Greenback Ending Miserable Month with a Spark of Resilience

Overview: Better than expected reports from Apple, Facebook, Amazon, and Alphabet have failed to revive the dollar’s fortunes, and the greenback was sold to a new low against the euro, yen, sterling, and Australian dollar before staging a bit of a recovery.  The dollar is stretched, and if the improvement is sustained through North America today, it boosts the chances of a corrective/consolidative phase early next week.  Nor did the better earnings do much for equities. Most markets in the Asia Pacific region fell by more than a 2% decline in Tokyo and Sydney.  China’s shares were an exception, and the gains secured a nearly 11% gain for the Shanghai Composite for the month.  European stocks are posting modest gains (~0.5% around midday), leaving the Dow Jones Stoxx 600 off about 1.6% for the week.  It was down about 0.2% here in July coming into today.  The S&P 500 is nursing about a 0.4% loss for the week so far, which leaves it up about 4.7% on the month.  The US 10-year benchmark yield is near 53 bp, and that reflects a 12 bp decline in July.  The European peripheral yields are down more than that and the core a bit less.  Gold has fully recouped yesterday’s losses, which snapped a nine-day advance.  It reached a new record high (~$1983.4).  It is the eighth consecutive weekly advance for gold and gained nearly 11% this month.  September WTI stabilized around $40 a barrel after falling to three-week lows yesterday (~$38.70).  It is up about 2.5% this month. 

Asia Pacific

With a clear bias in favor of the large state-owned enterprises, China’s July manufacturing PMI unexpectedly edged higher to 51.1 from 50.9 in June.  The non-manufacturing PMI, on the other hand, slipped to 54.2 from 54.4, and this dragged down the composite reading to 54.1 from 54.2.  The new orders component rose to 51.7, and while new export orders rose (to 48.8), it remains below the 50 boom/bust level.  China reports July trade figures next week, and today’s report may reinforce expectations that exports, which rose by 0.5% year-over-year in June, fell back this month.  

Japan reported better than expected data.  June industrial output rose by 2.7%, the first gain in five months.  Economists in a Bloomberg poll had a median forecast for a 1% gain.  It was sufficient to prompt the economic minister to upgrade its assessment of the sector.  Separately, also reported an unexpected decline in the unemployment rate to 2.8% from 2.9%.  Economists had looked for an increase.  However, the job-to-applicant ratio slipped to 1.11 from 1.20.  

The dollar dropped to about JPY104.20, its lowest level since March 12.  However, it has recovered to the JPY104.80 area in the European morning.  The North American session may be key to the near-term outlook.  A strong close for the dollar would leave a potentially bullish hammer candlestick suggesting scope for a further recovery next week.  On the other hand, there is an option for a little more than $600 mln at JPY105 that expires today, and North American deals have shown a strong inclination to sell dollars.  The intraday technicals are stretched.  The Australian dollar poked above the $0.7200 area that has capped it and got to almost $0.7230 before profit-taking set in.  The Aussie returned to the $0.7180 area in the European morning.  Support is seen near $0.7160, and a close below there would likely signal the start of a corrective/consolidative phase perhaps ahead of next week’s trade and retail sales data and RBA meeting.  A small rate cut cannot be ruled out.  The PBOC set the dollar’s reference rate at CNY6.9848, a little above what the models suggested, but this did not prevent the greenback from moving lower.  The roughly 0.45% decline today is the largest since March, and it is set to post its lowest close in four months.  Meanwhile, the dollar remains at the floor of the band against the Hong Kong dollar, forcing the HKMA to intervene.  


There is one overriding focus in Europe today, and that is on the Q2 GDP figures.  Europe reports its data on a quarter-over-quarter basis.  The eurozone has a whole contracted by 12.1% in Q2 after a 3.6% decline in Q1.  For a point of comparison, the US 32.9% contraction translates into a quarter-over-quarter reduction of about 9.5%.  Yesterday, Germany reported its economy contracted by 10% in Q2.  France’s economy shrank by 13.8%, which was not as bad as feared (~15.2%).  Italy surprised as well, contracting by 12.4% instead of 15.5%.  Spain was disappointing.  Its economy shrank by 18.5% in Q2, almost two percentage points more than economists had forecast.   The risk is that even with the EU joint efforts and the ECB’s purchases that the recovery is slow and uneven.  New divergences are likely to emerge that cause new strains and shaping the next crisis.  

