The Greenback is Firm Ahead of Powell's Jackson Hole Speech

[Ben Graham]

Overview: The dollar stalled after mostly extending this week's gains against the G10 currencies on the back of firmer US rates. The key event ahead of the weekend is Fed Chair Powell's speech in Jackson Hole (10 am ET). The greenback appreciated against all the G10 currencies this week, with the Antipodeans and sterling off more than 1% and the yen and euro not far behind. Emerging market currencies are mixed today, but on the week only a handful have managed to gain on the greenback, including the Chinese yuan and Mexican peso. 

The 10-year JGB yield rose five basis points this week and finished the week slightly above 1.60%, a new high since 2008. Most European benchmark yields are little changed today and mostly slightly firmer on the week. The 10-year UK Gilt yield is up a couple of basis points today to a new high for the week, near 4.75%. It has not been higher since May. The US Treasury yield is firm near 4.34%, near the level for the week. The month's high was around 4.40%. The MSCI Asia Pacific Index snapped a four-day slide today. Japan, China, Hong Kong, and South Korea led the advance. Of note China's CSI300 rose by 2.1% today (4.2% for the week), which is the largest gain since March. Europe's Stoxx 600 slipped fractionally yesterday, the first loss of the week, but is firmer today. The three-week rally has brought it to five-month highs. US index futures are trading with a higher bias. The S&P 500 has a five-day losing streak in tow. Gold is trading softer around $3330. It needs to close above $3336 to avoid its second consecutive week decline. October WTI reached a two-week high near $63.80 today but met sellers that pushed to back toward $63.30. Still, it settled slightly below $62 last week. 

USD: Stronger than expected preliminary PMI and New US house sales last month and stronger than expected existing home sales offset the bigger jump in weekly initial jobless claims in three months and a sharp drop in the Philadelphia Fed survey. US rates rose around five basis points. The Dollar Index rose to a nine-day high today near 98.85. If sustained today, it will be the fifth consecutive session that the Dollar Index held above the previous session's low. It met the (38.2%) retracement objective of this month's losses (~98.65) but may be stalling ahead of the (50%) retracement (~98.95). The couple of Fed surveys will not distract the participants from Fed Chair Powell's speech on the economic outlook at Jackson Hole. Powell can be expected to recognize the shifting balance between the Fed's two mandates and allow for the need for a less restrictive setting of monetary policy. He is also likely to be cognizant that the early estimates for this month's nonfarm payroll report are for less than 100k. Still, talk about stagflation continues to seem wide of the mark. The unemployment rate is at 4.2% and the Atlanta Fed's GDP tracker sees growth above what Fed officials see as the long-run sustainable, non-inflationary, pace. The PCE deflator, which the Fed targets is expected to be unchanged at 2.6% when the July data are reported next week. While elevated, it does not seem to raise to the level of "stagflation" either. The same can be said of the other common epitaph--fiscal dominance. Under conditions associated with fiscal dominance, the Federal Reserve would likely have succumbed to White House pressure to cut rates sharply to ostensibly reduce the debt servicing costs. 

EURO: Although the euro rallied on the back of the stronger than expected preliminary August PMI yesterday that saw the first manufacturing reading above the 50 boom/bust level since Russia's invasion of Ukraine in 2022, it gave it all back and more in the North American session amid greenback's broad gains on stronger data and the backing up of interest rates. The two-year US premium has widened almost 10 bp since the middle of last week and set a new high for the month yesterday near 183 bp. The euro held $1.1600 yesterday, the (38.2%) retracement of this month's gains but was sold below it today. It has held above the next retracement target (50%), near $1.1560. Nearby resistance is in the $1.1620-30 area. 

