Narrow Ranges for the Dollar Prevail Ahead of Tomorrow’s US CPI

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Marc Chandler
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Overview: The dollar is mostly softer today, but largely within the recent ranges, as the market appears to be waiting for tomorrow's US CPI. There are a few exceptions to note. The yen is trading near its recent lows. A less hawkish Reserve Bank of New Zealand has triggered a sell-off of the local dollar. Softer than expected Norwegian inflation has knocked the krone lower. Most emerging market currencies are firmer, with several Asia Pacific currencies bucking the move, including the Chinese yuan and the South Korean and Taiwanese dollars. The Mexican peso leads the advance with a 0.6% gain, and it is trading at its best level in a little more than a month. 

Global equities are mostly firmer following another record high in the US S&P 500 and NASDAQ. Both of which are trading firmer in the future market. Asia Pacific markets were mixed, but Tokyo, Taipei, and Seoul traded higher. Europe's Stoxx 600 is snapping a three-day slide with a 0.5% gain. European 10-year bond yields are mostly off 4-8 bp points today and France's bond is off nearly seven basis points, erasing yesterday's increase and the premium over German is narrowing by a few basis points. Ahead of the US sale of $39 bln 10-year notes today, the yield is slightly softer near 4.28%. Gold held support near $2350 yesterday and is firmer above $2370 in Europe. September WTI initially slipped below $80 after settling soft yesterday but has recover to near $81. 

Asia Pacific

The busy local session contrasts with what is likely a subdued session elsewhere. The highlight was China's June CPI and PPI. Deflationary forces in producer prices continues to slacken. The PPI has trending out of negative territory since last June when it reached -5.4%. It finished last year at half of that and was halved again in the first five months of the year. June's -0.8% year-over-year decline matches least deflation since the end of 2022. Consumer price deflation that was evident in Q4 23 bottomed in January at -0.8%. June's 0.2% year-over-year pace, however, disappointed expectations for a 0.4% increase after 0.3% in May. Bloomberg expressed the conventional view that the weak price pressures reflect weak demand. But we argue the situation is more complicated than that narrative suggests. First, per capita consumption has doubled in the past decade. That consumption as a percentage of GDP (~55%) is relatively low reflects the strong investment. Second, food prices and tobacco prices have the highest weighting in China's CPI basket. Food demand is more inelastic than supply. The swine cycle and weather (for fresh fruit and vegetables) are an issue of supply, not demand. Food and tobacco prices fell 1.1% in June, the fourth consecutive month of at least a 1% decline (on a year-over-year basis). Consumer goods prices slipped by 0.1%, while services prices rose 0.7%. Core CPI, which excludes food and energy rose 0.6%, and same pace as in May. On a month-over-month basis, headline CPI fell by 0.2% after a 0.1% decline in May. Third, the excess capacity that has become more central to the main narrative, puts downward pressure on prices, as we have seen with EV, solar, and batteries. Car prices fell, for example, by 5.3% from a year ago. This is not peculiar to command-economies. Many capital countries experienced similar forces in an earlier stage of industrialization. The solution was to rationalize production and this often meant industrial concentration and oligopolies. Turning to New Zealand, as widely expected the central bank kept the cash rate at 5.50%, where it has been since last May. However, the RBNZ softened its hawkish rhetoric and dropped the mention a discussion on a rate increase. The two-year yield fell by about 13 basis points and the New Zealand dollar is off nearly 0.9%. 

The dollar recouped the losses against the yen seen at the end of last week in response to the US jobs data. It has edged above yesterday's high to reach JPY161.60, leaving little in the way of last week's high slightly below JPY162.00. Many are talking about the risk of intervention, as if a certain level will trigger it. One consideration that argues against intervention is the relative calm of the market. It is no longer one-way and one-month implied vol is slipping below 8.5%, a two-week low and below the 50- and 100-day moving averages. On the other hand, the net short speculative position in future market is near a record. A decline in US rates, spurred perhaps by a soft CPI tomorrow may take some pressure off the exchange rate. The Australian dollar continues to consolidate after breaking above $0.6700 in the middle of last week. It was confined to a quarter-cent range yesterday (~$0.6725-$0.6750) and remains mostly in that range today. Meanwhile, the Australian dollar is trading at a two-year high against the New Zealand dollar (~NZD1.11) on diverging policy speculation. The PBOC set the dollar's reference rate at CNY7.1342 (CNY7.1310 yesterday). The dollar continues to bump against the upper end of the 2% band (CNY7.2769). Against the offshore yuan, the dollar spent this week so far within last Friday's range (~CNH7.2789-CNH7.2956). 

