Tuesday, July 17, 2018

Capital Markets: "Dollar on Back Foot Ahead of Powell"

From Marc to Market:
The US dollar eased in Asia session and the European morning. The greenback had appeared technically vulnerable, and the economic news stream is light.

The UK employment data were in line with expectations. The unemployment rate was steady at 4.2% in May, and the average weekly earnings rose 2.5%. The three-month employment change of 137k was only slightly lower than the April pace of 146k and better than the 115k economists expected. There is nothing in the report, or in BOE Governor Carney's testimony today, that gives any reason for investors to have second thoughts about the likelihood of a rate hike at the next MPC meeting on August 2.

Sterling, unlike most of the other major currencies, remains within yesterday's range. Yesterday's high, a little above $1.3290, maybe reinforced a little today by the GBP245 mln $1.33 option that is expiring. Brexit concerns may also be acting as a drag. At first, it looked like Prime Minister May was going to block the amendments to the Trade Bill. Even the sponsor did not expect them to pass. However, May instead chose to accept them.

The situation seems rather chaotic, at least from afar, and it is not clear how things will shake out. The decisive battle within the Tory Party has yet to be fought. It continues to appear that the signatures of Tory members needed to trigger a leadership challenge, and even if one is triggered, it is not obvious that May would be defeated. The underlying point is that while there may be dislike for the status quo, there is no agreement on the alternative or the way forward.

The New Zealand dollar is leading the charge today against the greenback, with only the yen not participating. The Kiwi was lifted by strong underlying inflation. The sectoral report showed inflation at a seven-year high near 1.7% in Q2, after the year-over-year increase in the headline rate accelerated to 1.5% from 1.1%. The low from last week was recorded ahead of the weekend near $0.6725. It traded up to $0.6840 today. The $0.6860 area capped it earlier this month. A move above there would open the door to a return to the $0.6950 area seen in late June.

The Australian dollar is lagging behind. Even though the Reserve Bank of Australia reinserted a line that had been dropped last month that indicated that the next move in rates is likely higher, the Aussie is little changed. Tomorrow Australia reports its employment data. A break of NZD1.0835 could confirm a double top in place, and signal a move into the NZD1.0650 area, where the Aussie had bottomed in mid-June.

Many markets in Asia fell today, led by Hong Kong's 1.25% decline. China, Taiwan, Korean, Thai, and Indonesian shares fell. Japan, returning from a long holiday weekend, saw the Nikkei raise almost 0.5% and the Topix nearly 0.9%. Utilities, consumer staples, and financials led the advance. The energy sector traded heavily after oil fell sharply. Excluding Japan, the MSCI Asia Pacific Index was off 0.35%, the second day of losses. With Japanese shares, the MSCI Asia Pacific index eked out less than a 0.1% gain....