The Dollar Begins September Heavier (Mostly)

Overview: The new month begins with risk appetites bolstered by stronger than expected PMI reports helping lift equity markets after the pause in the US yesterday.  The MSCI Asia Pacific Index extended its advance for a fourth session, led by 1%+ gains in Japan, China's CSI 300, and Singapore.  Europe's Dow Jones Stoxx 600 is at a new two-week high, and US futures indices are firm.  Benchmark yields have risen.  The US 10-year is at 1.31%, while European core yields have edged up to one-month highs, while peripheral yields are a little softer.  The Antipodean benchmark yields jumped 8-9 bp, and appear to be pushing their currencies higher, which along with the Canadian dollar, leads most of the major currencies higher. The Japanese yen and Swiss franc are softer, as one would expect.  Emerging market currencies are mixed, but the liquid accessible ones are firmer, and this is enough to lift the JP Morgan EM currency index for its fourth consecutive session and eight of the past nine.  OPEC+ has increased its projected oil demand next year, paving the ground for the announcement expected shortly to proceed with plans to boost output by 400k barrels in October.  Around $68.80, October WTI is little changed since the end of last week.  Rising rates sap a source of demand for gold, which is trading softer but within yesterday's roughly $1802-$1820 range.  China's iron ore prices fell for the second session, snapping a six-day rally.  It is off 8.5% in the past two sessions.  Copper is also about 1.5% heavier today.  

Asia Pacific

For at least a couple of months, there has been speculation that shortly after the Paralympic Games end on September 5, Japan's Prime Minister Suga would call a snap election.  The aim would not be so much to keep the opposition parties off balance but to keep his rivals within the Liberal Democratic Party, who are counting on a leadership challenge at the end of September.  Still, after setting a date for the leadership challenge, calling a snap election ahead of it does not seem cricket.  At the same time, the defeat of Suga's candidate for mayor in Yokohama (August 22) may have also injected an extra note of caution among the political strategists.  Today, a Japanese news report suggested Suga may dissolve the Diet on September 17 and hold the election a month later.  Ostensibly this would delay the leadership challenge until after the election.  

China's Caixin manufacturing PMI was weaker than expected, falling below the 50 boom/bust level to 49.2 to match the lowest level since last April.  Recall the "official" measure eased to 50.1 from 50.4.  Japan's manufacturing PMI was revised to 52.7 from the preliminary 52.4, following July's 53.0.  Australia's manufacturing PMI was also revised higher to 53.0 from 51.7.  It stood at 56.9 in July.  Separately, Australia reported a stronger than expected Q2 GDP of 0.7%. The market had looked for 0.4%, while Q1 growth was revised to 1.9% from 1.8%.  Lastly, although South Korean exports soared 34.9% year-over-year in August from 29.6% in July, the August PMI slipped to 51.2 from 53.0, matching its lowest reading since last September.  

The US dollar had posted an outside down day after the Fed's Powell spoke last week and yesterday posted an outside up day.  Unlike last week, follow-through buying has been strong.  The greenback rose to a new two-and-half-week high slightly above JPY110.40 after falling to about JPY109.60 yesterday.   It is flirting with the downtrend line drawn off the year's high set in early July near JPY111.65 and the August high around JPY110.80.  A convincing break signals another run at JPY111.00.  The Australian dollar is also trading at its best level since mid-August, near $0.7350.  Recall that the low for the year was set on August 20, slightly above $0.7100.  Resistance is seen in the $0.7380-$0.7400 area.  The dollar had approached the lower end of the CNY6.45-CNY6.50 yesterday, which has largely held since mid-June.  It recovered to finish above CNY6.46 and today made it to almost CNY6.4680.  Today's PBOC fix was at CNY6.4680, which is spot on the median projection in the Bloomberg survey.  Reports suggest that the PBOC has asked some banks to boost their lending last month and reduce the backlog of property loans.  Last week, before the PMI disappointment, PBOC Governor reportedly encouraged some banks to boost liquidity to the real economy.  


The flash EMU manufacturing PMI of 61.5 after 62.8 in July was close to the final reading of 61.4.  The details seemed a bit better than the headline.  It is true that Germany's manufacturing PMI was revised slightly lower to 62.6 from 62.7, but the French figure was revised higher to 57.5 from 57.3.  Both were lower than July's readings (65.9 and 58.0, respectively).  However, defying expectations, the Italian and the Spanish manufacturing PMIs were stronger than expected.  Italy's rose to 60.9 from 60.3 in July, while Spain's rose to 59.5 from 59.0.  Separately, the UK manufacturing PMI was revised to 60.3 from 60.1.  It was at 60.4 in July and peaked in May at 65.6.  

Other high-frequency data were mixed.  German July retail sales slumped 5.1% on the month.  Economists Bloomberg polled expected a 1% decline after strong gains in the previous two months (4.5% June and 4.6% in May).  The aggregate retail sales report is due Friday, and there are clearly downside risks to the median forecast of a flat report after a 1.5% gain in June. Unemployment in the EMU fell to 7.6% in July from 7.8% in June. Earlier today, Italy had reported its unemployment rate fell to 9.3% from a revised 9.4% in June (initially reported at 9.7%).  At the end of 2019, Italy's unemployment rate was 9.9% and 10.3% at the end of 2018.  