Europe

The Herculean task of putting together a new French government has begun with fits and starts, as President Macron left for the NATO summit today. While a caretaker government is a distinct possibility, there is still a reasonable chance that a majority can be cobbled together from a rump of Macron's movement and Socialists and Greens. The leftist Unbowed may be pushing hard but it seems unlikely to be able to secure a majority. The French 10-year bond yield rose six basis points yesterday, the most in nearly two weeks, taking back about half of the decline in the previous two sessions. It is off nearly five basis points today. In addition to the obvious factors, a new one emerged. Reports suggest that Saudi Arabia hinted earlier this year that it would sell some of its European bond holdings if the G7 went ahead and seized almost $300 bln of Russian assets. The reports indicated that the Saudis specifically cited French bonds. Last month, the G7 agreed to a structure that will provide Ukraine with around $50 bln of fresh aid that will be financed by the profits generated by the blocked Russian funds (mostly in Europe). Separately, Moody's reiterated its April warning that it could France's credit outlook (Aa2 rating with stable outlook) if there is a deterioration of debt servicing costs. Turing to Italy, it reported May industrial output rose 0.5% after falling 1.0% in April. However, this does little to offset the shockingly poor German and French figures that were out last week. German industrial output sank 2.5% (median forecast in Bloomberg's survey was 0.1%). French industrial production was expected to have fallen by 0.5% and instead tumbled by 2.1%. The eurozone aggregate figure is due on Monday. The UK reports May GDP tomorrow. A 0.2% increase is expected after a flat April. The British economy grew by 0.7% in Q1 after contracting in H2 23. The Q1 performance was an outlier and growth are seen slowing to around 0.3% quarter-over-quarter in Q2. 

Monday's outside day was followed by an inside day yesterday for the euro. It is trading firmly but continues to consolidate above $1.08, since it pushed above there before the day before the US jobs report. A break of the $1.0800-$1.0850 may signal the direction of the next half-cent move. Sterling rose for seven consecutive sessions through the end of last week. With the momentum stalling, late longs appeared to have cut for the second consecutive session yesterday. However, there has been no follow-through selling today, sterling resurfaced above $1.28 in early European trading. However, gains may be capped ahead of $1.2825. A softer CPI reading in Norway (2.6% year-over-year in June, down from 3% in May and the underlying rate -ex-energy and adjusts for tax changes-fell to 3.4% from 4.1%) has seen the krone slump against the dollar and euro. 

America

Chair Powell did not break new ground in testimony before the Senate Banking Committee. He recognized that the labor market has cooled, but said it remains strong. He noted that there is modest progress on inflation but that the Fed wants to see more progress. No one really expects a rate cut at this month's meeting, but before the next meeting on September 18, the Fed will see three more CPI prints, including tomorrow's, and two more jobs reports. The Fed funds futures imply about an 80% chance of a September cut, up from almost 70% at the end of June. Powell speaks before the House Financial Services Committee today. The questions may be different, but the answers will be the same. Fed Governor Bowman and non-voting Chicago Fed President Goolsbee speak during market hours today. The former is among the most hawkish members and latter is on the other side of the spectrum. 

The US dollar continues to trade within last Friday's range against the Canadian dollar (~CAD1.3600-CAD1.3650). This is the lower end of where the greenback has traded for nearly three months (CAD1.36-CAD1.38). The market still does not seem set to break the range, but a soft US CPI tomorrow could do the trick. Meanwhile, the greenback continues to trend lower against the Mexican peso. The higher-than-expected Mexican June CPI reported yesterday may have been the catalyst, but as we note that this is a continuation of a move that was already in place. The peso has risen in five of the past six sessions coming into today and is extending its gains today. The greenback has been sold through the low from late last month near MXN17.8755 and has straddling the MXN17.80 level in the European morning. In the larger context, Latam currencies but Argentina's peso have rallied since the end of June. Indeed, the Colombian peso, Brazilian real, and Mexican peso are the best performing emerging market currencies.