US
USD is hovering at the top-end of the range carved-out since Friday’s post-NFP low. US stocks are powering forward and dragging global equity markets higher. Expectations of looser Fed policy and resilient global economic activity are fueling the stock market rally. This risk-on backdrop should act as a headwind for USD, especially against cyclical-sensitive currencies.
We see no strong dollar bias in today’s US data release. The US merchandise trade deficit (8:30am New York, 1:30pm London) is seen narrowing to -$61.0bn vs. -$71.5bn in May reflecting a decline in imports. It’s worth noting that goods imports collapsed -35.3% q/q in Q2, making trade the main contributor to GDP growth.
The ISM Services index (10:00am New York, 3:00pm London) is expected to improve to a two-month high at 51.5 in July vs. 50.8 in June. Importantly, the Prices Paid subindex is seen easing 1 point to 66.5 in July but remain indicative of upside risk to inflation, complicating the Fed’s path toward policy easing.
We also get a fresh update of the Atlanta Fed GDPNow model later today. As of August 1, the model estimates Q3 annualized growth at 2.1%, down from 2.3% on July 31.
JAPAN
JPY and JGBs ignored the Bank of Japan Minutes of the June 16-17 policy meeting. At that meeting, the BOJ unanimously decided to leave the policy rate at 0.50% and unveiled a plan to slow the pace of JGB purchases. Interestingly, the Minutes showed that “A few members expressed the view that…the Bank would likely move on from its current wait-and-see approach and consider resuming the process of policy interest rate hikes, if trade friction was expected to progress without escalation.” On July 23, the US and Japan struck a trade deal, suggesting the bar for a BOJ rate hike later this year is low.
The swaps market price-in 50% odds of a 25bps rate increase by year-end and a total of about 50bps of rate hikes to 1.00% over the next two years. The BOJ is unlikely to raise the policy rate by more than is currently priced-in, limiting JPY upside. One reason is that Japan CPI less food & energy has held below 2% for over a year and the economy shows little sign of gaining real momentum.
AUSTRALIA
AUD/USD is holding above its 100-day moving average (0.6430). Australia June household spending report was mixed. On a current price basis, household spending rose less than expected by 0.5% m/m (consensus: 0.8%) vs. 1.0% in May driven entirely by spending on goods (1.3% m/m). Spending on services fell -0.5% m/m. In volume terms, household spending increased 0.7% q/q in Q2 vs. 0.5% in Q1 suggesting momentum in household consumption growth is picking up.
The RBA is poised to resume easing at its next August 12 meeting. RBA cash rate futures more than fully price-in a 25bps cut to 3.60%. Overall, RBA/Fed policy expectations still favor AUD/USD, with market pricing 80bps of RBA cuts vs. 110bps for the Fed.
CHINA
USD/CNH is firmer just under key resistance at 7.2000 and China’s stock index extended its rebound. China’s S&P Global Services PMI rose to a 14-month high at 52.6 in July vs. 50.6 in June driven by higher new business. In contrast, China’s S&P Global Manufacturing PMI - released last week - dropped to 49.5 in July vs. 50.4 in June, dragging the S&P Global China Composite PMI down to a two-month low at 50.8 vs. 51.3 in June.
China’s growth outlook remains soggy. China must shift its growth model toward one in which domestic consumption plays a greater role. However, three major structural constraints prevent any meaningful effort to increase the role consumption plays in China’s economy: low household income levels, high precautionary savings, and high levels of household debt. As such, China will continue to lean heavily on infrastructure to hit its growth target. This is good for commodity prices but bad for China’s long-term economic health.
