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.

AMERICAS

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.

 

EUROPE / MIDDLE EAST / AFRICA

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.


ASIA

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.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2021. All rights reserved.

This browser is not fully supported by our public website and may not display or function as expected for this reason. Please note, the Infuse Portal and BBH client applications fully support the IE 11 browser.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com


captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction