Dollar Flat as Eventful Week Begins

August 28, 2023

Win Thin

Markets are still digesting Fed Chair Powell’s Jackson Hole remarks; Fed speakers this week should relay a similar message; Dallas Fed manufacturing index for August will be the only U.S. data today
ECB hawks are getting more vocal; eurozone reported very weak July M3 data
Australia reported July retail sales; New Zealand has been forced to tighten fiscal policy

The dollar is trading flat as an eventual week begins. DXY is trading flat near 104.101 after it traded at a new high for this move Friday near 104.309. It remains on track to test the May 31 high near 104.699. The euro is trading flat near $1.0815 after traded at a new low for this move Friday near $1.0765. It remains on track to test the May low near $1.0635. Sterling is trading flat near $1.2580 after it traded at a new low for this move Friday near $1.2560. It remains on track to test the May low near $1.2310. USD/JPY is testing Friday’s high near 146.65 as it probes the upside of its 145-150 trading range. With the BOJ remaining dovish, we look for an eventual test of 150. The fundamental story continues to move in favor of the greenback. Friday’s speech by Powell confirms the Fed’s hawkish stance and we think another hike could be confirmed by U.S. data this week, which is of course dollar positive.

AMERICAS

Markets are still digesting Fed Chair Powell’s Jackson Hole remarks. The markets initially took his remarks as dovish but then quickly reversed when the realization came that Powell can’t and won’t promise outright that the Fed will hike again. He stressed that Fed policy is fully data-dependent and right now, the data say the Fed needs to hike again. Jobs report Friday is obviously key as the 2-year interest rate differentials continue to move in the dollar’s favor.

Fed speakers this week should relay a similar message. Barr speaks today and tomorrow. WIRP suggests nearly 25% odds of a hike September 20, up from 10% at the start of last week, with odds rising to nearly 70% November 1 vs. 40% at the start of last week. More importantly, the first cut has been pushed out to June from May at the start of last week.

Dallas Fed manufacturing index for August will be the only U.S. data today. It is expected at -19.0 vs. -20.0 in July. This will be followed by other key surveys. Its services index will be reported tomorrow. Chicago PMI will be reported Thursday and is expected at 44.1 vs. 42.8 in July. ISM manufacturing PMI will be reported Friday and headline is expected at 47.0 vs. 46.4 in July. Keep an eye on prices paid and employment, which stood at 42.6 and 44.4 in July, respectively.

EUROPE/MIDDLE EAST/AFRICA

European Central Bank hawks are getting more vocal. After the July meeting, the doves seemed to have the upper hand with growing talk of a pause. Today, Holzmann pushed back as he said “We’re not yet in the clear when it comes to inflation. If there aren’t any big surprises, I see a case for pushing on with rate increases without taking a pause.” Holzmann speaks again later today. So too will noted hawk Nagel, who is likely to take a similarly hawkish stance as Holzmann. ECB tightening expectations remain steady. WIRP suggest odds of a 25 bp hike stand near 45% September 14, rise to 66% October 26 and top out near 75% December 14. These odds will rise and fall with the data but 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.

Eurozone reported very weak July M3 data. It came in at -0.4% y/y vs. 0.0% expected and 0.6% in June. This matches the lows from the financial crisis. With the ECB still hiking rates, shrinking its balance sheet, and letting TLTROS roll off, we expect further weakness to new all-time lows in M3 data in the coming months. Of course, this all but guarantees a recession and the fact that it will be worse than what we saw back in 2009 suggests the downturn will be painful.

ASIA

Australia reported July retail sales. Sales came in at 0.5% m/m vs. 0.2% expected and -0.8% in June, and were apparently boosted by spending related to the Women’s World Cup as well as school holidays. However, the y/y rate still slowed to 2.1% vs. 2.3% in June and was the slowest since August 2021. Recent data have come in on the soft side as the slowdown in China and RBA tightening hit. July private sector credit will be reported Thursday. WIRP suggests no change is priced in for either the September 5 or October 3 RBA meetings. However, the odds of a hike November 7 then rise and top out at 60%. Bullock speaks tomorrow.

New Zealand has been forced to tighten fiscal policy. Finance Minister Robertson said the government has identified almost NZD4 bln ($2.4 bln) of potential savings over the next four years and noted “We have seen further deterioration in the global economy, particularly in China. This will continue to have a direct impact on the New Zealand economy, and it is important that the government responds to meet our balanced and responsible fiscal goals.” Robertson said the announced measures will help keep net debt under 30% of GDP and move the budget back to surplus by June 2027 vs. June 2026 previously. Robertson and Prime Minister Chris Hipkins are preparing the Treasury’s pre-election fiscal update scheduled for September 12, which is likely to show a slump in revenue that will lead to larger budget deficits. Hence, the pre-emptive moves from Robertson. The news couldn’t have come at a worse time as the ruling Labour Party is struggling to maintain support less than seven weeks from a general election.

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