Chief Macro Strategist
Summary: Today, a look at the US dollar wrapping up the week after a crazy-hot June CPI number failed to sustain any adjustment higher in Fed expectations and yet the USD remains relatively bid. Also, a look at event risks next week, including an ECB meeting and a likely chunky rate hike from Russia, as well as a look at how the front-end of the yield curve has developed for G10 FX countries this year, with New Zealand the recent outlier.
FX Trading focus: USD ending the week firm despite dovish Powell
The US dollar looks set to end this week on a firm note despite a fresh dip back towards the lows of the cycle in US treasuries yesterday and a hot June CPI print that failed to see a sustained reaction in the markets expectations for the Fed. The latter was helped in part by Fed Chair Powell doing all he could this week to stand up to at times withering questions from Congress on elevated inflation levels and held his ground on the transitory inflation narrative, about as dovish a performance as could be expected. Treasuries pushed back lower late today after the release of a very solid June US Retail Sales report (+0.6% month-on-month for the headline vs. -0.3% expected (-0.4% revisions to prior month’s data) and a chunky +1.1% ex Autos and Gas versus +0.5% expected (and -0.2% revision). That’s a strong performance suggesting consumer confidence and dissaving of stimulus money built up during the pandemic. But assuming we don’t get any late Friday fireworks, it looks as if we might close the week with the USD at the cusp of resistance it has been teasing for much of this week versus the EUR, AUD and CAD, for example – more thoughts on the week ahead below.
Chart: 2-year swap rates for the G10 non-zero yielders
A chart of this year’s moves in the G-10 swap rates (less the lowest yielding and almost non-moving JPY, CHF, EUR and SEK). Note the huge outlier the NZ yield rise that jumped higher still this week on the RBNZ moving to abandon QE at its meeting and the hot Q2 CPI print. Hard to believe that Australia has been at the bottom of the heap for almost the entire year – have a hard time, given our belief in non-transitory inflation and an eventual stimulus push from China that we don’t see the table shift for the Aussie in the coming two quarters. Disappointing, as noted below in Odds and Ends, that sterling hasn’t gotten more out of a firming rate view on BoE hawkish talk and a high Jun. UK CPI print this week.
Odds and ends
Hot NZ Q2 CPI the latest boost to NZD - the Q2 headline CPI came in far hotter than expected at 1.3% QoQ (vs. 1.0% expected) and 3.3% YoY vs. 2.7% expected. That sequential number, in particular, offers the RBNZ solid cover for announcing at its meeting this week that it would halt QE purchase next week. NZ short yields rose steeply again as discussed above.
Japan commits to climate agenda: although not on the scale of the ECB’s signaling on its intent to throw its full weight behind the climate agenda, the Bank of Japan used last night meeting’s as a platform for announcing it would support climate initiatives with interest-free lending for loans and investments by banks and allow larger exemptions for the assessing of the negative 0.10% policy on reserves. As well, the Bank said it would allow itself to purchase foreign currency loans linked to the climate agenda as well (are you listening EU?). More on JPY below.
Disappointed sterling bulls this week: It’s been disappointing to see EURGBP unable to sustain an offered tone and take out the 0.8500 area this week despite the high June UK CPI and a hawkish turn from the BoE’s Saunders this week. Even the House of Lords is creating a stir in complaining about QE this week. EURGBP needs to stay below 0.8600-25 next week in the awake of Thursday’s ECB meeting, or its back to the drawing board for sterling hopefuls.
JPY – correction over or something bigger afoot? I have put out a big question mark (since well before the JPY launched a broader rally this month) on why the JPY has traded so weakly in this cycle when coincident indicators have been very supportive of JPY strength since at least mid-May (when EU sovereign yields peaked and reversed, after the US peaked and started rolling over in late March). We have seen a solid JPY rally versus the weaklings in the G10, especially in July, but considering the scale of the support for a bigger rally in the form of the market selectively looking through inflation threats and bidding up safe-haven fixed income, the rally has been underwhelming. Will watch ongoing sensitivity to yields next week and especially the behaviour of EURJPY around the key 130.00 area over the ECB meeting (where EURUSD key technical levels much discussed of late below 1.1800 may also be in play) . ON a long-term inflation-adjusted basis, the JPY is extremely weak. weakness for some time (since well be
On next week’s agenda: An ECB meeting is up next Thursday after the June CPI reading for this month came in at a middle-of-last-eight-years range of 0.9% year-on-year, keeping the ECB concerned with ensuring that no one believes QE will ever end, as it sets up something to keep asset purchases rolling along after the current emergency PEPP. The calendar is quiet for the US, but semi-busy for Australia, with RBA Minutes up on Tuesday and Retail Sales for Jun. up on Wednesday. Friday sees flash EU July PMI’s and a Russian key rate announcement, with the market split on whether we get 50, 75 or 100-bps, and the spicy 4.6% year-to-date CPI driving the sense of urgency (2020 inflation ended just south of 5% YoY and the year-on-year figure for Jun rose to 6.6% at the core, the highest since 2016.
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy