Dollar Firms as Key Week Begins

July 19, 2021
  • The dollar smile theory seems to be in play; the outlook for fiscal policy in the U.S. remains uncertain; the results of the Chilean primary presidential elections brought some tentative good news for markets
  • ECB asset purchases for the week ending July 16 will be reported; U.K. policymakers are struggling to present a coherent message on the economy; between the worsening economic outlook and rising virus numbers, sterling is trading at the lowest level since April 13
  • Japan’s Cabinet Office maintained its economic assessment for a third straight month; public approval for Prime Minister Suga’s cabinet fell to record lows in two polls; risk sentiment has taken a turn for the worse in emerging Asia with rising delta variant fears; oil markets continue on a downward trend after OPEC+ confirmed the rumored supply deal
  • Cross-market implied volatility measure continue to reflect growing concerns about the impact of the delta variant. The Vix is back above 20, though still well off levels seen earlier in the year. The Move index at just under 60 is has been holding above its 1-month average for several weeks. G7 FX implied fall has been the outlier, still dormant at around 6%, well below its 1-year average of over 7%.

The dollar remains firm as the new week begins in risk off mode. DXY is up for the third straight day and is trading at the highest level since April 5 near 93. Further gains are expected as it moves toward a test of the March 31 high near 93.437. The euro remains heavy ahead of the ECB decision Thursday and the break below $1.18 sets up a test of the March 31 low near $1.1705. Sterling is also trading heavy as the government’s pandemic response comes under renewed scrutiny (see below). Cable is about to test the April 12 low near $1.3670 and further losses are likely. USD/JPY remains under pressure as risk off sentiment continues to take hold, though near-term support is seen around the July 8 low just above 109.50.

AMERICAS

The dollar smile theory seems to be in play. That is, strong U.S. data are feeding into increased dollar bullishness as the Fed continues to take tentative steps towards tapering. With the ECB and BOJ remaining ultra-dovish, the relative stances would seem to favor the dollar. On the other hand, growing risk off impulses are helping the dollar recently. This supports the view that the greenback is likely to benefit in either situation. Hence, the smile as the dollar turns up at both ends of the risk spectrum. The yen is the only currency that’s higher against the dollar today, as its old status as a haven appears be making a comeback. USD/JPY should see solid support near 109.50 but a break below the 109.10 area would signal a deeper correction to the April 23 low near 107.50.

The outlook for fiscal policy in the U.S. remains uncertain. Senate Majority Leader Schumer will reportedly take two major steps in an effort to force action this week on the bipartisan $579 bln traditional infrastructure plan and a separate $3.5 trln “human infrastructure” plan. Schumer announced he’ll take a preliminary step today that will lead to a first test vote on the infrastructure plan by Wednesday. He also set Wednesday as the deadline for all Senate Democrats to unite behind a budget blueprint that would carry out the bulk of Biden’s “human infrastructure” plan later this year. The former will take the traditional route and will need Republican support to get 60 votes, while the latter will reportedly be passed via budget reconciliation and will need unanimous Democratic support to get 50 votes. Neither seems assured by Schumer is clearly running out of patience and time. Stay tuned.

The results of the Chilean primary presidential elections brought some tentative good news for markets. On the left, the Communist Party candidate Daniel Jadue lost to the more moderate Gabriel Boric. Boric came to the scene during the mass student protests in 2011 and then won an election to the lower house. On the right, former minister Sebastian Sichel scored a surprise victory. The results plus the incipient tightening cycle should provide some support for the peso, at least in relative terms, but it will be limited to a tactical game. We doubt investors will gain enough conviction to re-establish any sizable positions until the political fog has cleared up further. The peso is still down 6% on the year, around the middle of the LatAm FX pack.