CNY: The PBOC has introduced greater flexibility into the setting of the dollar's reference rate. Yesterday, for the second time this month, the PBOC lowered the fix by 0.14%. This is the largest since day adjustment since January. Today's fix was at CNY7.1321 after CNY7.1287 yesterday, which was the lowest since last November. Despite the greater day-to-day adjustments of the greenback's reference rate, the yuan is up a meager 0.30% this month. Recall, though, that last month, when the dollar traded firmer, the Chinese yuan was the strongest currency in the world after the pegged Hong Kong dollar, falling about 0.5% against the jumping greenback. The dollar is well within this month's range against the offshore yuan (~CNH7.1680-CNH7.1985). It approached the lower end yesterday (~CNH7.1715) but the broad dollar gains saw it recover to around CNH7.1865 before settling near CNH7.1830. Today's high is slightly shy of CNH7.19. 

JPY:  Firmer US yields appeared to help the dollar recover back to JPY148.40, a seven-session high yesterday. The increase US weekly jobless claims saw US rates pullback and the greenback slip. It settled above JPY148 for the first time this month. If the dollar is broadly retracing the losses seen earlier this month, it has already surpassed the (38.2%) objective (JPY148), the next target (50%) is near JPY149.10, and the 200-day moving average is found around there, as well. Follow-through buying today lifted the greenback to almost JPY148.80. The key is US rates. As suggested by the Tokyo report out a few weeks ago, Japan's July CPI softened. The headline pace moderated to 3.1% from 3.3%, while the core rates, which exclude fresh food, also slipped to 3.1% from 3.3%, which matches the low for the year set in February. However, the improvement was in fresh food and energy, and without them, Japan's CPI was unchanged at 3.4%. This is the highest since January 2025. It has not moderated since July 2024. While the odds of a BOJ hike next month seem remote (~16%) in the swaps market, probability is slightly above 57% for October from a low of about 36% earlier this month. It reached 68% on July 24. 

GBP: Sterling recovered to almost $1.36 last week after putting in a low before the poor US jobs report on August 1, near $1.3140. It extended its pullback $1.34 yesterday and met the (38.2%) retracement objective of its rally in the first half of the half of the month (~$1.3420) and the 20-day moving average (~$1.3410). It slipped to almost $1.3390 today. The (50%) retracement is near $1.3370. The (61.8%) retracement is by $1.3315. The swaps market continues to downgrade the chances of another BOE cut this year. It fell below 50% for the first time this year this week and is now near 35%. It was closer to 60% at the end of last week and 100% before the central bank meeting earlier this month. Yet, sterling, off 1% this week, is the third worst performer after the Australian and New Zealand dollar's this week.

CAD: The US dollar is threatening to extend its recovery of against the Canadian dollar for the fourth consecutive session today and the sixth session in the past seven. The greenback reached almost CAD1.3920 today to record a three-month. Near-term risk extends into the CAD1.4000-35 area. Canada reports June retail sales today, and a strong recover is expected after the 1.1% drop in May. The measure, excluding auto sales, may have risen for the first time since February. It may discourage the speculation that has increased of a Bank of Canada rate cut next month. Still, with the Federal Reserve likely to resume its easing cycle, the Bank of Canada may have more room to maneuver given the disruption that is still unfolding. The swaps market has more than a 90% chance of a cut discounted before the end of the year. The pricing at the end of July was consistent with about a 60% chance. 

AUD: The Australian dollar is consolidating after recording the low for the month yesterday near $0.6415. Although it steadied, it still settled lower for the fourth consecutive session. Yesterday's low has held so far today but the upside has been blocked around $0.6430. A move above $0.6440 would help stabilize the technical tone but it may take a push above $0.6460 to bolster speculation that a low is in place. Still, without a strong recovery in North America today, the Aussie will post its first back-to-back weekly loss since June, which itself was the first time since January. 

MXN: The market shrugged off the larger than expected decline in Mexico's June retail sales (-0.4% after a revised 1.7% rise in May, which was initially 1.8%). The data is old news in the sense that shortly Mexico will update its estimate for Q2 GDP. The initial estimate was for 0.7% quarter-over-quarter growth (0.2% in Q1). More importantly today is the estimate of CPI for the first half of August. The year-over-year rate of the headline and core are expected to have ticked up. The dollar spent the entire week inside the range set on Monday (~MXN18.7120-MXN18.8675). While the peso was virtually flat this week, coming into today, the Brazilian real fell about 1.4% so far this week, putting it near the bottom of the emerging market currency complex.

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