Dollar Consolidates Ahead of the Weekend

September 10, 2021
  • August PPI data will be the data highlight; Mester speaks today; Canada reports August jobs data; Brazil IPCA inflation surprised on the upside yesterday at 9.68% y/y; Peru hiked rates by 50 bp to 1.0%, as expected
  • The ECB delivered a hawkish hold; according to Lagarde, "The lady isn't tapering"; U.K. monthly data dump for July was disappointing; Russia opted for a less aggressive 25 bp hike to 6.75% vs. 50 bp expected
  • Japan’s vaccine czar Kono has entered the LDP leadership race; President Biden and President Xi spoke on the phone overnight discussing a range of matters in an attempt to improve relations between the two nations

The dollar is consolidating ahead of the weekend. DXY is flat today near 92.46 as the euro’s post-ECB bounce ran out of steam near $1.1850. Some support is likely to be seen near $1.18. Sterling is holding up better near $1.3865 despite disappointing data (see below), while USD/JPY is edging back up towards 110 after selling took it as low as 109.60 yesterday. We remain positive on the dollar but acknowledge that a sustained rally will depend largely on the economic data in the coming days and weeks. Today’s PPI data could be one impetus for higher yields and dollar.

AMERICAS

August PPI data will be the data highlight. Headline PPI is expected to rise 8.2% y/y vs. 7.8% in July, while core is expected to rise 6.6% y/y vs. 6.2% in July. CPI data will be reported Tuesday. Given the upside average hourly earnings surprise in the August jobs reports, these inflation measures will take on even greater importance. For now, U.S. yields remain stuck in familiar ranges. However, if wages and inflation continue to move higher and brings tapering closer, then an upside breakout for yields seems very likely.

Mester speaks today. Fed comments this week suggest many officials are looking through the August jobs miss and still planning to taper before year-end. As of midnight tonight, the media embargo goes into effect and there will be no more Fed speakers until Powell’s post-decision press conference the afternoon of September 22. Wholesale inventories (0.6% m/m expected) and trade sales will be reported Friday. Yesterday, weekly claims data continued to show improvement. Initial claims came in at 310k and continuing claims at 2.783 mln. With revisions to the previous week, both initial and continuing claims are making new pandemic lows and supports our view that the labor market continues to heal, albeit in a spotty manner.

Canada reports August jobs data. A 67.5k gain expected vs. 94.0k in July, while the unemployment rate is expected to drop two ticks to 7.3%. A strong jobs report could give Trudeau some further traction going into the September 20 elections. Trudeau’s Liberals and O’Toole’s Conservatives are running neck and neck, with polls showing the two parties basically in a dead heat. A major point of attack on Trudeau is his decision to call an election in the middle of the pandemic, which appears to have offset his fiscal largesse and overall handling of the pandemic response.

As we wrote yesterday, the protests were a local maximum in political tensions in Brazil. President Bolsonaro released a statement signaling a truce in the hostilities with the country’s Supreme Court. He said that “harmony” between the powers is a “constitutional order” that all have to respect. With a truce in place and minimal support from the centrist parties, the government retains a minimum level of governability and the possibility (even if remote) of re-establishing a positive economic agenda. BRL appreciated over 2% yesterday and the Bovespa gained 1.7%. We retain our tactical short-term positive bias for Brazilian assets, but also our medium-term negative view.

On the data front, Brazil IPCA inflation surprised on the upside yesterday with CPI rising 9.68% y/y (9.50% expected), validating the hawkish turn of the central bank. This was the highest August print in 20 years, with underlying data suggesting it’s becoming widespread across most categories. And there are a lot more price pressures in the pipeline including negative currency pass-through, water shortages boosting energy costs, and risk of a truckers strike hitting the supply chain. This supports our view that a lot more hikes are coming, with the next one September 22 quite possibly 125 bp.

Peru’s central bank hiked rates by 50 bp to 1.0%, as expected. The forward guidance implies the possibility of a pause, but we think more tightening is likely. While much of the headline inflation pressures are likely temporary, the latest print near 5% y/y is far above the 1-3-% target range and core inflation of 2.39% is nearing the upper end. On top of this, there is political risk with the new president and a 5% depreciation of the sol over the last 3 months to filter through into price pressures. Peru remains well behind most major central banks in the region with target rates at 5.25% in Brazil, 4.50% in Mexico, 1.75% in Colombia and 1.50% in Chile. Next policy meeting is October 7 and we lean towards another hike then.


EUROPE/MIDDLE EAST/AFRICA

The ECB delivered a hawkish hold. Interest rates and the size of PEPP were all left unchanged. However, the bank announced that the pace of PEPP buying in Q4 will run at “a moderately lower pace” than in past quarters. The ECB stressed that PEPP will be used “flexibly” according to market conditions. Lagarde said that the “recalibration” was for the next three months, which suggests that if the recovery falters, the PEPP pace can be recalibrated again for Q1. The hawks have won a small battle but have they won the war? To be determined. We do think that Madame Lagarde is well aware of the ECB's past history of tightening too soon, mostly by her fellow countryman Trichet. She may have thrown this bone to the hawks whilst looking ahead to fight another fight to extend QE next year.

According to Lagarde, "The lady isn't tapering." Is this a taper? Yes and no. No, in that the size of PEPP remains unchanged. The EUR1.85 trln was always seen as a ceiling and one could say that the accelerated pace in Q2 and Q3 was meant to be temporary and subject to recalibration. Yes, in that the weekly asset purchases will be lower going forward. In a sense, this crystallizes the stock vs flow debate. Does the size (stock) of the ECB's balance sheet matter or does the weekly purchases (flows) matter? Either way, this is a modestly hawkish hold that we think is rather risky for the ECB. We just don't have much confidence that the eurozone economy is ready to have accommodation removed, however incrementally.

Macro forecasts were updated. For inflation, the ECB sees 2021 at 2.2% vs. 1.9% in June, 2022 at 1.7% vs. 1.5% in June, and 2023 at 1.5% vs. 1.4% in June. For growth, the ECB sees 2021 at 5.0% vs. 4.6% in June, 2022 at 4.6% vs. 4.7% in June, and 2023 at 2.1% vs. the same in June. This is a fairly upbeat outlook but the inflation forecasts are telling us the ECB sees no need to hike rates until 2024 at the earliest. The 2024 forecasts will be added at the December meeting and will be another element of forward guidance. If the 2024 inflation forecast is below 2% (which is likely), that would suggest no hikes until 2025.

U.K. monthly data dump for July was disappointing. GDP rose only 0.1% m/m vs. 0.5% expected and 1.0% in June, while manufacturing was flat m/m vs. 0.1% expected and 0.2% in June. IP was the only bright spot, up 1.2% m/m vs. 0.4% expected and -0.7% in June. Construction fell -1.6% m/m vs. +0.5% expected and -1.3% in June, while services were flat m/m vs. 0.6% expected and 1.5% in June. Lastly, the trade deficit widened to -GBP3.1 bln vs. -GBP1.6 bln expected and -GBP2.5 bln in June. With the economy reopening that month, many had hoped for a stronger rebound. The loss of momentum comes ahead of the expiry of the jobs furlough program this month, which will be another headwind on top of the planned hike in payroll taxes.

Next Bank of England decision is due September 23. Given the recent softness in the data, another dovish hold is expected. Updated BOE forecasts won’t be made until the next decision November 4. The August inflation forecasts were 4.0% (2.5% in May) in 2021, 2.5% (2.0%) in 2022, and 2.0% (2.0%) in 2023, while the GDP growth forecasts were 7.25% (7.25% in May) in 2021, 6.0% (5.75%) in 2022, and 1.5% (1.25%) in 2023. These inflation forecasts suggest no hurry to hike and no need to hike aggressively. 2024 will be added to the forecast horizon at the November 4 decision and will be a very important components of the bank’s forward guidance.

Russia’s central bank opted for a less aggressive 25 bp hike to 6.75% vs. 50 bp expected. This was quite a deceleration after the 100 bp hike at the July meeting. CPI is running at 6.7% y/y and core at a whopping 7.1% y/y, both well above the bank’s 4% target but expected to start moderating as one-off factors dissipate and the economy decelerates. On the other hand, fiscal spending is set to increase with the equivalent of nearly $10 bln in new social spending programs. The ruble saw the usual kneejerk reaction of a brief sell-off, but it wasn’t sustained. While surprising, we don’t think today’s decision will have a huge impact on asset prices. July trade and final Q2 GDP data will also be reported later today, with growth expected at 10.3% y/y.

ASIA

Japan’s vaccine czar Kono has entered the LDP leadership race. Kono joins former Foreign Minister Kishida and former Internal Affairs Minister Takaichi as candidates to replace the outgoing Suga. Both Kishida and Takaichi have pledged extra spending to help boost the economy, and we suspect Kono will too. With regards to inflation, Kono noted that “As to whether we can reach the target under the current circumstances -- it will be very difficult.” Recent polls suggest Kono has the strongest support amongst the three candidates. When all is said and done, however, we do not foresee any significant shift in policies no matter who wins.

President Biden and President Xi spoke on the phone overnight discussing a range of matters in an attempt to improve relations between the two nations, but doesn’t look like there was much progress. Still, this news coupled with clarification that Beijing intends to slow new game approvals and not halt them boosted risk appetite across the board to end the week. The Nikkei climbed +1.3% while Tencent (+1.1%) helped the Hang Seng and Shanghai Composite climb +1.5% and +0.6%, respectively.

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