Dollar Stabilizes as Risk Off Sentiment Takes Hold

August 16, 2021
  • Markets are starting the week with a modest risk-off tone; regional Fed manufacturing surveys for August will start rolling out
  • ECB asset purchases for the week ending August 13 will be reported; the latest Bloomberg survey of economists sees lift-off by the Bank of England in Q1 2023
  • Japan eked out very modest growth in Q2; China’s retail sales and IP data came in on the weaker side; Malaysian assets were under pressure overnight after Prime Minister Muhyiddin resigned

The dollar is stabilizing after Friday’s sell-off. DXY retraced about half of the August rally before recovering today. Support near 92.50 had held so far but a break below 92.321 would set up a test of the July 30 low near 91.782. We believe markets overreacted to the consumer confidence data Friday and we look for the dollar to continue clawing back some of its recent losses. The euro is running into resistance near $1.18 while sterling is having trouble trading much above $1.39. USD/JPY broke support near 109.50 on the risk-off vibe, which set ups a test of the July 4 low near 108.70. We remain positive on the dollar, as stronger U.S. data and hawkish Fed comments are likely to reassert themselves in the market this week.


Markets are starting the week with a modest risk-off tone due to a combination of worse virus numbers and lackluster data from China. There also seems to be some overhang from disappointing University of Michigan consumer confidence out of the U.S. last Friday (70.2 vs. 81.2 expected). That reading helped bring the 10-year U.S. Treasury yield down to 1.25% today from a high of 1.36% earlier in the week. The yield has since rebounded to 1.27% and remains well within recent ranges. Overnight, China’s retail sales and IP data (see below) came in considerably lower than expected.


Regional Fed manufacturing surveys for August will start rolling out. Empire survey kicks things off today and is expected at 28.5 vs. 43.0 in July. Philly Fed follows Thursday and is expected at 24.0 vs. 21.9 in July. Overall, the U.S. manufacturing sector remains strong and this week’s data should confirm this. Virtually all the survey and PMI readings are at or near record highs. Some moderation is to be expected but that does not mean the economy is slowing sharply. June TIC data will also be reported today.



ECB asset purchases for the week ending August 13 will be reported. Net purchases were EUR16.4 bln for the week ending August 6 vs. EUR10.7 bln for the week ending July 30 and EUR22.8 bln for the week ending July 23. 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 meeting. The latest Bloomberg survey of economists sees steady rates from the ECB through 2023.

Elsewhere, the latest Bloomberg survey of economists sees lift-off by the Bank of England in Q1 2023. This is at odds with market pricing, as the short sterling strip shows lift-off in Q1 2022, a full year earlier than analysts expect. Next BOE decision is due September 23 and no change is expected then. With recent economic data showing some softness, we expect another dovish hold.


Japan eked out very modest growth in Q2. Q2 GDP grew 0.3% q/q vs. 0.1% expected and a revised -0.9% (was -1.0%) in Q1. Private consumption (0.8% q/q) and business (1.7% q/q) came in stronger than expected and outweighed weakness in inventories and net exports. However, Q3 is looking worse and worse as higher case count in Japan mean that Tokyo will extend the state of emergency. Reports suggest Prime Minister Suga will expand and extend it for another two weeks rather than expire at the end of this month.

China’s retail sales and IP data came in on the weaker side but due to potentially transitory factors. Retail sales decelerated in July to 8.5% y/y vs. 10.9% expected, as the new virus wave takes its toll on consumption demand. IP came in at 6.4% y/y vs. 7.9% expected, likely impacted by the flooding events and other temporary production factors. All in all we don’t see these data points as a strong signals given so many temporary elements involved, and it shouldn’t do much to change investors view on the continued recovery of the Chinese economy. However, coming on top of weak loan data for July, the trend certainly bears watching.

Malaysian assets were under pressure overnight after Prime Minister Muhyiddin resigned. His government wasn’t able to balance the multiple demands of the challenging political landscape and managing the pandemic impact, making it unable to progress with its agenda. Muhyiddin will stay as a caretaker until a new government is in place. The situation is very fluid and highly uncertain but doesn’t seem to be at a crisis point. The country’s main equity index was down 0.7% and the ringgit is slightly weaker against the dollar, though in both cases still doing better than some of its EM Asian peers.

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