Dollar Consolidating with Downside Bias

The US dollar has been mostly confined to yesterday's ranges against the major currencies.  Outside of a larger than expected Japan trade deficit, and a jump in the eurozone's current account surplus, the data stream is light.  The main interest is the US CPI report and the FOMC minutes later in the session. 

The consensus expected for US July CPI is a 0.2% increase in both the headline and core measures.  If true, the year-over-year headline rate ticks up to 0.2% from 0.1%, and the core will remain unchanged at 1.8%.  We note that gasoline prices have been considerably stickier than oil prices.  Also, a relatively tight rental market is also contributed to a firm core rate.  

The FOMC minutes will draw attention, even though for those who think developments in Beijing substantially impact the Fed's decision, the minutes have been superseded by events.  The key issue, however, remains, how close is a rate hike?  Surveys show strong expectations for a hike in September (Dow Jones 82%, Bloomberg 77%), but market measures show a considerably smaller odds. 

In order to maintain that every meeting is live, and the decision is data-dependent, the Federal Reserve discussion, as revealed in the minutes, cannot pre-commit to a September hike.  Yet there are some tells that will be looked for in the minutes.  For example, was there a discussion about how much more improvement there needs to be in the labor market.  The FOMC statement talked about "some", which we read to be diminutive, or a "little more".  

Is the Fed comfortable with its exit plan and tools?  If it is operationally ready, they could also signal that it is prepared to hike.  Did the Fed discuss the Chinese stock market decline and commodity prices?  If the sense from the FOMC minutes is that the sense was that officials wanted to look past these events, and/or recognize the transitory nature of the impact, it could also, on the margins, support Fed hike expectations. 

Japan's trade deficit widened in July to JPY268 bln.  The consensus had expected a little improvement from the JPY69 bln June deficit.  Japan's trade flows have a distinct seasonal bias and the July balance typically worsens from June, which improves over May.  After a being a drag on GDP in Q2, net exports began Q3 on a soft footing.  Exports rose 7.6% year-over-year.  While this was stronger than expected (Bloomberg consensus 5.2%), imports fell 3.2% year-over-year.  The consensus was for an 8.2% decline.  

Meanwhile, the June eurozone current account surplus rose to 25.4 bln euros from 19.1 bln in May.   This essentially matches the six month average.  In H1 14, the eurozone current account surplus average almost 16 bln euros a month.   In H2 14, the monthly average was 19.25 bln euros.  In H1 15 it was 25 bln euros. 

 In the year ending in June, the eurozone current account surplus stood at 2.6% of GDP.  For a similar period ending June 2014, the surplus was 1.8% of GDP.  It reflects two developments.  The first is the decline in the euro, and observers typically emphasize this.  But export growth is uneven in Europe, and arguably, the second development is more important, and that is the compression of domestic demand.   Recall that nearly every eurozone country reported Q2 GDP below expectations.  

The notable exception was Greece, which reported a 0.8% expansion.  Rather than reflect stronger consumption or tourism as some economists suggested, we identified the issue as one in which prices fell faster than output.  This distorts the data.  Nominal growth contracted. 

In any event, the German and Dutch parliaments are expected to support the third aid package just in time for Greece to make its debt payment to the ECB.  Ideas that with this payment and a third aid package, the ECB will soon accept Greek bonds again as collateral and include Greece in its asset purchase operations.  This has encouraged some foreign institutional buying of Greek bonds in anticipation.    Fitch upgraded Greece's rating to CCC from CC.  

Greece is making important progress on re-launching its privatization efforts.  Formal approval was given yesterday, the first under Tsipras, for a 40-year concession to a German airport operator for 14 regional airports.  Additional bids were invited for port authority, rail services and train maintenance concessions. 

The ECB’s decision to cut Greece’s ELA yesterday was actually a favorable development.  It is a sign that Greek banks do not need as much as had been granted.  The Greek central bank that formally makes the request asked for 700 mln euro fewer euros.  It cited the improved liquidity conditions.  Confirmation that depositors would not be bailed into the recapitalization program has helped ease anxiety.  Tourism inflows have also reportedly increased.   

Lastly, the Chinese yuan has been eerily steady for the fifth day.  During this period, the dollar has settled with a CNY6.39 handle, and in the last three sessions, it has closed within 7 pips on either side of CNY6.3949 at the Shanghai close.  The fix (central reference rate) was set at CNY6.3963 today after CNY6.3966 yesterday.  

The stability in the yuan comes as the stock market has turned more volatile.  After yesterday’s 6% downdraft, Chinese stocks continued to tumble.  The Shanghai Composite near 3500, the perceived lower end of the acceptable range, and proceeded to rally, and closed on its highs near 3800 for a 1.2% gain.   

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