Dollar Firm Going into the Weekend

August 19, 2022
  • U.S. rates continue to creep higher; the Fed debate continues; Fed officials continue their communication strategy; yesterday’s data were mixed
  • ECB officials remain hawkish; U.K. reported July retail sales and public sector net borrowing; BOE tightening expectations have risen sharply; Turkey delivered a dovish surprise
  • Japan reported July national CPI data; Philippine central bank is pivoting

The dollar remains firm as the week draws to a close. DXY is up for the third straight day and four of the five days this week, trading near 107.88 currently. This is the highest since July 18 and on track to test the July 14 high near 109.294. The euro remains heavy and is currently trading near $1.0060 and on track to test the July 14 cycle low near $0.9950. Sterling is also making new lows for this move near $1.1845 despite more aggressive BOE tightening expectations (see below) and is on track to test the July 14 low near $1.1760. USD/JPY is marching higher and trading just below 137, and is on track to test the July 14 high near 139.40. We maintain our strong dollar call as the dollar smile seems intact. As risk-off impulses ebb, the dollar should still benefit from the relatively strong U.S. economic outlook and heightened Fed tightening expectations.

AMERICAS

U.S. rates continue to creep higher. The 10-year yield is traded near 2.95% today, the highest since July 21 and approaching that day’s high near 3.08%. Elsewhere, the 2-year yield traded near 3.27% and approaching the June 14 high near 3.45%. The 2- to 10-year curve remains inverted but at -33 bp, it is the least inverted since early August. Similarly, the 3-month to 10-year curve has steadied around 30 bp, up from the lows near 20 bp earlier this month. We expect volatility in the rates markets to continue well into September as markets are finding it hard to find a sustainable macro trend to latch on to.

The Fed debate continues. We've got a lot to get through in the coming weeks, starting with Jackson Hole August 25-27. While we do not expect any bombshells here, the Fed is likely to maintain its hawkish stance. Next comes the August jobs report September 2, CPI September 13, PPI September 14, retail sales September 15, and some early September Fed surveys scattered through that week before the Fed decision September 21. A lot can certainly happen to get either a 50 or 75 bp outcome. As the Fed said, it's data dependent but if the market gives the Fed 75 bp, it will take it without hesitation. We also think that if the market is leaning towards 50 bp, the Fed could make a very strong hawkish statement by delivering a surprise 75 bp. Stay tuned.

Fed officials continue their communication strategy. Bullard said he leans toward a 75 bp hike next month. He stressed that it’s too soon to say inflation has peaked, adding that the jobs market remains strong and H2 growth will be stronger than H1. George said July CPI data was encouraging but added that it’s too soon for a victory lap. She said that the case for continuing rate hikes remain strong and the Fed will continue to debate the question of how fast to hike. George expects growth in the economy to slow. Kashkari said the Fed is committed to getting inflation under control. He stressed that the Fed has more work to do in terms of rate hikes in order to limit inflation. Lastly, Kashkari admitted that he doesn’t know if the Fed can lower inflation without causing recession. Lastly, Daly said the Fed should raise interest rates above 3% by year- end to cool inflation. Specifically, she said “We need to get the rate up, up to neutral at least, which is around 3%, but likely to restrictive territory -- a little bit above 3% this year and a little bit more above 3% next year.” She pushed back against a quick pivot, noting “I really think of the raise-and-hold strategy as one that has historically paid off for us.” Lastly, Daly said either a 50 or 75 bp hike next month would be appropriate, depending on the incoming data. Barkin speaks today.

Fed tightening expectations still need to adjust. WIRP suggests a 50 bp hike is fully priced in for the September 20-21 FOMC meeting, with 55% odds of a 75 bp hike. Looking ahead, the swaps market is now pricing in a 3.75% terminal rate vs. 3.5% at the start of last week. We think this is likely to move higher. The market is still pricing in a quick turnaround by the Fed into an easing cycle in 2023. It's pretty clear that the Fed doesn't see it that way and the data bear that out, at least for now. Market should also reprice these easing expectations in the coming days and weeks.

Yesterday’s data were mixed. The Philly Fed index came in at 6.2 vs. -5.0 expected and -12.3 in July. This was welcome news after the Empire survey kicked things off Monday with a -31.3 reading vs. 5.0 expected and 11.1 in July. July existing home sales came in weaker than expected at -5.9% m/m, while the leading index came in firmer than expected at -0.4% m/m. The housing sector should continue to weaken but that is what Fed rate hikes are supposed to do. Weekly jobless claims were better than expected. Of note, initial claims came in at 250k vs. 264k expected and are for the BLS survey week containing the 12th of the month. There is no Bloomberg consensus yet for NFP. All in all, the U.S. economy is holding up fairly well but is undoubtedly slowing as the Fed continues to tighten.

EUROPE/MIDDLE EAST/AFRICA

ECB officials remain hawkish. Schnabel said that next month, “any decision is going to be taken on the basis of incoming data. If I look at the most recent data, I would say that the concerns we had in July have not been alleviated.” Elsewhere, Kazaks said “At the moment what we see is that that inflation is unacceptably high, in Latvia above 20%.” ECB tightening expectations have picked up a bit recently. WIRP suggests a 50 bp hike is fully priced in for September 8, with low odds seen of a larger 75 bp move. The swaps market is pricing in 175 bp of tightening over the next 12 months that would see the deposit rate peak near 1.75%, up from 1.5% at the start of this week. Yet higher expected rates have done nothing for the euro. The single currency is trading at the lowest since mid-July and is on track to test the July 14 low near $0.9950. After that, the next target is the September 2002 low near $0.9615.

U.K. reported July retail sales and public sector net borrowing. Headline sales rose 0.3% m/m vs. -0.2% expected and a revised -0.2% (was -0.1%) in June while sales ex-auto fuels rose 0.4% m/m vs. -0.3% expected and a revised 0.2% (was 0.4% in June). Any strength in consumption will be impossible to sustain as U.K. household energy bills are set to rise about 80% in October. The latest industry estimate sees average annual bills near GBP3,600 when the new cap is announced vs. GBP1,971 that went into effect in April. Another big jump is seen in January. Late yesterday, August GfK consumer confidence was reported at -44 vs. -42 expected and -41 in July. This was the lowest since the series began in 1974, with GfK official noting “A sense of exasperation about the UK’s economy is the biggest driver of these findings. The crisis of confidence will only worsen with the darkening days of autumn and the colder months of winter.” Lastly, PSNB ex-banking groups came in at GBP4.9 bln vs. GBP3.2 bln expected and a revised GBP20.9 bln (was GBP22.9 bln ) in June.

BOE tightening expectations have risen sharply. WIRP suggests a 50 bp hike September 15 is fully priced in, with 25% odds of a larger 75 bp move. The swaps market is pricing in 225 bp of tightening over the next 12 months that would see the policy rate peak near 4.0% vs. 3.25-3.50% at the start of this week and 3.0-3.25% at the start of last week. This will only add to the headwinds and yet higher expected U.K. rates have done nothing for sterling either. Cable is trading at the lowest since mid-July and is on track to test the July 14 low near $1.1760. After that, there are no major chart points until the March 2020 low near $1.1410.

Turkey delivered a dovish surprise. With inflation running near 80%, the central bank unexpectedly cut rates 100 bp to 13.0%. The bank is clearly worried about slowing growth as it noted that financial conditions need to remain supportive. More specifically, the bank said “It is important that financial conditions remain supportive to preserve the growth momentum in industrial production and the positive trend in employment in a period of increasing uncertainties regarding global growth as well as escalating geopolitical risk.” However, it seems to signal no further easing as it noted that “the updated level of policy rate is adequate under the current outlook.” Still, the reputational damage continues to be felt.

ASIA

Japan reported July national CPI data. Headline came in as expected at 2.6% y/y vs. 2.4% in June, while core (ex-fresh food) came in as expected at 2.4% y/y vs. 2.2% in June. Core ex-energy came in a tick higher than expected at 1.2% y/y vs. 1.0% in June but still shows that without energy prices, inflation remains subdued. This was the highest reading for core since December 2014, but the latest macro forecasts from the BOJ see core inflation at 2.3% in FY22 before falling back below target to 1.4% and 1.3% in FY23 and FY24, respectively. For now, the data support the bank’s decision to maintain ultra-loose policy for now. Next policy meeting is September21-22 and no change is expected then.

Philippine central bank is pivoting. After delivering a surprise 75 bp hike last month and following up with the expected 50 bp hike at this week’s meeting, new Governor Medalla is downplaying the need for further aggressive hikes. He said the bank’s previous hikes have likely contained inflation enough and so the bank is more likely to deliver one or two 25 bp hikes the rest of this year. He added that three consecutive 25 bp hikes are unlikely. However, August CPI data September 6 will be a key input for that decision. CPI rose 6.4% y/y in July, the highest since October 2018 and further above the 2-4% target range. Along with aggressive Fed tightening still being seen, it seems too early for BSP to declare victory but only time will tell. Next policy meeting is September 22 and a 25 bp hike to 4.0% seems likely.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2022. All rights reserved.

As of June 15, 2022 Internet Explorer 11 is not supported by BBH.com.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com


captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction