Fed's Williams pushes dollar down to one-month low vs. yen
The dollar fell across the board on Tuesday, falling a full yen to a
one-month low against the Japanese currency and down against the
commodity-linked currencies most associated with growth and greater
risk-taking by investors worldwide.
The greenback has been under
pressure for the past week as the perceived chances of a rise in U.S.
interest rates this year took a knock from several batches of data and
the tone of some Federal Reserve policymakers.
The trigger for
its weakness overnight was a paper from San Francisco Fed President John
Williams arguing that central banks might have to raise inflation
targets, focus more on growth and back much looser fiscal policy in
To market ears, that all added up to a strong argument
for keeping the Fed's rates unchanged for the foreseeable future and the
dollar fell 1 percent against yen and around half a percent against the
euro as Asian and European markets came back online.
Williams paper yesterday was pretty dovish, so people are selling
dollars. Dollar yields are lower pretty much across the curve since the
release," said Citi strategist Josh O'Byrne.
further aggressive monetary easing by Tokyo that would weaken the yen
was quelled by last month's Bank of Japan meeting, and speculation on
the chances of the government launching direct intervention in the FX
market has also eased.
"There is this feeling that Japan may not
have that much left up their sleeve and the Fed does seem to be backing
off," said O'Byrne.
"The Japanese have been surprisingly quiet
and people in general are talking about (intervention) a lot less.
Verbal intervention really stepped up when we were seeing fast moves in
the yen, and this has been more of a grind, so it's harder for them to
argue that there have been disruptive markets."
The dollar traded
as low as 100.15 yen, its lowest since the aftermath of Britain's vote
in June to leave the European Union. It weakened to a 7-week low of
$1.1258 per euro , and by 0.5 and 0.7 percent respectively against the Australian and New Zealand dollars.
Against a basket of six major currencies, it lost 0.6 percent to 95.051 (DXY).
dollar is being weighed on by the limited appetite for Fed trades, and
this strength in emerging markets and the commodities currencies," said
Stephen Gallo, a strategist with Canada's BMO in London.
markets will look to U.S. data later in the day including consumer
prices, housing starts and industrial output for another chance to gauge
the health of the economy.
The dollar will
probably fall further against the yen over the next few months, with the
yen supported by factors such as Japan's rising current account
surplus, said Heng Koon How, senior FX investment strategist for Credit Suisse (SIX:CSGN).
risk to our view for more yen strength is of course more aggressive
easing by the Bank of Japan when they next meet," said Heng, who expects
the dollar to be trading at 96 yen three months from now.
"But so far this year, they have disappointed and failed to turn around sentiment," he added.
U.S. Dollar Index falls to 2-month low amid soft inflation, strong Pound
The U.S. Dollar Index
fell sharply to a two-month trough on Tuesday, extending previous
losses over the last week, as investors reacted to soft inflation
figures and hints from a top Federal Reserve policymaker that it could
be appropriate to raise interest rates in the coming months.
The Index, which measures the strength of the dollar versus a basket
of six other major currencies, fell more than 0.90% to an intraday low
of 94.38, before rallying slightly to 94.75 at the close of U.S.
afternoon trading. The dollar is on pace for its third straight losing
session and its fifth loss over the last six trading days. At
session-lows on Tuesday, the index fell to its lowest level since June
On Tuesday morning, the U.S. Bureau of Labor Statistics said its Consumer Price Index
remained flat in July, in line with consensus forecasts, falling back
slightly from a monthly gain of 0.2% in June. On an annual basis, consumer inflation
rose by 0.8% from the previous 12 months, also slowing from June's
yearly increase of 1.0%. It came as food prices remained flat and
transportation experienced a slight contraction, offset by strength in
medical and housing prices.
At the same time, Core CPI,
which strips out volatile food and energy prices, rose by 0.1% in July,
slightly below analysts' expectations for a 0.2% gain. Core Inflation
increased by 2.2% on a year-over-year basis, also slowing from June's
yearly gains of 2.3%. For the month, volatile energy prices declined by
1.6%. Despite strong signs of firming inflation at the start of the
year, the Fed's long-term target for inflation still remains below its
Also on Tuesday, New York Fed president William Dudley jolted markets with hawkish comments
on the likelihood that that the U.S. central bank could lift interest
rates before the end of the year. Speaking exclusively with Fox
Business, Dudley said the Fed is "getting closer" to that point when it
"will be appropriate" to actually raise short-term rates. Following last
December's historic interest rate hike, the Federal Open Market
Committee (FOMC) has held the targeted range of its benchmark interest
rate at its current level between 0.25 and 0.50% in each of its first
five meetings this year.
