Dollar Soft as Key Week Gets Under Way

August 23, 2021

All eyes are on the Kansas City Fed’s Jackson Hole Symposium later this week; the September 21-22 FOMC meeting is a more likely venue to formally announce tapering; data this week are expected to show continued strength in the U.S. economy
The eurozone reported solid preliminary PMI readings for August; ECB asset purchases for the week ending August 20 will be reported; U.K. reported soft preliminary PMI readings for August; Israel is expected to keep rates steady at 0.10%
Japan and Australia reported weak preliminary PMI readings for August; Korea reported strong trade data for the first twenty days of August

The dollar is starting the week off on a soft note. After trading at new highs for this move Friday near 93.729, DXY is now back around 93.30. Despite this setback, our next targets are the November 2020 high near 94.302 and the September 2020 high near 94.742. EUR broke below $1.17 last week to trade at new cycle lows near $1.1665 but has since recovered to trade near $1.1715. We believe it remains on track to test the November 2020 low near $1.16. Sterling is finally playing catch-up and nearing a test of the July 20 low near $1.3570. While some support near $1.36 was seen, we still target the January low near $1.3450. The return of risk-on sentiment today has led USD/JPY to trade back above 110. Overall, hawkish risks from Jackson Hole and solid U.S. data should keep the dollar rally going this week.

AMERICAS

All eyes are on the Kansas City Fed’s Jackson Hole Symposium later this week. Some are looking for Fed Chair Powell to make an explicit tapering announcement then. If he does not, then there is some scope for market disappointment. That said, we believe Powell and company will continue to set the table for imminent tapering. As an aside, we are heartened by reports that Treasury Secretary Yellen has endorsed a second term for Powell, whose term ends in February. He has done a masterful job navigating the pandemic and deserves the chance to see his efforts through to the other side.

We think the September 21-22 FOMC meeting is a more likely venue to formally announce tapering. New macro forecasts will be released then. More importantly, the Fed will have gotten another jobs report on September 3 that will hopefully be strong enough to trigger tapering. It’s clear that once tapering starts, the Fed wants to get it over quickly, perhaps in the span of six months rather than twelve. As such, our current call is for an explicit tapering announcement at the September FOMC, tapering of $20 bln in USTs and $10 bln in MBS at each meeting starting in November, and completion by March 2022. If the economy continues to develop as the Fed expects, then this would allow for a waiting period of 6-9 months before rate lift-off in Q4 2022.

Data this week are expected to show continued strength in the U.S. economy. Markit reports its preliminary PMI readings for August today. Headline manufacturing is expected at 62.3 vs. 63.4 in July, while services is expected at 59.2 vs. 59.9 in July. July Chicago Fed National Activity Index will also be reported (0.11 expected), along with existing home sales (-0.5% m/m expected).

EUROPE/MIDDLE EAST/AFRICA

The eurozone reported solid preliminary PMI readings for August. Headline manufacturing fell to 61.5 vs. 62.0 and 62.8 in July, services fell to 59.7 vs. 59.5 expected and 59.8 in July, and the composite fell to 59.5 vs. 59.6 expected and 60.2 in July. The German and French composites fell to 60.6 and 55.9, respectively. Final readings will be reported next week. It’s worth noting that the eurozone economy is holding up relatively well in H2, unlike the other developed economies in Asia and the U.K. That said the ECB will continue with its stimulus efforts to ensure that the economy does not lose any momentum in the coming months.

ECB asset purchases for the week ending August 20 will be reported. Net purchases were EUR17.2 bln for the week ending August 13 vs. EUR16.4 bln for the week ending August 6 and EUR10.7 bln for the week ending July 30. The ECB has been aiming for net weekly purchases of around EUR20 bln since the accelerated pace began in March, but there have been several outliers on both sides. The bank is expected to discuss changes to its asset purchases at the next meeting September 9 but a consensus may not be reached until the December 16 meeting. Of note, July eurozone M3 will be reported Thursday and is expected to rise 7.6% y/y vs. 8.3% in June. If so, this would be the slowest since March 2020 and would be extremely disappointing in light of ongoing ECB asset purchases.

