Dollar Steadies Ahead of Jackson Hole

August 24, 2021

Many markets remain rangebound ahead of Jackson Hole; regional Fed manufacturing surveys for August will continue to roll out; Mexico reports mid-August CPI
Details of the ECB asset purchases for the week ending August 20 will be reported; Hungary is expected to hike rates 30 bp to 1.5%
Prime Minister Suga’s favored candidate lost the race for Yokohama mayor; hawkish comments from the RBNZ are helping tie Kiwi today; the PBOC pledged to make sure that monetary stimulus makes its way to supporting the economy

The dollar is getting some traction after two straight down days. DXY had given up nearly two thirds of its gains since mid-August but found support just below 93. A break below the 92.952 area would set up a test of the August 13 low near 92.471. For the euro, a break above $1.1750 would set up a test of the August 13 high near $1.1805. Sterling has lagged, retracing less than half of its recent losses. A break above $1.3775 would set up a test of the August 16 high near $1.3880. USD/JPY remains heavy and a break below 109.55 would set up a test of the August 16 low near 109.10. While we remain positive on the dollar, a period of consolidation is likely ahead of Jackson Hole.

AMERICAS

Many markets remain rangebound ahead of the Jackson Hole Symposium. The U.S. 10-year yield has been stuck in a roughly 1.10-1.40% range since early July; at 1.26% currently, we are smack in the middle of that range now. Inflation expectations have also been rangebound, with the 10-year breakeven rate trading between 2.20-2.4% since early July; at 2.28% currently, we are pretty close to the middle of that range as well. DXY looked on the verge of an upside breakout but it has since returned to the roughly 92-93 range that has held since early July. U.S. equity markets are mixed, with the S&P 500 and NASDAQ making new all-time highs while DJIA is lagging. If the Fed continues to move the tapering timeline forward at Jackson Hole as we expect, then the dollar and bond yields should break out to the upside. We will be sending out a preview of the symposium later today.

Regional Fed manufacturing surveys for August will continue to roll out. Richmond Fed reports today and is expected at 25 vs. 27 in July. Kansas City Fed reports Thursday and is expected at 25 vs. 30 in July. Last week, Empire survey came in at 18.3 vs. 28.5 expected and 43.0 in July, while the Philly Fed came in at 19.4 vs. 23.1 expected and 21.9 in July. Yesterday, Markit preliminary PMI readings for August were reported. Manufacturing PMI came in at 61.2 vs. 62 expected, services came in at 55.2 vs. 59.2 expected, and the composite came in at 55.4 vs. 59.9 in July. Some moderation is to be expected from these lofty levels but that does not mean the economy is slowing sharply. Overall, the U.S. manufacturing sector remains strong. Of note, IP came in much stronger than expected in July, up 0.9% m/m vs. 0.5% expected, driven by continued strength in manufacturing production (1.4% m/m vs. 0.7% expected). New home sales (3.3% m/m expected) will also be reported.

Mexico reports mid-August CPI. Headline inflation is expected at 5.66% y/y vs. 5.75% in mid-July. If so, it would be the lowest since March but still well above the 2-4% target range. Banco de Mexico minutes will be released Thursday. At the August 12 meeting, the bank delivered the second straight 25 bp hike to 4.5%. However, it was a 3-2 split vote and so the minutes will be of interest. Also noteworthy is the changing makeup of the MPC. The two dissents were from Esquivel and Borja, two AMLO appointees who voted for steady rates. Governor Diaz de Leon’s terms will end and AMLO has chosen his Finance Minister Herrera to take over as Governor in January. As such, there are risks that the central bank will tilt more dovish next year.

EUROPE/MIDDLE EAST/AFRICA

Details of the ECB asset purchases for the week ending August 20 will be reported. Net purchases were reported yesterday at EUR16.6 bln vs. EUR17.2 bln for the week ending August 13 and EUR16.4 bln for the week ending August 6. Redemptions and gross purchases will be reported today. 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.

National Bank of Hungary is expected to hike rates 30 bp to 1.5%. At the last meeting July 27, the bank delivered the second hike of the same magnitude and promised “firm steps on a monthly basis.” Inflation eased to 4.6% y/y in July from the 5.3% peak in June, but remain above the 2-4% target range. The bank said then that “The Monetary Council will continue the cycle of interest-rate hikes until the outlook for inflation stabilizes around the central bank target.”

ASIA

Prime Minister Suga’s favored candidate lost the race for Yokohama mayor. While part of the loss undoubtedly reflects Suga’s unpopularity, it’s worth noting that the LDP vote was split between Suga’s favored candidate and the incumbent, making it easier for the opposition win. Still, signs are not good for Suga ahead of the LDP leadership vote next month and a general election in the fall. His LDP has also lost several special elections this year. Elsewhere, Japan reported July supermarket sales, which rose 4.6% y/y vs. 1.7% in June. With Suga’s popularity still under water, we still expect another fiscal package in the coming weeks.

Hawkish comments from the Reserve Bank of New Zealand are helping tie Kiwi today. Assistant Governor Hawkesby said a 50 bp hike was discussed at last week’s meeting, and stressed that the surprise decision to stand pat was due to fear of bad optics rather than economic risks. He said “We put out a document that would have easily supported putting up the official cash rate last week. It was less about Covid stopping us doing it and it was more about the timing of communicating our policy move -- was the 18th of August the right day as the country went into lockdown.” WIRP suggests nearly 75% odds of a 25 bp hike at the next RBNZ meeting October 6.

The People’s Bank of China pledged to make sure that monetary stimulus makes its way to supporting the economy. Governor Yi stressed that the bank “will basically match the expansion of money supply and social financing to nominal economic growth” and encourage more funding to technological innovation, green development, and small businesses. Yi also called for efforts to push down real lending rates and financing costs for small companies. Money and new loans slowed sharply in July despite the RRR cut and it’s clear policymakers want to make sure that their efforts to boost the economy take hold. We would not rule out another RRR cut if credit growth does not pick up in August.

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