EUROPE/MIDDLE EAST/AFRICA

ECB asset purchases for the week ending July 16 will be reported. Net purchases were EUR22.1 bln for the week ending July 9 vs. EUR15.7 bln for the week ending July 2. The ECB has been aiming for net weekly purchases of around EUR20 bln since the accelerated pace began in March, but there have been a couple of outliers on both sides. That said, the large net purchases last week underscore our belief that the ECB will not risk making any premature moves that could endanger the recovery. Indeed, it is expected to announce further stimulus measures this Thursday. We will be sending out an ECB preview tomorrow.

U.K. policymakers are struggling to present a coherent message on the economy. Last week’s CPI data came in higher than expected, but officials continue to frame this as a transitory spike even as the real sector data soften. Yet virus numbers continue to rise even as the economy fully reopens today. With daily new cases rising above 50k over the weekend, it seems that dire warnings about potential for 100k per day are becoming increasingly prescient. Prime Minister Johnson and his government are under fire for the botched handling of Johnson and Chancellor Sunak’s exposure to Home Minister Javid, who tested positive despite being fully vaccinated.

Between the worsening economic outlook and rising virus numbers, sterling is trading at the lowest level since April 13. Cable is testing the 200- day moving average near $1.37 currently and below that is the April 12 low near $1.3670. After that is the February 4 low near $1.3565 and then the January 11 low near $1.3450. Next BOE meeting is August 5 and a dovish hold is expected, which should add fuel to the sterling sell-off. MPC member Haskel today warned that tighter policy would risk the recovery, adding that some inflation is temporary.

ASIA

Japan’s Cabinet Office maintained its economic assessment for a third straight month. However, it noted that weak consumer spending continues to weigh on the recovery. On the other hand, shipments abroad, business investment, industrial production, and overall corporate profits are improving. No wonder the BOJ delivered a dovish hold last week. Updated forecasts were released and the bank sees targeted core inflation at 0.6% (0.1% previously) for FY2021, 0.9% (0.8% previously) for FY2022, and steady at 1.0% for FY23. The bottom line is that even with these forecast tweaks, inflation is likely to remain below the 2% target through FY23. As such, the BOJ continues to signal that it intends to keep policy accommodative until FY24 at least.

Public approval for Prime Minister Suga’s cabinet fell to record lows in two polls. A Kyodo survey showed the approval rating dropping 8.1 points from last month to 35.9%, while the disapproval rate reached 49.8%, the highest since Suga took office in September. A separate survey by the Mainichi Shimbun newspaper saw the approval rating falling 4 points to 30%, while the disapproval rate rose 7 points to 62%. With the economy struggling and Suga’s support falling, we continue to expect another fiscal package to be announced soon.

Risk sentiment has taken a turn for the worse in emerging Asia with rising delta variant fears. Some of the notable price action include a 4.3% tumble for Vietnam main equity index on stricter mobility measures. The capital will go into a soft lockdown allowing citizens to leave only when “truly necessary” and non-essential services will shut. The Philippine peso fell about 0.5%, reaching the weakest level in over a year after 16 new delta variant cases were reported. The combination of worsening virus outlook, mostly low vaccination rates, and some negative sentiment coming from sell-off in Chinese stocks has dented the positive narrative many of these equity markets started the year on. Most EM Asian markets are significantly underperforming the MSCI world index year to date.

COMMODITIES

Oil markets continue on a downward trend after OPEC+ confirmed the rumored supply deal. Output will increase by 400k barrels a day starting in August until they reach 5.8 mln, thus re-establishing the supply level from before the cuts. The deal also included higher baseline production levels for some of the larger produces. Of course, these numbers can and will be adjusted depending on changing market condition, but for now it eases the concerns about the Saudi-UAE spat, providing greater visibility to the energy market. Brent front-month futures are down 2.3% on the day, on top of last week’s 2.6% decline. Perhaps more telling, the deep backwardation in the futures curve has roughly halved in the last few sessions to -$3.8 dollars spread between the front-month and the 12-month contracts.

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. 2021. All rights reserved.

This browser is not fully supported by our public website and may not display or function as expected for this reason. Please note, the Infuse Portal and BBH client applications fully support the IE 11 browser.

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