Dollar Soft as FOMC Meeting Begins

September 19, 2023
  • The auto strike may widen; the two-day FOMC meeting starts today and ends with a decision tomorrow afternoon; housing data will hold some interest; Canada reports August CPI
  • The discussion at the ECB has clearly shifted from how high to how long; reports suggest the ECB wants to start discussing ways to unwind its bond-buying programs as well as raising reserve requirements; headline August eurozone inflation was revised down a tick to 5.2% y/y
  • RBA released its minutes; capital outflows from China accelerated

The dollar is slightly softer as the FOMC meeting begins. DXY is trading marginally lower for the third straight day near 105.063 after three straight up days took it up to the highest since March 9 near 105.435 last Thursday. It remains on track to test that month's high near 105.885. The euro is trading flat near $1.0695 but remains on track to eventually break below the May low near $1.0635 and test the March low near $1.0515. Sterling is trading flat near $1.2390 but remains on track to test the May low near $1.2310. Break below sets up a test of the March low near $1.1805. USD/JPY is trading flat near147.70 after trading at a new cycle high near 148 Friday. The pair remains on track to test 150. We believe the fundamental story remains in favor of the greenback as the U.S. economy remains in a much stronger position than the other major economies such as the eurozone or the U.K. Indeed, the worsening outlook in Europe led the ECB to deliver a dovish message last week and we believe the BOE will follow suit this week. With firm U.S. data and a hawkish Fed, this would feed into further dollar strength.


The auto strike may widen. The UAW warned that more of its members will go on strike this Friday unless substantial headway is made towards new labor contracts. UAW President Shawn Fain said “Either the Big Three get down to business and work with us to make progress in negotiations, or more locals will be called on to stand up and go out on strike.” The UAW has said it was still waiting for counterproposals from the Big Three automakers as no new offers had been received after the union made its latest proposals September 14, the day before the strikes began.

The two-day FOMC meeting starts today and ends with a decision tomorrow afternoon. We expect a hawkish hold. Recent data have been mixed enough for the Fed to feel comfortable with another skip and WIRP suggests less than 5% odds of a hike tomorrow. Most likely, we will get a hawkish message now and then the next hike November 1. By that November meeting, we will get one more each of the jobs report, CPI, PPI, and retail sales as well as two PCE readings. If things go the way we expect for the U.S., the current 30% odds of a hike then are way too low. Those odds rise to top out near 45% December 13. New macro forecasts and Dot Plots will be released. Due to the media embargo, there are no Fed speakers this until Chair Powell’s press conference tomorrow afternoon.

Housing data will hold some interest. August building permits and housing starts are expected at 0.2% m/m and -0.9% m/m, respectively. Existing home sales will be reported Thursday and are expected at 0.7% m/m. Yesterday, the September NAHB housing market index came in at 45 vs. 49 expected and 50 in August. This was the second drop in a row and takes the index to the lowest since April. As such, there may be some cracks forming in the housing recovery.

Canada reports August CPI. Headline is expected at 3.8% y/y vs. 3.3% in July. If so, headline would accelerate for the second straight month to the highest since April and further above the 2% target. Core trim is expected to rise a tick to 3.7% y/y while core median is expected to remain steady at 3.7% y/y. At the last meeting September 6, the Bank of Canada kept rates steady at 5.0% but the message was hawkish. It remained “concerned” about sticky inflation and is prepared to hike again if needed. The summary of its deliberations for that meeting will be released tomorrow. Looking ahead, WIRP suggests 25% odds of a hike at the next meeting October 25, then rising to top out near 65% in Q1.


The discussion at the ECB has clearly shifted from how high to how long. Villeroy was the latest to suggest rates have peaked by stressing that the current level of policy rates is a “plateau, but I won’t say anything on the length of the plateau.” WIRP suggests around 5% odds of another hike October 26, then rising to top out near 25% December 14. The first cut is still seen around mid-2024. Elderson speaks today and tomorrow.

Reports suggest the ECB wants to start discussing ways to unwind its bond-buying programs as well as raising reserve requirements. Both would be meant to tighten liquidity in the financial system. Debate is reportedly likely to start either at the next policy meeting October 26 or at an autumn retreat for ECB policymakers and is expected to carry over into 2024. Several policymakers reportedly favor raising the amount of reserves that banks must keep at the ECB from 1% of customer deposits currently to something closer to 3-4%. Some policymakers want to set the new reserve requirements at the same time it adjusts its asset purchase programs. As things stand, the ECB is letting its APP roll off but will continue PEPP reinvestments through at least end-2024. As such, we do not think these discussions will have any near-term impact on policy or liquidity.

Headline August eurozone inflation was revised down a tick to 5.2% y/y. As a result, headline has declined four straight months, Core remained steady at 5.3% y/y. Preliminary September CPI data will be reported September 29.


Reserve Bank of Australia released its minutes. At the September 5 meeting, the bank kept rates steady at 4.10% but warned that further tightening may be required. The minutes show that a hike was also discussed but that “In weighing up the two options, members agreed that the case to keep the cash rate target unchanged at this meeting was the stronger one. The recent flow of data was consistent with inflation returning to target within a reasonable timeframe while the cash rate remained at its present level.” The RBA stressed its data dependency by noting “Some further tightening in policy may be required should inflation prove more persistent than expected. In assessing the need for such a move, members affirmed that they will be guided by the incoming data and how these alter the economic outlook and the assessment of risks.” Next meeting is October 3 and no change is expected at Governor Bullock’s first one. WIRP suggests 25% odds of a November 7, rising to top out near 50% in Q1.

Capital outflows from China accelerated. SAFE data for August show total outflows of -$49 bln, the most since 2015. The bulk of the outflows came from securities investment (-$29 bln), which should be seen within the context of monetary policy divergences and interest rate differentials that no longer favor the yuan as they did back in 2020 and 2021. More worrisome is FDI outflows of -$17 bln, which should be seen within the context of de-risking and friend-shoring as firms look for alternative supply chain partners. With the PBOC still easing and U.S.-China relations still rocky, we see outflows continuing for now and putting continued pressure on the yuan.

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