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Marc Chandler
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Overview:  The dollar is consolidating yesterday's advance and is confined to fairly narrow ranges in quiet turnover.  Most of the major currencies are within 0.1% of yesterday's close near midday in Europe. The $1.1700-level held in the euro.  Most emerging market currencies have edged a little higher.  Despite the largest fall in the US NASDAQ in three weeks and the largest fall in the S&P 500 in a month, the MSCI Asia Pacific Index rose for the first time in five sessions today, led by a nearly 1.2% gain in China's CSI 300.  The Dow Jones Stoxx 600 in Europe and US futures indices are sporting small losses.  The US 10-year note yield is firm, around 1.27%, while European benchmarks are 1-2 bp softer.  The Reserve Bank of New Zealand, citing the lockdown, held off lifting rates, though indicated a move was still coming, and its 10-year yield that fell 10 bp yesterday rose five today.  Gold is consolidating inside yesterday's range, but the market does not appear to have given up on a test of $1800.  Crude oil prices fell for the fourth session yesterday, the longest losing streak since March, but has steadied today, with the September WTI contract straddling the $67-level.  China's iron ore contract fell 2.7% to its lowest level in five months today, while copper remains heavy after falling nearly 4.3% in the past two sessions and is trading near its lowest level in a month (~$418).  

Asia Pacific

The Reserve Bank of New Zealand appeared poised to hike rates today, but the government's decision to impose a three-day lockdown deterred them.  The official cash rate remains at 25 bp.  Officials signaled their intent to hike rates and project that the cash rate will reach 1.15% in Q2 22.  The New Zealand dollar fell to new lows since last November near $0.6870 before rebounding to about $0.6950 before stalling.  Still, it is struggling to maintain the re-entry into the Bollinger Band (two standard deviations below the 20-day moving average) found by $0.6915 today.  The next area of support is seen near $0.6800.  

Japan reported a smaller than expected July trade surplus as both exports and imports slowed more than expected. As a result, the seasonally adjusted trade surplus of JPY52.7 bln is a little less than half of the median forecast in Bloomberg's survey anticipated. Exports rose by 37% year-over-year, down from 48.6% in June and a bit weaker than projected.  Exports to the region of steel, semiconductor products, and chip-making equipment led, while auto parts and steel to Europe were strong. Still, to assess the contribution to growth, one needs to take into account imports as well.  Recall that the net export function shaved 0.3% off Q2 growth and 0.2% of Q1 growth.  

The dollar is in about a 20-pip range against the yen, mostly above JPY109.50.  The week's high, set Monday, was just shy of JPY109.80.  Not that it is showing any inclination, but there are almost $2 bln of options that expire today stacked in the JPY110.00-JPY110.20 area.  The Australian dollar made a marginal new low for the year, slightly below $0.7240 in Asia earlier today.  The bounce ran out of steam near $0.7270.  Note that tomorrow, options for around A$1.9 bln at $0.7250 expire.  The Aussie closed below its lower Bollinger Band yesterday and remains below it today (~$0.7275).  The Chinese yuan continues to trade in a very tight range and within that range ticked slightly higher.  The dollar has not been below CNY6.45 or above CNY6.49 for three weeks. The dollar eased less than 0.1% so far today.  The PBOC set the dollar's reference rate at CNY6.4915 today, a little softer than the CNY6.4930 anticipated.  

Europe

Due mostly to the base effect, UK consumer inflation eased last month.  The BOE's preferred measure of CPI that includes owner-occupied costs pulled back from 2.4% to 2.1%.  It was the first decline since February.  CPI itself was flat in July, the softest since January, and replaces the 0.4% gain in July 2020 in the 12-month comparison.  The core measure slowed to 1.8% from 2.0%.  The base effect has not been dissipated and will return in October and November, suggesting consumer inflation has not peaked yet, despite the statistical reprieve in July.  Separately, producer prices, both output and input prices, were stronger than expected, even after the June series was revised higher.  Lastly, the UK official house price index accelerated in June to 13.2% year-over-year from a revised 9.8% in May (initially 10%).  

While China and Russia maintain a diplomatic presence in Afghanistan, NATO members do not appear to have a common response to the Taliban's rapid ability to gain control.  Canada's Trudeau, in the middle of an election, refuses to recognize the Taliban government. At the same time, the UK's Foreign Minister Raab suggested its aid could increase by 10%, even though the foreign aid budget was controversially cut as part of Chancellor Sunak's fiscal efforts.  The EU foreign ministers met and agreed that talks with the Taliban ought to occur, which is not the same as diplomatic recognition.  However, the EC's foreign policy commissionary, Borell, suggested a scalable approach depending on the behavior of the Taliban in respecting women's rights and preventing the use of Afghanistan as a base for terrorism.  Europe will also have to deal with the refugee challenge.  The US has frozen Aghanistan reserves kept in the US and appears to be attempting to block the transfer of the new SDR allotment (scheduled for next week).  

