The US dollar has found steadier footing today after trading heavily
yesterday. There are two main themes. The first is sterling’s heavy tone. After closing the
North American session 0.5% higher yesterday to snap a five-day losing streak, it has come under new pressure
today.
The ostensible trigger was the RICS house price balance, which slumped to
5% from a revised 15% in June (initially 16%) It is the lowest reading in
three years. It plays on concerns that commercial and residential
property prices are not waiting to see if the bookmakers
who have reportedly tightened up the odds that Article 50 is not triggered
until 2018, if at all, are correct.
Also, there seems to be an asymmetrical
response by sterling. The
market seems more eager to sell sterling on disappointing news than to sell it
on favorable news. There was much
trepidation, for example over the third leg of this week’s bond buys, and it
was for the longest duration. It went off without a hitch, but sterling slipped back down to finish just above
$1.30. Sterling has not closed below $1.30 since July 8. Intraday
resistance is seen in around
$1.3025.
On the other side of the spectrum is New Zealand. The Reserve
Bank of New Zealand delivered a 25 bp cut in the cash rate, and the New Zealand
dollar rallied. It shot up from near $0.7200 to $0.7340 in less than five
minutes. It has since trended lower, and ahead of the start of the North
American session, it is trading near $0.7240.
Not only was the rate cut widely anticipated, but in recent days, there
was talk of the chances of a 50 bp rate
cut. The derivatives market appeared to discount about a 20% chance
of a 50 bp move, which Governor Wheeler indicated he did not seriously
consider. The RBNZ’s path for the 90-day bill implies a trough in the
official cash rate of 1.50%-1.75% rather than 2% previously. This is a little above what the market prices
implied. Still, officials made it
clear that the strength of the currency was a challenge. By suggesting
that the inflation target is more important than ever, it points market
participants which data to pay particular attention to going
forward.
With today’s pullback, the euro has retraced 38.2% of the post-US jobs
report rally. That retracement is
found near $1.1135. The next retracement is $1.1120, which also
corresponds to the 20-day moving average. It looks as if
today’s pullback is over or nearly so, and regaining the $1.1160 level could
spur the euro for a running start at $1.12 again.
The news stream remains stuck in the summer lull, but following Norway
earlier in the week, Sweden reported firmer than expected consumer
prices. The 0.1% rise in July is the third consecutive increase, the
longest advancing streak in two years. The year-over-year pace edged up
to 1.1%, the highest in four years.
The underlying rate of inflation in Sweden is not what is often thought
of as a core measure (excluding food or energy or both) but is calculated using
fixed mortgage interest rates. By that measure, the year-over-year
pace is 1.4%, down from 1.5% in June. It remains near its highest levels
in five years.
The takeaway is it appears that
rising consumer inflation reduces pressure on the respective central banks to
ease policy, and both currencies are appreciating against the euro.
Today is the third session that the Swedish krona is gaining against the euro
and the sixth in the past nine sessions. The euro is only slightly lower
today against the Norwegian krone after falling 1.1% yesterday. It losing
streak is extending into the fourth session. The euro has only risen
against Nokkie in two of the past 10 sessions.
It may be worth noting that the krona’s firmer tone has materialized despite
the heaviness of oil prices. Brent is off 0.4% today after completely
unwinding Monday’s 2.5% rise on Tuesday and Wednesday. News that OPEC
output rose 150k barrels in July, with Saudi Arabia, Kuwait and UAE producing
record amounts took a toll after the US reported a one million barrel inventory
build while the expectations for were a draw down of 1.5 mln
barrels.
We think the risk of a supply agreement among OPEC and non-OPEC members
next month is low. Ironically, lack of funding, which is partly
related to some continued US sanctions may be slowing Iran’s efforts to boost
oil output as quick as it can. In turn, without regaining
pre-embargo levels of output, Iran cannot abide by a freeze.
Another observation is an insight from game theory. If an oil producer anticipated that there might be a freeze in output in the coming
period, it would make sense to boost output first.
There are a few economic reports from the US and Canada today, but
nothing that is likely to move the markets. The US reports July
import prices. A decline much larger than 0.4% could impact expectations
for tomorrow’s PPI report. Weekly jobless claims are the closest thing to
a real-time report on the US labor market. Next week’s report will be more
important as it covers the week of the nonfarm payroll survey.
Tomorrow the US reports retail sales. Auto sales improved
more than expected in July and that will keep the headline firm. The GDP
components are expected to rise 0.3% after two months of 0.5% increases.
Consumption in Q2 rose over 4%. Some moderation in Q3 is expected, with
investment picking up some slack, and the inventory headwind
diminishing.
Separately, Canada reports new house prices. A 0.3% increase is expected in June after a 0.7% rise in
May. It would probably keep the year-over-year rate near 2.7%.