The dollar has held firm

31 August, 2016

The dollar has held firm

European Outlook: Asian stock markets are mixed, the Japanese Nikkei 225 close up 0.97% at 16,887, with banks and oil producers leading gains. The Hang Seng is little changed and the ASX down, but mainland Chinese markets are moving higher. U.S. stock futures meanwhile are little changed and FTSE 100 futures are heading south. Oil prices are little changed on the day after the front end WTI future fell below USD 47 per barrel Tuesday amid firm U.S. confidence data as Fed’s Fischer repeated that rate hikes will be data dependent and that the economy is close to full employment. The European calendar has more August inflation data, with the overall Eurozone number now seen steady at 0.2% y/y, after weaker than expected German data yesterday. German unemployment is also seen steady in August, while the July Eurozone unemployment rate is expected to fall to 10.0% from 10.1%.

The USD takes centre stage: The dollar has held firm while the yen has continued to underperform. USDJPY rose for a fourth straight session, this time making a one-month high of 103.22. Yesterday the pair broke and closed above the 50-day moving average at 102.69, which now reverts as support. Most yen crosses have followed, with EURJPY also making a one-month peak, and AUDJPY a two-week high. The weaker yen has been tonic for Japanese stock markets. Increased odds for a September rate hike by the Fed, juxtaposed to the likelihood of further easing by the BoJ at its September 20th-21st policy meeting, have been underpinning USDJPY, which we expect to remain the case in the coming weeks, although Friday’s U.S. jobs report will be a key determiner. EURUSD, meanwhile, has remained heavy in the mid 1.11s, though holding above yesterday’s three-week low at 1.1132. Cable has also remained heavy, on net, with a bounce after an above-forecast reading of the August Gfk UK consumer confidence survey failing to sustain. At -7, this is the second lowest in over two years, while the UK Lloyds business confidence survey fell to a near five-year low of 16 in August, down from 29 in July.

US Data Reports: The U.S. consumer confidence pop to an 11-month high of 101.1 reversed the July drop to 96.7  from 97.4 to leave the measure still-below the 103.8 cycle-high in January of 2015. Despite today’s consumer confidence upswing, the full array of confidence indicators continues to trend sideways in 2016. The Michigan sentiment index fell to 89.8 from 90.0, versus a 98.1 cycle-high last January. The IBD/TIPP index rose to 48.4 in August from 45.5 in July but a similar 48.2 in June, versus a 54.0 cycle-high in October of 2012. The Bloomberg Consumer Comfort index has risen slightly to a 43.6 average thus far in August from a 43.4 average in both June and July, versus a 45.7 cycle-high average in April of 2015. Confidence faces an ongoing lift from low gasoline prices, stock market and home price gains, and an expected GDP bounce in the second half of 2016 as the inventory unwind and petro-hit to factories diminishes. Yet, confidence faces a political headwind from the highly negative and unsettling tone of the U.S. election campaigns.

Fedspeak: Fed VC Fischer may be out on a hawkish limb on his own, speculates a Bloomberg article that is in line with the muted market reaction to his words overnight compared to the reaction in which he hijacked the Jackson Hole calm following Yellen’s speech Friday. Others such as Bullard and Lockhart have been more circumspect on the “hike or two” front this year, leading some analysts to wonder if Fischer is more of an outlier rather than a shadow Chairman. In January he concluded that four hikes this year were probable, which obviously has yet to be met. Of course, the August payrolls report could be the swing factor for or against a September hike, by Fischer’s own admission.  The next round of Fedspeak will be from doves Rosengren and Evans, who will take part in a closed panel discussion from China ahead of the US open Wednesday, while moderate Kashkari talks about the role of the Fed board. This could slow the USD rise ahead of ADP’s today and NFP data on Friday.

Main Macro Events Today        

Canadian GDP  Real Q2 GDP, is expected to fall 1.8% after the 2.4% increase in Q1. The temporary halt to oil sands production and the impact on related services that was due to the Fort McMurray wildfire will factor in the Q2 GDP fall. Also, real exports plunged 19.9%, suggestive of a big drag from net exports. Real GDP is expected to rebound 4.0% in Q3 as shuttered production comes back on-line and rebuilding commences in the region.

Eurozone HICP After yesterday’s weaker than expected German HICP number we have lowered our forecast for the overall Eurozone rate to 0.2% y/y, which would leave it unchanged from July. The Spanish HICP rate rose markedly, to -0.3% y/y from -0.7% y/y, but the Belgian headline rate also ticked lower and the French reading, due early today, is also seen unchanged. Inflation rates are only very gradually moving higher and remain firmly below the ECB’s definition of price stability. With confidence indicators showing that especially the manufacturing sector is waking up to the risks of the Brexit scenario and the impact of drop of the Pound against the EUR, the data will add to the arguments of the doves ahead of the September ECB meeting.


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