The EC reached its objective of fully vaccinating 70% of its adults through the 27 members by the end of the summer.  It is unevenly distributed.  According to the NY Times, Romania has less than 20% of its adults vaccinated, the lowest in the EU, and it is the only member with a fatality rate higher than the US.  Ireland and Portugal have inoculated 80% of their adult populations.  Yet, Ireland has the highest number of cases proportionately, though still below the US, where a little more than 63% of adults are fully vaccinated.   

The euro reached $1.1845 yesterday before meeting selling pressure that knocked it back to test support a little below $1.1800.  It made session highs in European turnover after the PMI reports, but the range is narrow, and the single currency has not traded above $1.1820 yet today.  There are options for about 740 mln euros at $1.1825 that will expire today.  Many players are reluctant to sell the dollar ahead of the US jobs data, for which the ADP estimate today is a downpayment.  Sterling slipped to a marginal new three-day low near $1.3730 today, and although it was better bid in the European morning, there was little enthusiasm.  Selling pressure reemerged when sterling poked above $1.3760.  Sales were seen yesterday when sterling edged above $1.3800.  Support is seen in the $1.3680-$1.3700 area.  Meanwhile, the euro is testing the GBP0.8600 area, which it has not been traded above in over a month.  


US auto sales are arguably among the most under-appreciated high-frequency data points.  It integrates numerous economic forces.  It may be the second most important report after the employment figures.  August is often a strong selling month as dealers clear out inventory to make room for the new models.  This time is different. Auto sales are likely to have fallen in August for the fourth consecutive month, but what makes August different is that it will likely fall below the year-ago level.  After peaking in April at 18.51 mln vehicles (seasonally adjusted annual rate), sales have fallen to 14.75 mln in July.  The median forecast in Bloomberg's survey projected a 14.5 mln pace in August.  It was nearly at 15.2 mln in August 2020.  The problem is supply (low, as in less than a third of normal inventory), not demand.  Incentives have been reduced dramatically, which boosts the effective price, which gets fed into inflation measures.  

US house prices in June had risen by 18.6% year-over-year, according to CoreLogic.  The FHFA calculation was similar at 18.8%.  The Biden administration will reportedly soon (as early as today) announce some regulatory changes aimed to make housing more affordable to first-time buyers.  The US is not alone.  In recent days, New Zealand reported its house prices from 27% above year-ago levels in August.  Australia reported a 15.8% increase.  Earlier today, the UK's Nationwide estimated that house prices rose 11% year-over-year in August, up from 10.5% in July.  It is the fastest rate in seven years.  

The US reports ADP private-sector jobs estimate. The median looks for around 638k after 330k in July (when the government estimates slightly more than 700k private-sector jobs were created).  Markit reports its final reading for the manufacturing PMI, while the ISM's manufacturing report is also out.  Construction spending is expected to have risen by 0.2% in July.  Canada surprised yesterday with a 1.1% contraction in Q2 GDP.  The monthly GDP was in line with the 0.7% forecast, but the May series was revised lower.  Because the momentum is positive, next week's Bank of Canada meeting is unlikely to be unduly impacted by the report.  Today's August PMI may be important for psychology.  It has fallen for four months through July.  Today, a rise from July's 56.2 would also boost confidence that the Canadian economy has emerged from the soft patch.  

Mexico reports worker remittances, which appear to be the top source of hard currency inflows into the country.  Also on tap is the Markit manufacturing PMI.  It stood at 49.6 in July, which is the highest level since February 2020.  The IMEF manufacturing and non-manufacturing surveys, which have held up better than the PMI, are also due today.  Yesterday's Banxico central bank inflation report seemed consistent with the pause in the rate cycle after hiking in July and August.  Brazil reports Q2 GDP (expected 0.2% after 1.2% quarter-over-quarter in Q1).  It also reports August trade figures, where a modest recovery is expected after the surplus fell to a four-month low in July of $7.4 bln. Late yesterday, the central bank of Chile surprised by hiking 75 bp to double the overnight target rate to 1.5%.  Many had expected a 25 bp hike, and some, like ourselves, anticipated 50 bp.  Still, with CPI at 4.5% (and likely ticked up to around 4.7% in August, which will be reported next week), its tightening cycle is not complete.  

The US dollar is trading inside yesterday's range against the Canadian dollar (~CAD1.2570-CAD1.2655).  It is straddling the CAD1.26-area near midday in Europe.  Support is seen in the CAD1.2535-CAD1.2550 area.  A break would boost confidence that a high is in place and signal a move toward CAD1.2475 and then CAD1.2370.  The greenback closed below its 200-day moving average against the Mexican peso (~MXN20.11) for the first time in nearly two weeks.  Yet, it remains above MXN20.00.  A break of it opens the door to MXN19.85.  


The Dollar Begins September Heavier (Mostly) The Dollar Begins September Heavier (Mostly) Reviewed by Marc Chandler on September 01, 2021 Rating: 5
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