Dollar Struggles to Hold Ground

August 29, 2024

Dollar Struggles to Hold Ground

  • USD is back on the defensive after yesterday’s rebound. Weekly jobless claims and the second estimate of Q2 US GDP are due today.
  • Sweden’s economy contracts less than expected in Q2.
  • New Zealand business confidence outlook is looking up. NZD outperforms.

USD is back on the defensive after yesterday’s rebound. There were no fundamental triggers behind yesterday’s USD relief rally. End of month portfolio rebalancing flows and oversold technical conditions may have offered USD some support. European and US equity futures are down slightly after Nvidia’s revenue outlook fell short of analysts lofty forecasts.

In our view, USD will remain under broad downside pressure until we get top-line data that confirms a soft landing in US labor market condition is underway. Next week’s July JOLTS and August non-farm payrolls prints are policy relevant. Weekly jobless claims are released today (1:30pm London).

The second estimate of Q2 US GDP is due today (1:30pm London). Real GDP is expected to remain steady at 2.8% SAAR in Q2 while personal consumption is expected to fall a tick to 2.2% SAAR. The preliminary data showed underlying economic momentum was robust as real private domestic final purchases, which comprises private consumption expenditure and private fixed investment, was the strongest growth tailwind. Looking ahead, the Atlanta Fed’s GDPNow model projects Q3 growth at a solid 2.0% SAAR.

Atlanta Fed President Bostic (FOMC voter) continues to argue for a cautious easing approach. Bostic said that while it “may be time to cut”, he wants to see a little more data so as not to be in a situation “where we cut and then we have to raise rates again.” Bostic pointed out the US labor market is still quite strong by historical standards and inflation still has some distance to fall. Bostic’s comments are not surprising as he’s one of the leading hawks on the FOMC and has said before that his June Dot Plot contains one cut this year. Bostic speaks again later today (8:30pm London).

EUR/USD retraced some of yesterday’s losses. Eurozone economic data releases today are unlikely to generate material market volatility. The Eurozone economic sentiment index is forecast to remain broadly stable around 96.0 in August (10:00am London). Germany’s August EU harmonized CPI (1:00pm London) will offer a preview of tomorrow’s Eurozone preliminary CPI print. German headline CPI is expected at 0% m/m (vs. 0.5% in July) and 2.2% y/y (vs. 2.6% in July). ECB Chief Economist Philip Lane speaks on a panel titled “Inflation - Challenges for Policymakers and Researchers” (10:15am London).

USD/SEK is trading heavy. Sweden’s economy contracts less than expected in Q2. Real GDP fell -0.3% q/q in Q2 (consensus: -0.8%) after rising 0.8% in Q1. The downturn in Q2 is mainly explained by changes in inventories. Household final consumption also contributed to the decline while exports was the biggest growth tailwind. In line with the Riksbank’s guidance, the swaps market continues to more than fully price-in 75bps of cuts by year-end.

AUD/USD is powering forward on USD weakness. AUD ignored Australia’s poor Q2 capex print. Total new capital expenditure (capex) unexpectedly fell -2.2% q/q in Q2 (consensus: +1.0%) from an upwardly revised 1.9% q/q rise in Q1 (prior: 1.0%). The drop in capex was led by lower spending on non-mining building & structures and plant & equipment. Overall, non-mining business investment is a drag to growth and supports the case for an RBA rate cut by year-end.

The outlook for Australia capex is mixed. The third estimate for planned capex for 2024-25 was revised 10.3% higher from the previous estimate to A$170.7bn. However, the RBA’s liaison contacts increasingly report that they plan to reduce investment in the year ahead due to high construction costs, a subdued outlook for demand and broader macroeconomic uncertainty. Australia July retail sales is the next data highlight (tomorrow, 2:30am London).

NZD outperformed and New Zealand government bond yields rallied underpinned by the encouraging ANZ August business confidence outlook survey. In August, the forward-looking business confidence index surged 23 points to a ten-year high of +51 and expected own activity jumped 21 points to a seven-year high of +37. Nonetheless, reported past activity, which has the best correlation to GDP, remains very weak at -23 and consistent with a contraction in economic activity. Indeed, the RBNZ projects real GDP to fall -0.5% q/q and -0.2% q/q in Q2 and Q3, respectively. The ANZ August consumer confidence index is up next (11:00pm London).

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