Dollar rallies on thin trading ahead of US holiday
Risk assets traded listlessly all week, though US equities managed to hit yet another all-time high.
Rates dropped, and in this somewhat unusual environment the US dollar performed quite well, ending the
week higher against almost all of its major peers. A pullback after the publication of a strong US payrolls report
on Friday was not enough to take the shine off the greenback. Commodities breaking to another five-year
high, having recouped completely from their recent shallow pullback, received remarkably little notice; this
bodes well for emerging market currencies as a whole.
This week should be relatively quiet in terms of major data releases in the large economic areas. The Fourth of
July holiday will shorten and thin trading worldwide, so we expect no major surprises or market volatility.
Trader attention should drift back to second-tier economic releases like national industrial production in the
Eurozone countries and perhaps vaccination progress in emerging markets that have been lagging thus far.
Not much of note last week out of the UK, save for yet another double digit annual increase in house prices.
The combination of the COVID-driven demand for housing away from urban centers and extremely stimulative
monetary policy settings is having an impact here.
Monthly GDP growth for May is out on Friday, the latest read on the impact of the reopening on the services
sector. We think that the concerns over the delta variant of COVID are overblown, as it is having a very limited
impact on deaths and the generally more vulnerable but now vaccinated elderly population. Therefore we see
some scope for sterling to recover the ground it lost over the past few weeks.
Economic data out of the Eurozone continues to come in on the strong side, but June inflation dipped slightly
from its May rebound, to 1.9% headline and 0.9% core. The haphazard lifting of the various country lockdowns
means pent up demand there has not yet been released to the extent that it has in the US.
To the extent that recent weakness has to do with delta variant concerns, we think that the euro is likely to
recover its recent losses in the next few weeks. Meanwhile, regular macroeconomic data is very thin this week.
The US payrolls report for June could be best described as mixed-to-strong. The establishment survey showed
850k net jobs were created, more than the market expected. However, the parallel household survey was less
bullish, showing an uptick in unemployment and no sign of easing in labour supply bottlenecks. The dollar
weakened modestly in the aftermath of the report, but it is difficult to read the market’s mind in this case.
The main event this week will be the release of minutes of the Federal Reserve June meeting, which should
add much needed clarity on the extent of the hawkish turn the Fed seemed to suggest there.
The Swiss franc was one of the best performers in G10 last week, alongside other safe-havens and the
Canadian dollar. Last week’s domestic economic data largely surprised to the downside. Instead of ticking up,
inflation came in at 0.6% YoY, same as in May. An index of leading indicators from KOF, as well as the
manufacturing PMI, dropped notably in June suggesting that optimism about the economic rebound in the
country might have been slightly exaggerated. The data, however, didn’t have any significant effect on the
franc that continues to be driven mainly by the external developments.
This week is light in terms of new publications from Switzerland, so we’ll focus mostly on the weekly speculative
positioning, sight deposit releases and outside news.
With the exception of the Norwegian krone, the Australian dollar was the worst performer in the G10 last week,
briefly slipping to its weakest position versus the USD since early-December last year. Optimism surrounding
Australia’s handling of the COVID-19 crisis has turned slightly sour in the past few weeks. While the country has
done well in suppressing rates of infection since the start of the pandemic, the country’s very slow vaccine
rollout is preventing a complete return to normal.
Concerns over the delta variant means that almost half of the population is now back under stay-at-home orders, including Sydney, Brisbane and Perth. While this is
expected to be a temporary return to tighter restrictions, the impact on AUD is negative, and we wouldn’t be
surprised to see additional weakness in the currency during the course of the week as a result.
Attention this week will also be on Tuesday’s RBA meeting. Given the latest lockdowns, a dovish tilt is
expected. So far, the RBA has insisted it is unlikely to hike rates until 2024, so any change in this stance would
likely trigger a bout of volatility.
The Canadian dollar has continued to outperform all of its G10 peers and was the only currency to end last
week higher versus the USD. Other than the country’s impressive vaccine rollout and higher oil prices, there has
been no new catalyst for this outperformance. April GDP data beat expectations (-0.3% MoM contraction vs.
-0.8% expected), but this is very much a backward looking indicator and was largely ignored by the market.
This Friday’s labour report for June will be the main market mover in Canada this week. The most meaningful
removal of lockdown measures did not come in Canada until the end of last month, so we don’t necessarily
expect this to be reflected in the data. Economists’ are penilling in another 20k contraction in net jobs that,
while this would be a rather disappointing print, is expected to prove short-lived.
There was very little volatility in the yuan last week, which ended more-or-less where it began it versus the US
dollar. Yet, with the greenback rallying versus most of its peers in recent weeks, CNY has strengthened in
trade-weighted terms. The CFETS index, which is the index the People’s Bank of China looks most closely at
when deciding its next policy moves, has now risen by around 3.5% since the start of the year and almost 7%
since last August. We don’t think that this is major cause for concern just yet, although the PBoC will be
keeping a close eye on things given the impact of a stronger currency of worsening China’s export
Meanwhile, we had further evidence last week that the rebound in China’s economy is stalling. The services
PMI from Caixin slipped to 50.3 in June, well below the 55.7 consensus and only just in expansionary territory.
This has not been reflected in a weaker CNY yet, but it may do should this downturn prove more prolonged