Dollar Firm as Risk-Off Sentiment Returns

On the other hand, economic data has come in on the stronger side of expectations, at least in the US and the euro area (though not so much in the UK). This suggests that some of the pessimism built in during the depths of the pandemic was overdone. It is also a testament to the vigor with which governments and central banks around the world have reacted. But most importantly, we expect the recovery to continue because we believe that the balance of risks between economic and medical priorities has shifted in favor of the former. This means that despite the localized resurgence of Covid-19 case, the bar is very high for widespread lockdowns to be re-instated. However, if virus numbers deteriorate significantly, we would expect to see self-imposed lockdowns that would likely lead to pockets of dampened economic activity.

Economic Surprise, 2019-2020

- Click to enlarge

EUROPE/MIDDLE EAST/AFRICA

Germany’s June IFO survey came in on the stronger side of forecasts. The key expectations component bounced back to 91.4 compared to 87.0 expected and 80.1 in May. The overall business climate and current assessment components also improved to 86.2 and 81.3, respectively. This reinforces our view that the German government’s response, including a material easing of fiscal restraint, has been effective and will continue to support the economy.

Austria issued the second 100-year bond in its history and it was very well received. The €2 bln issues received over €13 bln in orders and came in with a yield of just under 1.0%. Whatever the outlook for the economy and fixed income markets, this is a remarkable feat.

German Data, 2015-2020

- Click to enlarge

Hungary central bank (NBH) surprised markets with a 15 bp cut to the base rate yesterday to 0.75%. This was the first in four years, and this fine-tuning move was designed to bring rates “a step closer towards” to the levels of its neighbors. Recall that the NBH kept the base rate on hold during the pandemic, though it did engage in several other easing measures, including a bond purchase program. This probably implies a re-balancing of the government’s strategy to start moving closer to conventional tools and reducing emphasis on QE. As such, we should expect more easing ahead, possibly in the bank’s other rates. But for now, the deposit rate remains at -0.05%, while the overnight and one-week collateralized lending were left at 1.85%.

South Africa will present its emergency budget today. Yields have been climbing this month on expectations that the fiscal trajectory will worsen further as the result of the pandemic. Government forecasts are widely expected to reflect this new reality. Earlier, South Africa May CPI came in as expected with headline inflation falling to 3.0% y/y from 4.1% in April. This was the lowest since September 2010 and right the bottom of the 3-6% target range. March retail sales will be reported shortly and are expected to rise 1.9% y/y vs. +2.0% in February. Next SARB policy meeting is July 23 and another rate cut is expected then.

Hungarian Central Bank, 2015-2020

- Click to enlarge

ASIA

The summary from last week’s Bank of Japan meeting suggests that the initial emergency response to the pandemic is over. However, policymakers stand ready to do more as needed. Many board members felt it was time to pause and gauge the impact of measures taken by the bank since March. Yet several pointed to ongoing deflation risks, while others were concerned about a possible rise in business bankruptcies that “may have a negative impact on employment, prices, and finance.” Next policy meting is July 15 and no change in policy is expected then.

The RBNZ kept rates steady at 0.25%, as expected. Here too, the bank is clearly on hold for now. However, the bank said it was ready to provide more stimulus “as necessary.” It noted that besides possibly expanding its asset purchases, “it continues to prepare for the use of additional monetary policy tools as needed.” Furthermore, the bank did not reaffirm its previous guidance that the policy rates would remain at current levels until at least March 2021. Lastly, the RBNZ said that recent NZD appreciation has placed further pressure on exports and damped the outlook for inflation. May trade data will be reported Thursday.

Bank of Thailand kept rates steady at 0.5%, as expected. It last cut rates 25 bp to 0.5% in late May but signaled steady rates were now likely for the time being. The bank cut its GDP forecast for this year to -8.1% from -5.3% in March but raised its forecast for next year to 5% from 3% previously. It again expressed concern about the strong baht. As such, the bank is likely to continue jawboning the exchange rate and perhaps take some action to weaken the baht in the coming weeks.