Dollar Rangebound as Key Week Begins

June 28, 2021
  • All eyes are on the jobs report Friday; some reports suggest ending enhanced unemployment benefits have not yet led to a boost in employment; Fed speakers are likely to continue pushing the more hawkish narrative this week; Fed manufacturing surveys for June will wrap up today; Colombia is expected to keep rates steady at 1.75%.
  • Boris Johnson’s government is under the microscope during a key week; July 1 is an important day for the U.K.; ECB asset purchases for the week ending June 25 will be reported; if eurozone CPI measures ease in June as expected, the ECB’s dovish stance will be vindicated
  • Tensions are rising at the border between China and India; Malaysia extended its national lockdown as the virus outlook darkens

The dollar remains rangebound ahead of key US data this week. DXY remains stuck just below 92.. The euro remains heavy near $1.19 after having trouble breaking above $1.1950 last week, while sterling remains heavy just above $1.39 as it enters a key week (see below). Lastly, USD/JPY continues to trade just below 111. The March 2020 high near 111.70 is the next target, followed by the February 2020 high near 112.25 and the April 2019 high near 112.40. Indeed, strong U.S. data this week should help the dollar see further broad-based gains.

AMERICAS

All eyes are on the jobs report Friday. Ahead of that, we will get several key snapshots of the U.S. economy such as the Chicago and ISM PMIs and auto sales. Suffice to say that we expect the data to show continued strength in the economy. By all accounts, the softer jobs numbers seen in recent months are due more to supply than demand, in which case wages will have to adjust higher. Perhaps this is behind the expected jump in average hourly earnings to 3.6% y/y vs. 2.0% in May. Wage inflation is always the key to broad-based price inflation and such acceleration would get the market’s attention.

Of note, some reports suggest ending enhanced unemployment benefits have not yet led to a boost in employment. A New York Times story over the weekend focused on Missouri, one of first four states to half the federal aid on June 12. Since then, anecdotal evidence suggests that job growth has yet to pick up significantly. Of course, it’s early still and we need to see hard data confirming this. However, it would certainly support the SF Fed’s recent study that suggests only 1 in 28 unemployed workers are staying home due to the enhanced benefits. It also supports our reasoning that wages will have to rise to attract more workers.

Fed speakers are likely to continue pushing the more hawkish narrative this week. Indeed, Bullard, Rosengren, and Kaplan last week all spoke of a 2022 rate hike. Williams, Barkin, and Quarles speak today. While some on the FOMC remain in the more dovish camp, we expect more and more to tilt hawkish of the economic data remain strong. Of note, the 10-year Treasury yield rose to 1.54% Friday, the highest since June 17 and helped by the accelerating core PCE readings. The yield has since fallen back a bit to 1.51%. If the wage and other economic data this week confirm our outlook for a stronger economy and labor market, then there is clearly further upside potential for U.S. yields.

Fed manufacturing surveys for June will wrap up today. Dallas Fed is expected at 32.5 vs. 34.9 in May. So far, Richmond came in at 22 vs. 18 in May, Kansas City came in at 27 vs. 26 in May, Philly Fed came in at 30.7 vs. 31.5 in May, and Empire survey came in at 17.4 vs. 24.3 in May. Despite some modest softness, the U.S. manufacturing sector remains in solid shape, growing but at a slightly slower pace. Chicago and ISM PMI readings later this week should confirm this.

Colombia central bank is expected to keep rates steady at 1.75%. Minutes will be released Wednesday. June CPI will be reported Saturday, with headline inflation expected at 3.73% y/y vs. 3.30% in May. If so, it would be the highest since March 2020 and nearing the top of the 2-4% target range. Bloomberg consensus sees the tightening cycle beginning in Q3 with a 25 bp hike to 2.0%. Like Mexico, we do not expect an aggressive tightening cycle in Colombia like we saw in Brazil.

EUROPE/MIDDLE EAST/AFRICA

Boris Johnson’s government is under the microscope during a key week. First, the government suffered another blow to its image as its Health Secretary Matt Hancock quit over the weekend after being caught breaking social distancing rules. To make matters worse, the scandal has brought the so-called “sleaze factor” back into the public eye. Hancock had already come under fire for the government’s Covid response but Johnson had stuck with him. He was quickly replaced by Sajid Javid, former Chancellor and rival to Johnson for the Tory leadership. The scandal comes at a bad time for the government, which is expected today to confirm that rising virus numbers won’t allow further reopening until at least July 19.

Furthermore, July 1 is an important day for the U.K. First, there will be a by-election held in the northern constituency of Batley and Spen, which has been held by Labour since 1997. The Tories had been hoping to flip another seat but recent developments may hurt its chances. Of note, the Tories lost a by-election in the southern seat of Chesham and Amersham earlier this month. More importantly, the grace period ends for customs-free movement of some goods between Northern Ireland and Britain on June 30. The U.K. has requested an extension from the EU but if it is not granted, then customs operations will begin. If the U.K. then unilaterally agrees to extend the grace period, the EU has threatened retaliatory measures such as tariffs.

ECB asset purchases for the week ending June 25 will be reported. Net purchases are likely to remain near the recent average of EUR20 bln per week. ECB speakers this week are too many to list here. Suffice to say that most will maintain the dovish narrative. The only exception will likely be Weidmann on both Monday and Tuesday. Of note, Hernandez de Cos, Panetta, Stournaras, Scicluna, and Guindos also speak today and they should more than offset any hawkishness from Weidmann.

If eurozone CPI measures ease in June as expected, the ECB’s dovish stance will be vindicated. Eurozone headline CPI will be reported Wednesday, which is expected to ease to 1.9% y/y from 2.0% in May. Ahead of that, we will get clues from CPI readings from Germany and Spain Tuesday and France Wednesday.


ASIA

Tensions are rising at the border between China and India. Reports suggest India has moved at least 50k troops along with fighter jet squadrons over the past few months to three separate border areas. This brings the total number of Indian troops at the border to 200k. One official noted that the redeployment will allow the Indian military more options to attack and seize territory in China if necessary in a strategy known as “offensive defense.” Indian officials have reportedly detected more Chinese troops at the border recently, as well as increased infrastructure sch as bunkers and airfields along the disputed border in Tibet. While hostilities are not imminent, such buildups typically raise the risks of an inadvertent spark. Stay tuned.

Malaysia extended its national lockdown as the virus outlook darkens. The emergency measures were due to end this week but will remain in place until new daily cases fall below 4,000, according to local news reports. The new timeline will force even more budget outlays as the government enacts further assistance programs, since only essential sectors will remain open. The KLCI index fell 1.2% to a 7-month low, impacting sentiment across the region.

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