expected) will be reported.
FOMC minutes will be released. Since that July 27-28 meeting, more and more Fed officials have tilted hawkish and so the minutes will be of great interest ahead of the Jackson Hole Symposium next week. We expect a very hawkish tilt will emerge from these minutes. We believe the ranks of the hawks will continue to grow, raising the odds of another hawkish shift in the September Dot Plots to show median lift-off expectations moving up to 2022. Bullard speaks today and is likely to retain his hawkish tone.
Canada reports July CPI. Headline inflation is expected to pick up to 3.4% y/y vs. 3.1% in June, while common core is expected to pick up a tick to 1.8% y/y. June retail sales will be reported Friday. At the last meeting July 14, the Bank of Canada delivered another round of tapering, reflecting the “continued progress towards recovery.” The bank updated its inflation forecasts then to 3.0% (2.3% in April) in 2021, 2.4% (1.9%) in 2022, and 2.2% (2.3%) in 2023. The BOC also confirmed it is likely to hike rates in H2 2022, though exactly when is still unclear. At this point, we think it’s more likely to happen on the earlier side. Next policy meeting is September 8 and perhaps the bank will provide some more clarity on future policy.

U.K. reported soft July CPI data. Headline inflation was expected to ease to 2.3% y/y but instead fell to 2.0% vs. 2.5% in June. CPIH was expected to fall a tick to 2.3% y/y but instead came in at 2.1%. However, PPI readings accelerated and warrant some caution ahead, with input prices up 9.9% y/y and output prices up 4.9% y/y, both stronger than expected. Last week’s data were mixed. Industrial and construction output unexpectedly contracted in June, while GDP and services grew slightly stronger than expected. It’s just as well that the Bank of England just delivered a dovish hold August 5. New inflation forecasts were 4.0% (2.5% in May) in 2021, 2.5% (2.0%) in 2022, and 2.0% (2.0%) in 2023, which suggest the BOE is no hurry to hike and that there is no need to hike aggressively. Recent softness in the U.K. data is likely to support the bank’s decision to tilt dovish. Next policy meeting is September 23 and no change is expected.

Inflation in South Africa came in near expectations at 4.6% y/y, just above the 4.5% mid-point of the 3-6% target range. As in many other economies, the overshoot is entirely due to headline factors such as food and energy, so won’t be a huge concern at this stage. South Africa’s structural unemployment and domestic demand issues mans that SARB won’t be part of the first wave of tightening. Next policy meeting is September 23 and rates are expected to be kept steady at 3.5%. At the last meeting July 22, the bank left policy steady but softened its stance about future tightening. Its model now suggest one hike by year-end vs. two previously, though we believe the bank will be hard-pressed to deliver any hikes this year. Instead, we expect the bank to gradually gear up for a hike early next year. The rand is unchanged and sovereign yields are a few basis points lower across the curve, but not out of line with broader market moves.

Japan reported July trade data and June core machine orders. Exports rose 37.0% y/y vs. 39.4% expected and 48.6% in June while imports rose 28.5% y/y vs. 35.3% expected and 32.7% in June. Orders fell -1.5% m/m vs. -2.8% expected and 7.8% in May. With growth in the region slowing, it will be difficult for Japanese exports to remain strong in H2. Other regional exporters are already seeing some softening and so Japan is likely to follow. The strong yen isn’t helping, especially with the key JPY/KRW cross up nearly 6% from the June low. On the domestic side, the state of emergency for Tokyo and seven other prefectures was officially extended to September 12. This means Q3 will likely be another lost quarter.
Reserve Bank of New Zealand delivered a dovish surprise and kept rates steady at 0.25%. The bank said “The Committee discussed the merits of an increase in the OCR at this meeting. The Committee agreed that their least regrets policy stance is to further reduce monetary policy stimulus to reduce the risk that inflation expectations become unanchored. However in light of the current Level 4 lockdown and health uncertainty the Committee agreed to leave the OCR unchanged at this meeting.” Governor Orr stressed “I want this conference to understand that our general path is to be tightening monetary conditions.”
We hesitate to call this a hawkish hold as some are, as the RBNZ moved against market expectations for a hike. Next meetings are October 6 and November 24. The bank’s expected rate path was updated to show the average OCR rising to 0.6% by end-2021, 1.6% by end-2022, 2.0% by end-2023, and 2.1% by Q3 2024, the end of the forecast period. In the May projections, the first hike was tipped for H2 2022, with the average OCR seen at 0.7% by end-2022, 1.5% by end-2023, and 1.8% by mid-2024. While a hike is expected before year-end, it will clearly depend on how the virus situation evolves. We also note that the RBNZ has taken a very different approach than the RBA, which is going ahead with tapering next month despite the lockdowns now in place.
NZD is making new cycle lows today on the dovish outcome. A clean break below last month's cycle low near .6880 would open up a potential test of the September 2020 low near .6510. Looking at the AUD/NZD cross, we got an outside up day yesterday. The NZD leg had obviously been outperforming the AUD leg due to RBNZ tightening expectations but the Kiwi lockdown news may have led to a key reversal. If the RBNZ is forced to remain on hold, this cross will likely move higher.

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