The US dollar gains scored yesterday in response to what appeared to be a
more hawkish FOMC than expected have been extended today. The euro
and the Swiss franc have recorded new lows for the month.
Sterling's attempt to recover from the election rout fizzled yesterday
above $1.28 after the poor average weekly earnings data. News today
that May retail sales were dismal compounds concerns that higher inflation and
weaker earnings growth will undermine consumption, and through it,
production. Retail sales, excluding auto fuel, fell 1.6%, the most this
year. It follows a revised 2.2%
rise in April (from 2.0%). The decline was widespread, everything but
fuel. Household goods sales fell 5.7%. Department store sales were
off 0.8%, and sales at other stores fell 2.9%. The year-over-year
pace fell to 0.9%, matching a four-year low.
The Bank of England meets. Although Forbes is likely to dissent
again at this her last meeting, she has
failed to persuade her colleagues, and a
7-1 vote is expected. The
minutes will likely recognize the recent high frequency data and risks. Focusing on the signal, the strongest case will
be made for a steady hand.
In some ways, a do-nothing MPC meeting may be overshadowed by the Mansion
House speeches tonight by Hammond and Carney. Recall many expected
Hammond to have lost his post in if the Tories would have been able to secure a
majority in parliament. He is expected to make a case for a more
pro-business Brexit, and while that sounds good, it is not clear what it
means. Of course, the UK wants access to the single market, but the EU
does not appear prepared to compromise on the four freedoms. The central
trade-off of "control over national borders" and the single market
remains as stark today as it was a year ago.
The only major currency that is gaining against the dollar today is the
Australian dollar. It is trading at
the upper end of yesterday's range and
trying to get a foothold above $0.7600. It began the month below
$0.7400. A strong employment report is a
key driver. The unemployment rate fell to 5.5% from 5.7%, and the participation rate ticked up
to 64.9% from 64.8%. The country grew 42k job, four-times more than
expected and the April jobs growth was revised to 46.1k from 37.4k. Those
jobs Australia created were all full-time positions (52.1k).
There is an important caveat against taking the data at face value.
It is the sixth month in the past seven that sample for the data was
rotated. The data is not clean, and although the Australian dollar rose,
Australian bonds rallied, with the 10-year yield easing almost five bp to 2.35%, and the equity market lost
1.2%, among the largest decline in the region.
Equity markets are lower.
The 0.9% drop in the MSCI Asia Pacific Index is the largest of the month.
China and Taiwan were the exceptions. Their equity markets increased, but
the Hong Kong market and the HK Enterprise Index fell 1.2% and 1.6%
respectively. In Europe, the Dow Jones Stoxx 600 is off 0.6%, for the
third losing session this week after four last week. The 0.6% decline is being led by telecoms and
materials, but no sector is
gaining today.
Reviewing the FOMC statement and Yellen's comments, we stick with our
initial impression that as a while, the Fed was more hawkish than many
expected. The willingness of officials to look past the recent
economic weakness and softness of prices
is important. It also dropped a reference to the global economy and
financial developments being monitored.
Officials are simply more confident of the broad direction. Indeed, as we
have suggested before, the Fed is not longer worried about the recovery and
expansion. It is accepted, and moreover, it seems to accept that trend
growth has slowed, and the economy is
growing near trend. Yellen was willing to dismiss the 3-4 month
decline in core inflation to one-off factors.
Late in her press conference, Yellen suggested that the balance sheet
adjustment could begin "relatively soon." This is potentially an important tell. This is a strong hint that it will be initiated after the September FOMC
meeting. This means that the third
rate cut of the year, which the median
dot plot still suggests will be appropriate, may come in December. Here
the significant caveat is that the
economy must evolve in line with the Fed expectations.
The FOMC meeting may make today's US economic data less
potent. The Empire and Philly Fed surveys are for June and
represent the new news, but May industrial output and manufacturing will draw
attention. After 1.0% gains in both in April, the risk to the median
guess (0.2% and 0.1% respectively) is to the downside. Treasury International
Capital flows are reported at the close of the equity market.
Import/Export prices and weekly initial jobless claims will draw little
attention.
The euro's low from late-May is near $1.1110. A break of this
area will likely be seeing the euro longs
peel back. Below there is the 50% retracement of the euro rally since
mid-May that is found near
$1.1070. That said, the kind of topping pattern we are looking
suggests potential toward $1.10. The dollar is trading inside yesterday's
broad range against the yen. US yields are slightly firmer. We
have found the direction of rates is often more important than
level. Resistance is seen in the JPY110.00-JPY110.20 area,
even though yesterday the dollar briefly traded a little higher.
The US dollar recovered smartly against the Canadian dollar yesterday
after probing the lowest level since February. Some follow through US
dollar buying has been a big adjustment to interest rate expectations for
Canada. Looking at the derivative markets,
it appears that more Bank of Canada rate hikes has
been discounted than Fed hikes over the
next year. Recall too that in the futures market, speculators had nearly
a record short Canadian dollar position. A US dollar move
above CAD1.3310 could spark a correcting the move that began at the end of last
week's CAD1.3340 area.
Disclaimer
Dollar Trades Higher in Wake of the FOMC
Reviewed by Marc Chandler
on
June 15, 2017
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