US dollar swoons in late Friday sell-off
A downward surprise in US consumer expectations would normally be shrugged off by financial markets.
However, thin August trading meant that this second-tier data print late-Friday had an outsized impact on
markets that had mostly ignored the much more critical CPI print a couple of days earlier. US rates gave up
their weekly gains in the space of a few hours and the dollar sold-off against nearly every other major currency.
Commodity currencies benefited the most, with the conspicuous exception of the Brazilian real, snared by
domestic political problems.
This week there is not much in the way of major news out of the US or the Eurozone. Inflation data out of the
UK on Wednesday could move the needle on the pound. The main event of the week will, however, be the
expected interest rate hike from the Reserve Bank of New Zealand very early on Wednesday, the first
developed economy to do so since the start of the pandemic.
While the pound has been in a holding pattern lately, this may well change this week, as it is the UK’s turn to
release its July inflation data. Markets are expecting a pullback from June’s elevated reading, but we think that
the general trend worldwide towards surprises in this increasingly key macro measure means the risks are to the
This would increase pressure on the Bank of England to start removing monetary accommodation, perhaps as
early as the first quarter of 2022, and would be supportive of the pound.
Mired in typical August trading torpor and the almost complete absence of market moving data releases or
policy announcements, the euro should continue to trade in a tight range against other major currencies until
the big summer event: the late-August Jackson Hole meeting of the world central bankers.
We do think that the 2021 floor of 1.17 versus the US dollar should hold and perhaps provide buying
opportunities until then.
The much-awaited inflation data for July published last week in the US did not entail any major surprises.
Inflation did stabilise, albeit at a high level, and doves quickly seized on this as evidence that the inflation spike
will be short-lived. Rates and currencies did not react much, however, until two days later, when yields fell after
a poor consumer confidence report.
This week’s data in the US is mostly third tier, and the minutes for the FOMC’s last meeting are unlikely to
provide much insight given the publication lag. The dollar is likely to trade listlessly until the Jackson Hole
central bank bash in late-August.
The Swiss franc sold off against every other G10 currency last week, although its fate began to reverse on
Friday. CHF was supported by a sharp decline in US yields and ongoing concerns regarding the outlook for the
global economic recovery, brought into the limelight following the release of the surprisingly bad US consumer
sentiment report mentioned earlier.
There’s no too much macroeconomic data to report out of Switzerland this week, but we will be keeping a
close eye on the CHF speculative positioning data. That being said, given the relationship between the franc,
US yields and shifts in global market sentiment, we’ll mostly focus on external news.
The Australian dollar has continued to outperform most of its major peers so far this month, despite weak data
out of China sapping risk appetite and ongoing concerns surrounding rising infection levels in a handful of
Compared to most of the rest of the developed world, new virus caseloads remain very low in
Australia, although have still spiked in the past month and look on course to rise to their highest level during
the pandemic period. With the vaccination programme still lagging well behind, authorities have taken a zero
tolerance approach, with lockdowns in New South Wales and Victoria being extended in the past few days.
This has raised one or two concerns surrounding the potential negative impact on the Australian economy.
We don’t think the RBA’s meeting minutes will move AUD too much on Tuesday – the monthly labour report on
Friday will probably take on much more importance. Investors’ reaction to Wednesday’s RBNZ rate decision
may impact the Aussie dollar, particularly if policymakers there do indeed raise rates, as expected.
The USD/CAD cross traded within a relatively tight range last week, despite news that Prime Minister Justin
Trudeau was planning on holding a snap general election on 20th September. News of a sooner-than-expected
vote would ordinarily be negative for a domestic currency, but Trudeau’s Liberal Party of Canada have opened
up a reasonable lead in the latest poll of polls, and the party will likely be helped by the country’s impressive
vaccination rollout that has so far seen around 63% of the population receive both jabs. Optimism surrounding
the Canada economy is high and this, we believe, is likely to both support bets in favour of BoC tightening and
the Canadian dollar in the coming weeks.
July inflation data will be closely watched by investors on Wednesday. Retail sales on Friday may also be a
market mover, although this data is for June and therefore runs on a bit of a time lag.
Yet again, the Chinese yuan ended the week around the middle of the pack of EM currencies, which proves just
how stable the currency tends to be compared to its peers.
Recent news from China has been rather disappointing. All of the key economic prints released by the National
Bureau of Statistics of China came out worse-than-expected today. Retail sales disappointed the most, showing
growth of only 8.5% year-on-year in July, well short of the double-digit increase penciled in by economists’.
Given the importance of consumption for the economy, this will surely catch the attention of the PBoC officials
deciding over monetary policy later this week, but it seems unlikely we’ll see any immediate changes in bank’s
main rates. So far, the bank has used other measures, cutting its reserve requirement ratio and injecting
liquidity through its medium-term lending facility to support the economy. Nonetheless, we’ll be keeping a
close eye for news from the PBoC meeting out on Friday.