The eurozone’s preliminary July CPI surprised on the upside.  The headline rates slipped by 0.3%, not the 0.5% that had looked likely.  This permitted the year-over-year rate to edged up to 0.4% from 0.3%.  This is twice the rate economists forecast.  The core rate unexpectedly jumped to 1.2% from 0.8%, where it was expected to have stayed.  It is the highest since February.   Although the basket is different, the US will report its June PCE deflator later today, and it appears that the US and European core rates may have nearly converged.  

The euro has been sold in the European morning after racing above $1.19 in the Asia Pacific time zone.  It is as if following the data, month-end profit-taking set in.  It was sold to a little below $1.1840.  There was an 888 mln euro option at $1.19 that expires today that might have required some last minutes hedging.  The 516 mln euro option at $1.1850 that expires today may also be keeping some option dealers busy.  There is another one at $1.18 for about 855 mln euro that too will be cut today.  Even with this pullback, the euro is having its best month in a decade.  Sterling is holding in better than the euro as it tries to extend its record streak for an 11th consecutive session.  It reached $1.3145 before easing back to $1.3100.  Initial support is seen around $1.3080.  Recall that last week, it settled just below $1.28. 


Bamm!  Q2 US GDP contracts by 32.9% at an annualized pace of nearly 10% between the end of March and the end of June. Bamm!  Weekly initial jobless claims rose for the second consecutive week, and continuing claims rise for the first time in eight weeks.  Still little in the markets, though yields were slipping.  Then, President Trump questioned in a tweet whether the November election should be postponed until it was safe for people to vote in person.  Bamm! It broke the seeming paralysis, and the dollar broke down. At the same time, little progress on the stimulus bill and the Senate adjourned until Monday with no deal on unemployment benefits that expire today.  The idea of postponing the election is a non-starter among Republican and Democratic lawmakers.

The Q2 GDP report renders today’s June personal income and consumption report moot as the data incorporated in yesterday’s report.  Still, it is worth recalling that previously some emphasized that income was rising faster than consumption and expressed concern about inflationary implications of the pent-up demand.  Rest easier. Consumption rose more quickly than incomes in June for the second consecutive month.  The loss of the $600 a week federal unemployment insurance won’t be reflected until the August figures are available in late September.  Consumption expenditures are expected to have jumped around 5% while income likely eased by about 0.6%.  In March and April, consumption expenditures fell by nearly 20% before rising 8.2% in May.  As consumption recovered, what happened to prices?  The headline PCE deflator, which the Fed targets, slowed to 0.5% year-over-year in May, the third consecutive monthly decline.  The rate was 1.8% in February and 1.3% in March.  It likely ticked up to around 0.9% in June. The core rate, which the Fed talks about but does not target, is hovering just above 1%. 

Separately, the University of Michigan is likely to confirm that consumer sentiment eased in July. Given the spread of the virus and the rise in weekly jobless claims, it does seem too surprising.  The long-term (5-10 year) inflation expectation may draw attention.  It has been bouncing back and forth between 2.5% and 2.7% and was at 2.7% in June.  In fact, this recent period is the first time it has been this high since March 2016.  The 10-year breakeven (spread between conventional and inflation-protected notes) has risen almost 20 bp this month after rising about the same amount in June.  It is now above 1.50% for the first time since February.  Meanwhile, real and nominal rates are falling, and Fed Chair Powell was explicit that the disinflationary forces have the upper hand. 

The US dollar jumped against the Canadian dollar yesterday and is consolidating above CAD1.3400 today.  The Canadian dollar is among the most sensitive of the major currencies to the S&P 500, and it typically underperforms the other major currencies in a weak US dollar environment,  Canada reports May GDP and is expected to show a recovery has begun.  The economy is projected to have expanded by around 3.5% after an 11.6% contraction in April.   The US dollar has carved a base in recent days around MXN21.85-MXN21.90.  Yesterday’s high was a little shy of MXN22.24, though it might take a move above the week’s high set on Monday (~MXN22.3265) to signal a correction is at hand.  


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