U.K. reported soft preliminary PMI readings for August. Headline manufacturing came in at 60.1 vs. 59.5 expected and 60.4 in July, services came in at 55.5 vs. 59.1 expected and 59.6 in July, and the composite came in at 55.3 vs. 58.7 expected and 59.2 in July. This is the lowest composite reading since February and is clearly disappointing given the nation’s high vaccination rate and the reopening of the economy. Indeed, a senior Markit official noted that “There are clear signs of the recovery losing momentum in the third quarter after a buoyant second quarter. Rising virus case numbers are deterring many forms of spending, notably by consumers, and have hit growth via worsening staff and supply shortages.”

Recent U.K. data have come in mixed. Elsewhere, the CBI released the results of its August industrial trends survey. Total orders were 18 vs. 16 expected and 17 in July, while selling prices were 43 vs. 40 expected and 42 in July. CBI reports its distributive trade survey Wednesday. The weakness in some readings comes ahead of the expiration of the government’s job furlough program next month, which is likely causing some concerns for U.K. policymakers. Indeed, the Bank of England was clearly justified in delivering a dovish hold August 5 and is likely to do so again at the next meeting September 23.

Bank of Israel is expected to keep rates steady at 0.10%. July CPI came in at 1.9% y/y vs. 1.8% expected, the highest since November 2013 and nearing the center of the 1-3% target range. At the last meeting July 5, the bank cut its growth forecast for this year to 5.5% from 6.3% previously, but raised its growth forecast for next year to 6.0% from 5.0% previously. However, the bank warned then that the delta variant “poses some risk to the continued recovery of the economy.” For now, policy remains on hold. Ahead of the decision, Israel reported July unemployment and June manufacturing production. Unemployment fell a tick to 5.0%, while production rose 4.0% m/m vs. a revised -1.8% (was -1.7%) in May.

ASIA

Japan reported weak preliminary PMI readings for August. Headline manufacturing came in at 52.4 vs. 53.0 in July, services came in at 43.5 vs. 47.4 in July, and the composite came in at 45.9 vs. 48.8 in July. This is the lowest composite reading since August 2020 and we suspect September will be even worse as the state of emergency has been extended well into next month. Elsewhere, nationwide July department store sales rose 4.2% y/y vs. -1.6% in June, driven largely by an 8.0% y/y gain in Tokyo.

Australia also reported weak preliminary PMI readings for August. Headline manufacturing came in at 51.7 vs. 56.9 in July, services came in at 43.3 vs. 44.2 in July, and the composite came in at 43.5 vs. 45.2 in July. This is the lowest composite reading since May 2020 and here too, we suspect September will be even worse as rising virus numbers mean lockdowns are unlikely to end anytime soon. July retail sales will be reported Friday and are expected at -2.1% m/m vs. -1.8% in June. Next RBA meeting is September 7 and no change is expected. The bank has already signaled that it will begin tapering that month despite the lockdowns, which it views as temporary.

Korea reported strong trade data for the first twenty days of August. Exports rose 40.9% y/y and imports rose 52.1% y/y. Export gains were broad-based, with shipments to the U.S. rising by 50.1%, to China by 37.3%, to the EU by 42.7%, and to Japan by 49%. Semiconductor shipments increased almost 40%. Overall, the data is a promising sign that regional trade and activity can remain firm even with mainland China slowing. Bank of Korea meets Thursday and is expected to keep rates steady at 0.50%. At the last meeting July 15, the bank kept rates on hold but there was one dissent in favor of a hike. The worsening virus numbers and the partial lockdown of Seoul haven’t discouraged the BOK officials from their intention to hike this year, but we think this week is too soon for a move. Even with the supportive fiscal backdrop, we doubt officials would risk a policy mistake by hiking rates until the infection curve improves.

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