Dollar Flat as Markets Await Fresh Drivers

August 29, 2023

Win Thin

Fed tightening expectations continue to adjust; August Conference Board consumer confidence will be reported; Chile central bank showed little concern about the weak peso
Germany reported soft September GfK consumer confidence; U.K. food prices continue to fall; Sweden reported Q2 GDP data; National Bank of Hungary meets
Japan reported soft July labor market data; incoming RBA Governor Bullock sounded hawkish; reports suggest China’s largest state-owned banks are considering another cut to deposit rates

The dollar is trading flat ahead as markets await fresh drivers. DXY is trading flat for the second straight day near 104.067 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 $1.0810 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 $1.26 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 trading higher 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

Fed tightening expectations continue to adjust. After Powell’s hawkish Jackson Hole remarks, WIRP suggests over 20% odds of a hike September 20, up from 10% at the start of last week, with those 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. This has helped the dollar, to state the obvious. The next leg higher will depend largely on how the U.S. data come in this week. It’s started off quietly with minor data yesterday and today but the calendar really picks up quickly with ADP tomorrow.

August Conference Board consumer confidence will be reported. Headline is expected at 116.0 vs. 117.0 in July. Last week, final August University of Michigan consumer sentiment came in at 69.5 vs. 71.2 preliminary. Both current conditions and expectations fell nearly two full points from preliminary 77.4 and 67.3, respectively. As such, we see downside risks to the Conference Board reading this week. June FHFA and S&P CoreLogic house price indices will be reported.

Ahead of the jobs report Friday, other key labor market data will be reported. July JOLTS job openings will be reported today and is expected at 9.50 mln vs. 9.582 mln in June. If so, openings would be the lowest since April 2021 but still high by historical standards. Keep an eye on hires, which fell to the lowest since February 2021. On the other hand, layoffs fell to the lowest since December 2022 and quits are near the lowest since early 2021. With all these indicators moving in tandem, it’s hard to get a clear read on the labor market but to us, most signs still point to overall tightness.

Chile central bank Vice President Garcia showed little concern about the weak peso. Specially, he said that “So far, the news that we’ve had, both on the international scenario and domestic data, inflation, gyrations of the exchange rate, they don’t seem to paint a picture dramatically different from what we had in mind when we started the cuts in July.” Since the bank delivered a dovish surprise July 28 with a 100 bp cut to start he easing cycle vs. 75 bp expected, the peso has fallen about 3% but these comments are just inviting further CLP weakness as the central bank pushed ahead with aggressive easing plans. Minutes from the July meeting show that the bank is planning for total cuts of 325-350 bp by year-end, which implies a policy rate of 7.5-8.0%. With policy meetings September 5, October 26, and December 19, that implies cuts of at least 75 at each remaining one.

Such aggressive cuts will continue to weigh on the peso. As it is, CLP is the worst EM performer so far in H2 (not counting ARS and RUB) after being one of the top performers in H1. HUF has a similar profile due to aggressive easing, with the central bank expected to deliver another 100 bp cut in the 1-day deposit rate today. BRL is holding up relatively better but it too should suffer more if rates are cut too quickly. Keep an eye on PLN and CZK as those central banks are expected to soon join the others in cutting rates. Banxico is being much more cautious about easing and so MXN is the top EM performer so far in H1 as its outperformance carries over from H1.

EUROPE/MIDDLE EAST/AFRICA

Germany reported soft September GfK consumer confidence. It came in at -25.5 vs. -24.5 expected and a revised -24.6 (was -24.4) in August. Elsewhere, Spain reported July retail sales at 7.3% y/y vs. 6.7% expected and a revised 6.5% (was 6.4%) in June. Germany reports July retail sales Thursday and are expected at 0.3% m/m vs. -0.6% in June. Germany remains the weak link in the eurozone but others are following it into recession. No wonder European Central Bank tightening expectations remain subdued. WIRP suggest odds of a 25 bp hike stand near 45% September 14, rise to 65% October 26 and top out near 75% December 14.

U.K. food prices continue to fall. The British Retail Consortium reported shop price inflation fell to 6.9% y/y in August vs. 7.6% in July, led by declines in the prices of meat, potatoes, and cooking oil that saw grocery prices slow to 11.5% y/y vs. 13.4% in July. This was the lowest since September 2022. This bodes well for headline inflation readings. Bank of England tightening expectations remain subdued. WIRP suggests only 5% odds of a 50 bp hike September 21, while a 25 bp hike November 2 is largely priced in. The odds of one last 25 bp hike top out near 50% in Q1.

Sweden reported Q2 GDP data. GDP came in at -0.8% q/q vs. -1.3% expected and a revised 0.4% (was 0.6%) in Q1 and -1.0% y/y vs. -1.1% expected and a revised 1.0% (was 0.8%) in Q1. Growth is slowing but the Riksbank remains focused on the weak krona and upside inflation risks. At the last policy meeting June 29, the Riksbank hiked rates 25 bp to 3.75% and said rates would be hiked at least one more time this year as the weak krona is contributing to high inflation. WIRP suggests a 25 bp hike to 4.0% at the next meeting September 21 is fully priced in. Looking ahead, another 25 bp hike in H1 2024 is about 50% priced in that would see the policy rate peak near 4.25%.

National Bank of Hungary meets. It is expected to keep the base rate steady at 13.0% but cut the 1-day deposit rate by 100 bp to 14.0%. Another 100 bp cut next month is expected and will align the two rates at 13.0%, after which the central bank is expected to continue cutting both together in the coming months. The swaps market sees 175 bp of easing over the next three months followed by another 225 bp over the subsequent months that would take both rates down to 9.0%. Such aggressive easing would likely take a toll on the currency.

ASIA

Japan reported soft July labor market data. Both the unemployment rate and the job-to-applicant ratio were expected to remain steady at 2.5% and 1.30, respectively. However, unemployment rose to 2.7% and the job-to-applicant ratio fell to 1.29, suggesting some softening of the labor market. Unemployment is the highest since March but still not far from the cycle low of 2.4% in January. Still, the softening suggests that wage pressures will be limited going forward. This is the missing ingredient to BOJ liftoff and so this will likely feed into the bank’s cautious stance.

Incoming RBA Governor Bullock sounded hawkish. She said inflation was too high and added that “We may have to raise interest rates again, but we’re watching the data very carefully. And we’ll be taking decisions for the time being until next year at least month by month.” Bullock takes over from outgoing Governor Lowe in mid-September. 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 are around 25% and rise and top out at 45% in Q1.

Reports suggest China’s largest state-owned banks are considering another cut to deposit rates. Cuts between 5-20 bp have already been approved by regulators and could come as soon as this Friday. Deposit rates were cut last June and September and so this round would just continue the cycle. In related news, Finance Minister Liu Kun and Chairman of the National Development and Reform Commission Zheng Shanjie together pledged more fiscal support for the economy. However, there were really no new details and simply mirrored past promises to boost growth. All of the recent measures are akin to pushing on a string and so we believe the economy will continue to weaken, along with the yuan.

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