Dollar Rally Continues Ahead of Beige Book

September 08, 2021
  • July JOLTS job opening will be reported; Fed releases its Beige Book report for the September 21-22 FOMC meeting; Fed speakers this week should reveal how the Fed is viewing the August jobs miss; BOC is expected to keep policy steady; yesterday’s large pro-government protests across Brazil were mostly peaceful
  • The euro is soft ahead of the ECB decision tomorrow; the euro is a mixed bag on ECB decision days; U.K. Parliament is set to vote on a proposal to increase payroll taxes on workers and firms; TRY is underperforming after dovish comments by the central bank governor
  • Japan reported final GDP data; July current account data are worth discussing; the washout in cryptocurrency markets continues

The dollar is getting further traction. DXY is up for the second session after six straight down days and has more than recouped its post-NFP losses to trade at the highest level since September 1 near 92.70. A clean break above 92.71 would set up a test of the August 27 high near 93.181. The euro remains heavy ahead of the ECB decision tomorrow (see below) and a break below $1.18 would set up a test of the August 27 low near $1.1735. Sterling is also heavy and a clean break below $1.3760 would set up a test of the August 27 low near $1.3680. USD/JPY traded at a new high for this move near 110.45 but has since fallen back. The next upside target is the August 11 high near 110.80.

AMERICAS

July JOLTS job opening will be reported. Openings are expected at 10.049 mln vs.10.073 mln in June. If so, it would remain near the record highs and supports the view that businesses are struggling to attract workers. Of note, the BLS household survey showed total unemployed falling to 8.383 mln in August, a new pandemic low. Job openings have been higher than the number of unemployed since May, something that hasn’t happened since (wait for it) February 2020. While there are always some skill mismatches, excess job openings supports our view (again) that wages are likely to move higher. Consumer credit will also be reported and is expected to rise $25.0 bln vs. $37.69 bln in June.

The Fed releases its Beige Book report for the September 21-22 FOMC meeting. Since the last FOMC meeting July 27-28, most of the real sector data have softened. The survey and PMI data suggest bottlenecks persist and this should be reflected in the Beige Book. Also, it appears job growth has slowed and this too should be picked up in the Beige Book report. However, we suspect most Fed districts will say that firms continue to have trouble filling job vacancies. All in all, we expect the Beige Book to be balanced enough to allow the Fed maximum flexibility at this meeting.

Fed speakers this week should reveal how the Fed is viewing the August jobs miss. Will they still talk about tapering sooner rather than later? Many of the speakers are in the hawkish camp and so their remarks will be very important in terms of managing market expectations. Williams and Kaplan both speak today. It’s a tough call but we believe that the weak August jobs print will push back the official tapering announcement to the next FOMC meeting November 2-3.

Bank of Canada is expected to keep policy steady. The weak Q2 GDP print from last week should keep the bank cautious but we still expect tapering to continue in Q4. At the last policy meeting July 14, the bank tapered its QE to a weekly pace of CAD2 bln, reflecting the “continued progress towards recovery.” The bank also affirmed its forward guidance that it is likely to hike rates in H2 2022, though exactly when is still unclear after the Q2 GDP shocker. At the July meeting, the bank downgraded its 2021 growth forecast by 0.5 ppts to 6% this year but upgraded the 2022 and 2023 forecasts to 4.6% and 3.3%, respectively. New forecasts won’t come until the October 27 meeting. August Ivey PMI will be reported today.

The Loonie tends to gain on BOC decision days. It has not weakened on one since last October, covering six straight meetings. Going further back to the June 2020 meeting, the Loonie has only weakened once over the past ten meetings.

Yesterday’s large pro-government protests across Brazil were mostly peaceful and will probably not have large implications beyond what we already know. We had the usual fiery speeches and calls for a military takeover from the supporters’ ranks. In parallel, the Electoral Court continue to investigate Bolsonaro’s behavior during the last elections, not to mention the inquiry about mismanagement during the pandemic. But again, there is no new information here. Brazilian equities underperformed yesterday, down 1%, but BRL managed a small gain.

EUROPE/MIDDLE EAST/AFRICA

The euro is soft ahead of the ECB decision tomorrow. No change in policy settings is expected but there are risks of a hawkish surprise. Many of the hawks will point to still-favorable financing conditions as justification to slow the pace of PEPP. On the other hand, the doves are pushing back with the notion that the jump in inflation is temporary. Of course, the divide is a north-south one, with Germany, Austria, and the Netherlands all lining up on the hawkish side. The ECB meeting will be lively but we think the doves led by Lagarde remain in control.

New macro forecasts will be unveiled at this meeting. The June macro forecasts saw inflation at 1.5% in 2022 and 1.4% in 2023, which is the end of its current forecast horizon. Given the ongoing prolonged spike in inflation, we expect these forecasts could be nudged up modestly. However, that shouldn’t change the basic message under the new criteria that a hike is highly unlikely before 2024 and perhaps even 2025. 2024 will be added to the forecast horizon at the December 16 meeting and this will be another element of the new forward guidance.

The euro is a mixed bag on ECB decision days. It has weakened the past three but prior to that, it had strengthened on three straight decision days. We think a strong euro is the last thing policymakers want or need right now and so Madame Lagarde may serve a little warning to the markets at her press conference.

U.K. Parliament is set to vote on a proposal to increase payroll taxes on workers and firms. The move is meant to fund the National Health Service and other social spending by boosting taxes 1.25 percentage points. The move is fraught with peril for the Johnson government, as increased taxes will break a key promise that the Tories made in their 2019 election platform. More details are due before October 27, when Chancellor Sunak will announce his budget along with a three-year spending review. The estimated annual revenue from the new charge will be around 0.6% of GDP and is just the first baby steps in government efforts to rein in record budget deficits. However, it’s worth noting the divergence here between the U.K. and the U.S, where two big spending bills are being debated. The eurozone falls somewhere in between.

The Turkish lira is underperforming after dovish comments by the central bank governor. Governor Kavcioglu said he will “give weight” to core inflation. At face value, this looks like the typical central bank line about fading the re-opening spike in headline inflation, which implies no need to tighten. As we have argued, we think the bank will remain well behind the curve, with its reaction function heavily weighted by political influence from President Erdogan. And of course, markets will continue to punish Turkish assets for it. The lira is down 1.5% on the day and local rates have moved higher, with the 10-year swap rate back above 16%.

ASIA

Japan reported final GDP data. Growth was revised up to 0.5% q/q vs. 0.4% expected and 0.3% preliminary. Private consumption was revised up a tick to 0.9% q/q, while business spending was revised up three ticks to 2.3% q/q. That means that, like Australia, Japan had a bit more momentum than anticipated as it went into lockdown. So far in Q3, the economy has held up better than expected but the state of emergency may stretch into Q4 if the virus numbers don’t improve soon. We anticipate another fiscal package once the LDP leadership vote is completed September 30.

July current account data are worth discussing. An adjusted surplus of JPY1.41 trln was posted vs. JPY1.85 trln expected and JPY1.78 trln in June. However, the investment flows will be of more interest. July data showed that Japan investors were net sellers of US bonds to the tune of -JPY764 bln vs. net buying of JPY1.5 trln in June. Japan investors were also net sellers (-JPY155 bln) of Australian bonds for the third straight month and five of the past six months. Japan investors were net buyers of Canadian (JPY93 bln), and Italian (JPY376 bln) bonds, with both coming after two straight months of net selling.

COMMODITIES AND ALTERNATIVE INVESTMENTS

The washout in cryptocurrency markets continues, albeit less dramatic than yesterday, and as usual propelled by leverage liquidation. There wasn’t an obvious trigger, but perhaps some degree of contagion from the broader market sentiment and a buy the rumor, sell the fact from the El Salvador bitcoin purchase. There has also been some slowdown in the NFT craze, as seen by lower volumes on Open Sea platform, which could also have served to dampen the sentiment for ethereum. Looks as if well over $2 bln of leveraged longs were liquidated, leading to a nearly 20% loss for ethereum and 15% for bitcoin, erasing this month’s strong gains.

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