The euro briefly traded a couple of ticks below the March low to record a new low for the year, but the $1.17-level continues to hold.  There are options for around 1.9 bln euros struck at $1.17 that expire tomorrow.  On the upside, offers at $1.1730 restrained stronger gains.  Resistance above is likely to be encountered in the $1.1740-$1.1750 area.  Sterling remains trapped near yesterday's trough that extended to an almost four-week low near $1.3725.  It is absorbing offers in the European morning in the $1.3750-$1.3760 area.  The 200-day moving average that was violated for the first time in a month comes in now slightly below $1.3790, and a band of resistance extends toward $1.3820.  

America

US retail sales sorely missed expectations.  The 1.1% decline was nearly four times larger than the decline projected by the median forecast in Bloomberg's survey.  Since restaurant and bar spending was up, a benign view was that the retail sales report is picking up the shift from consumption of goods to services.  There may be something to that, but it ought not to be exaggerated.  The fact of the matter is that retail sales have fallen for the second time in three months. Moreover, the components used for GDP calculations were off by 1%, five times more than expected.  There may have been some other quirks in the data, such as the timing of Amazon's Prime Day. Yet, it is also notable that the first round of checks for the Child Tax Credits was distributed and did not appear to have been spent on retail sales as many anticipated.  

We have expressed concern that the pent-up demand would be short-lived, and this, coupled with the end of different fiscal supports, would generate slower growth going forward.  Consumption drives the US economy, retail sales are a little more than consumption, and the July PCE report is due next week (August 27).  This time series also picks up a slowing of consumption.  Consider that in Q1, it rose by an average of 2.5% per month, helped of course by the fiscal stimulus that was passed shortly after Biden was sworn in.  In Q2, the monthly average was slower but still robust 0.7%.  Personal consumption in July was expected to rise by 0.5% before the retail sales report.  If, for the sake of argument, that next week's report matches expectations, the three-month average will fall below 0.5%. The monthly average was 0.4% in 2019 and 0.3% in 2018 when the US economy grew by 2.3% and 2.9% respectively.  As an aside, the budget deficit was 4.7% of GDP in 2019 and 4.2% in 2018.  

Industrial output surpassed expectations, even though the June series was revised lower.  Manufacturing output jumped 1.4%, which was twice as strong as the median forecast in Bloomberg's survey anticipated.  It was the largest gain since March.  The June series was revised to -0.3% from -0.1%.  That manufacturing production outstripped demand should not be worrisome.  The rebuilding of inventories can contribute to growth.  In another sign of the economic recovery, note that the capacity utilization rate rose to 76.1% from 75.4%.   On the eve of the pandemic, at the end of 2019, the utilization rate was 76.5%.  

US July housing starts are expected to have fallen by around 2.6% after a 6.3% rise in June.  The monthly noise should not distract from appreciating that the housing start activity remains firm at its best levels since 2007.  The FOMC minutes from July will be scrutinized for clues about the tapering plans.  Still, the proximity of next week's Jackson Hole symposium means that the minutes may be somewhat dated, and of course, since the meeting, another strong employment report was seen.  Canada reports July CPI.  The headline pulled back to 3.1% in June from 3.6% in May but is expected to have risen to 3.4% last month.  If so, it will be the fourth consecutive month above 3%.  The core measures are expected to have remained firm.  The implied yield of the short-term interest rate futures (Banker Acceptances) for June next year topped out in early July near 88 bp and is now near 63 bp. The market still appears to be pricing in the first Bank of Canada hike around the middle of next year.  

The US dollar was consolidating in the upper end of yesterday's range against the Canadian dollar when it reached almost CAD1.2650.  The CAD1.2660 area represents a (61.8%) retracement objective of the pullback since last month's high near CAD1.2800 was recorded. It has held above CAD1.26 so far today, and tomorrow there are options for around $1.1 bln at CAD1.2580 that expire.  The dollar rose above MXN20.00 for the first time in four sessions yesterday.  It has come back offered today and is below MXN20.00.  Initial support is seen in the MXN19.90-MXN19.93 band.  Meanwhile, the greenback settled near BRL5.2940 yesterday, its highest close since late May.  Political issues weigh on the real.  The income tax reform bill has been delayed.  President Bolsonaro's disapproval rating rose to the highest of his term, while Lula's lead in the polls for next year's election continues to widen.  The dollar's 200-day moving average comes in near BRL5.3340, and it has not traded above it since early May.  

Disclaimer 

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