Dollar Starts the Week Soft

September 30, 2024

Dollar Starts the Week Soft

  • U.S. labor market data this week will test the risk-on market theme.
  • China’s September PMI prints remain indicative of sluggish economic activity, reinforcing the government’s recent stimulus pledge.
  • New Zealand business confidence rises to a decade high, suggesting the downturn in economic activity will be short-lived.

Please see our Drivers for the Week Ahead for an in-depth look at what markets are facing this week.

USD is under modest downside pressure mostly against growth-sensitive currencies as the risk-on market theme is intact. Greater stimulus measures out of China and market pricing an aggressive Fed easing cycle while the US economy is strong support risk assets. U.S. labor market data this week will test this theme. Financial market risk sentiment will stay positive as long as the data points to a soft landing in labor market conditions.

Second-tier U.S. economic data are released today. September MNI Chicago PMI (2:45pm London) and Dallas Fed manufacturing activity (3:30pm London). Meanwhile, Fed Governor Michelle Bowman speaks on the economic outlook and monetary policy (1:50pm London) and Fed Chair Jay Powell gives the luncheon address at the National Association for Business Economics (6:55pm London). Remember Michelle Bowman dissented in favor of a smaller 25 bp cut at the September meeting.

EUR/USD is range-bound around 1.1160. Italy and German CPI today will likely add to evidence that the Eurozone disinflationary process is quickening (10:00am and 1:00pm London, respectively). Italy’s EU harmonized CPI inflation is expected to ease to 0.8% y/y vs. 1.2% in August. Germany’s EU harmonized CPI inflation is expected to slow to 1.8% y/y vs. 2.0% in August. Overall, the ECB has room to dial-up easing as the Eurozone economy is stagnating and inflation risks undershooting the ECB’s 2% target. ECB President Christine Lagarde is schedule to speak (2:00pm London).

GBP/USD is trading just under last week’s cyclical high of around 1.3434. UK real GDP is estimated to have increased by 0.5% q/q in Q2, revised down from a first estimate of 0.6% largely due to a smaller growth contribution from government spending. The UK housing market continues to recover. UK nationwide house prices rose 0.7% m/m in September (consensus: 0.2%) after falling -0.2% the previous month. On a year-over-year basis, house prices are up 3.2% vs. 2.7% in August which is the highest since November 2022.

UK August aggregate money growth is up next (9:30am London). The annual growth rate of sterling net lending to private sector companies and households (M4Lex) is expected to recover further in August indicative of a gradual pick-up in economic activity. This would reinforce the BOE’s cautious easing policy guidance and offer GBP support. Later this evening, BOE policy maker Megan Greene is on a panel discussing “perspectives on global monetary policy” (9:10pm London).

USD/JPY is trading heavy around 142.00 on USD weakness. Japan economic data released overnight were mixed and argue for a cautious Bank of Japan tightening cycle. Industrial production fell more than expected by -3.3% m/m (consensus: -0.5%) after rising 3.1% in July. But retail sales growth overshot expectations rising 0.8% m/m (consensus: 0.5%) following a 0.2% increase in July. The swaps market is pricing in just 25 bp of total tightening over the next 12 months which limits JPY upside traction.

AUD/USD is breaking higher in line with surging iron ore prices. The Chinese government’s recent stimulus announcements are boosting market sentiment and underpinning the rally in iron ore prices. Over the weekend, the People’s Bank of China (PBOC) went ahead with plans to cut fixed mortgages rates effective November 1 while the cities of Guangzhou, Shanghai, and Shenzhen eased rules for homebuyers.

China’s September PMIs prints remain indicative of sluggish economic activity and underscores the government’s recent pledge for stronger stimulus measures. China’s official composite PMI rose to 50.4 vs. 50.1 in August. The details showed the contraction in manufacturing activity eased with the PMI up 0.7pts to 49.8 (consensus: 49.4) while non-manufacturing activity stalled with the PMI down 0.3pts to 50.0 (consensus: 50.4).

China’s Caixin PMI was more disappointing as the composite PMI fell to 50.3 vs. 51.2 in August. The details showed the manufacturing sector dropped back in contraction territory with the PMI down 0.9pts to 49.3 (consensus: 50.5) while the expansion in the services sector is close to stagnation with the PMI down 1.3pts to 50.3 (consensus: 51.6).

NZD rallied against most major currencies following the encouraging ANZ September business confidence outlook survey. In September, the business confidence and activity outlook indexes rose 10 and 8 points to more than ten-year highs at 60.9 and 45.3, respectively. Reported past activity, which has the best correlation to GDP, remains very weak but lifted from -23 to -18.5 suggesting the downturn in economic activity will be short-lived. For the next October 9 RBNZ policy-setting meeting, the swaps market has fully priced-in a 25 bp cut and implies 58% odds of a 50 bp rate reduction.

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