Dollar Firm as New Week Begins

September 13, 2021
  • After the post-jobs report sell-off, the dollar has come roaring back; due to the media embargo ahead of the September 21-22 FOMC meeting, there will be no Fed speakers this week; the only U.S. data today is the August budget statement
  • ECB asset purchases for the week ending September 10 will be reported; Tory infighting is coming into full view; Turkey’s external accounts and IP figures came in below expectations
  • The lockdown in Auckland was extended for at least another week; the news stream out of China’s regulators continues, with Alipay the latest target; North Korea announced a successful test of a new long-range cruise missile; the split in metals performance continues to widen as aluminum futures rally and iron ore tanks

The dollar continues to gain traction. DXY is up for the second straight day and traded at the highest level since August 27 near 92.877. A break above 93.048 is needed to set up a test of the August 20 high near 93.729. Similarly, the euro is making new lows for this move near $1.1775 and a break below $1.1760 would set up a test of the August 20 low near $1.1665. Sterling is holding up better near $1.3825, while USD/JPY has edged back above 110 after selling took it as low as 109.60 last week. 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.

AMERICAS

After the post-jobs report sell-off, the dollar has come roaring back. The dollar was up against every major currency last week, with NOK and JPY outperforming and AUD and CAD underperforming. The greenback did well against EM as well. The dollar remains firm as the new week begins, but it will be up to the data to keep the dollar rally going. CPI tomorrow and retail sales Thursday are the main events. It’s noteworthy that the dollar remains bid despite the somewhat softer U.S. data recently and a more hawkish ECB.

Due to the media embargo ahead of the September 21-22 FOMC meeting, there will be no Fed speakers this week. Last week, most Fed officials sounded as if they are looking through the weak August jobs report and still want to taper this year. Mester said Friday that “I don’t think the August employment report has changed my view that we’ve made substantial further progress. I would like us to begin tapering sometime this year.” This followed similar comments from Williams, Bowman, and Kaplan last week. Our best guess is that the Fed announces a formal timeline for tapering at the November 2-3 meeting and starts tapering at the December 14-15 meeting. Sure, it’s possible the Fed waits until January but really, why wait?

The only U.S. data today is the August budget statement. While very rarely market-moving, the data take on more importance given the debate raging about the next stimulus bills. Democrat Manchin is using the budget deficit as a reason to call for a much smaller “human infrastructure” package than the $3.5 trln that’s been proposed. House Democrats have already started to make compromises to appeal to the centrists. Reports suggest the proposed corporate tax rate has been cut to 26.5% vs. 28% proposed by Biden, though it is up from the current rate of 21%. Similarly, the proposed top rate on capital gains is reportedly now at 25% vs. 39.6% proposed by Biden, though up from the current 20%. Stay tuned.

EUROPE/MIDDLE EAST/AFRICA

ECB asset purchases for the week ending September 10 will be reported. This weekly number has taken on more importance after the ECB last week announced that it would aim for a more “moderate” pace going forward. Net purchases were EUR16.7 bln for the week ending September 3 vs. EUR11.5 bln for the week ending August 27 and EUR16.6 bln for the week ending August 20. The ECB has been aiming for net weekly purchases of around EUR20 bln since the accelerated pace began in March but have fallen a bit short in recent weeks due to thin market conditions over the summer. Now, it will likely take a few weeks to figure out what the new pace will be.

Tory infighting is coming into full view. Health Secretary (and former Chancellor) Javid demanded no new taxes ahead of the next election, and instead pushed cuts to public spending. This is a direct rebuke of Johnson’s plan to hike payroll taxes to fund healthcare and social spending. Other unnamed back-benchers are saying their constituents are unhappy with the tax hike. General elections aren’t due until May 2024 and so it’s too early to talk about the political costs to Johnson that come from breaking his long-standing manifesto. Stay tuned, but we suspect the infighting will only get worse.

Turkey’s external accounts and IP figures came in below expectations, compounding the already complicated outlook for the country’s asset prices. The current account deficit narrowed to -$0.68 bln in July, a material improvement from the previous month but less than expected. The improvement was largely due to tourism, which saw a fourfold increase compared to the previous year. IP decelerated sharply to 8.7% y/y, nearly half what was expected. In m/m terms, IP sank -4.2%. Turkish assets have been stable over the last few session, but we suspect that it’s more due to lack of participation than anything else. We still don’t see any convincing case to take a risk in Turkish assets (in either direction) given the uncertainty about the local political and policymaking outlook.

ASIA

The lockdown in Auckland was extended for at least another week as the virus numbers remain stubbornly high. While much of the country moved to Level 2 last week, Auckland will retain the strictest measure under Level 4 for at least another week. Despite the lingering lockdowns, RBNZ officials have signaled that they are ready to begin the tightening cycle at the next meeting October 6. A 25 bp hike is fully priced in.

The news stream out of China’s regulators continues, with Alipay the latest target. Reports claim that the government is looking to separate Alipay from Ant Group and into a new app for its loan business. As part of the move, Ant Group would transfer user data to a new partly state-owned credit scoring entity. According to a PBOC advisor Cai Fang, controlling tech companies is important to avoid a “winner takes all” dynamic. Alibaba, which owns about 1/3 of Ant Group, saw its share price in Hong Kong fall 5.4%, and other Chinese tech stocks are getting hit as well.

North Korea announced a successful test of a new long-range cruise missile, rekindling this vector of geopolitical risk that’s been dormant since March. According to Bloomberg, the missiles show its capability for nuclear strikes against Japan and South Korea. This follows a report from the UN claiming that North Korea had resumed plutonium-producing operations. The Korean won underperformed on the day, down 0.5% against the dollar, but the news had no major impact on the Kospi.

COMMMODITIES AND ALTERNATIVE INVESTMENTS

In the commodity space, the split in metals performance continues to widen as aluminum futures rally and iron ore tanks. Aluminum is now at a 13-year high, driven largely by supply restrictions in China that are due in part by environmental concerns restricting production and power shortages. In addition, political unrest in Guinea has compromised supplies of bauxite (used in aluminum production). Iron ore on the other hand, has been hit hard by changes in production quotas in China, regulatory measures against production mills, and speculation that regulators are aiming to slow down growth in the property sector.

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