The chances of a September rate hike from the CME Group's (NASDAQ:CME)
Fed Watch tool doubled to 18% following Dudley's comments from around
9% during the previous session. In addition, the CME Group placed the
probability of a December rate hike at 55.1%, up from around 41.9% in
GBP/USD surged by more than 1.25% to 1.3043, bouncing from near 31-year lows from the previous session. It came after the CPI in Britain
firmed by 0.6% in July, following a 0.5% monthly gain a month earlier,
providing further indications that the U.K. economy could be on solid
footing following June's Brexit shock. As the British Pound fell sharply
throughout the month, import costs accelerated by the highest amount
since 2011. EUR/USD
rose by more than 0.8% to an intraday high of 1.1322, clearing 1.13 for
the first time since June 24 when voters in the U.K. approved the
historic Brexit referendum.
EIA US Weekly Crude Oil Stockpile Unexpectedly Declines 2.5 Million Barrels
The Energy Information Administration’s (EIA) released its weekly inventory figures today. The report unexpectedly showed US crude oil
stockpiles drawing down by 2.5 million barrels during the week ending
August 12. Analyst on average were looking for a build of 522 thousand
barrels, according to a Thomson Reuters survey. The total US stockpile
climbed to 521.1 million barrels. This marks the lowest level since
U.S crude oil imports averaged 8.2 million barrels per day last week, lower by 211,000 barrels from the week before.
Crude oil refinery inputs averaged 268,000 barrels more per day than
the prior week’s average, bringing the average inputs to 16.9 million
barrels per day.
Gasoline production increased for the week, averaging 10.3 million
barrels per day. The production of distillate fuel (fuel and diesel
oils) also increased, averaging over 4.9 million barrels per day. The
total motor gasoline inventory fell 2.7 million barrels last week.
Inventories for finished gasoline rose while blending components
declined. Distillate fuel inventories rose 1.9 million barrels while
propane/propylene increased 1.8 million barrels. The total for
commercial petroleum inventories rose 1.3 million barrels for the week.
In response to today’s report, crude oil shot up by 60 cents in the
few minutes following the release. The September contract is still lower
on the day at the time of writing, off by 0.27% to $46.42.
The price of oil in recent trade has continued to rebound sharply
after falling under $40 per barrel at the beginning of the month, when
the September WTI contract hit a low of $39.19 on August 3.
US Markets Lack Direction on Confused Fed Messages
Despite making new record highs this month US markets have struggled
to push on, capped by concerns about valuations as well as mixed
comments from a number of Fed officials in recent days about the future
direction of monetary policy.
It has become clear in recent days that Fed officials are increasingly divided over the timing of when to move on rates next,
and their constant briefings to the market aren’t helping in this
regard, which probably explains why US markets have struggled for
direction in the past few weeks.
Last week’s FOMC minutes
reinforced the nature of these divisions as have recent comments from
William Dudley, New York Fed President and John Williams at the San
Over the weekend Federal Reserve vice Chairman Stanley Fischer, who tends to be one of the more hawkish Fed members
was quoted as saying that the central bank was close to meeting its
inflation and employment targets. Unfortunately for Mr Fischer this has
been the case for most of this year and yet the Fed has failed to act so
his intervention doesn’t really add to the overall debate, particularly
since he stated at the beginning of this year that 4 rate rises this
year was very much in the “ball park”. Yet here we are heading into
September and we’ve yet to see one, is it any wonder the markets look at
the Fed and shrug?
In company news reports that US pharmaceutical giant Pfizer is bidding $14bn for Medivation a small California based cancer drug maker,
has seen a rally in equivalent sector shares in early trading in
Europe. It’s not the first time Medivation has been courted by its
larger peers with Sanofi also previously interested. It’s likely that
today’s reports could well trigger speculation about further M&A in
Housing stocks have also enjoyed a bit of a pickup as
they continue to shrug off their post Brexit hangover and recover some
of the losses seen in the aftermath of the June “Brexit” vote, with
Taylor Wimpey, Berkeley Group and Barratt Developments leading the way.
the downside mining stocks have slid back as gold and silver prices
have come under pressure on a stronger US dollar, with Fresnillo and
Randgold Resources the biggest losers.
Oil prices have also come
under pressure after failing to hold on to the $50 a barrel mark,
prompted in some part by Iraq’s announcement that it will increase
exports by 5% in the next few days, while US rig counts increased again
at the end of last week by another 10 to 491. The stronger US dollar is
also helping pull it back lower.
July Chicago Fed National Activity Index Hits 2016 High
The Chicago Fed National Activity Index (CFNAI) strengthened to 0.27
for July from a downwardly revised 0.05 in June and was the strongest
reading for 12 months. The three-month index improved to -0.10 from
-0.19 previously and there is a strong chance that this measure will
turn positive for August as poor data from May drops out of the
The data overall offers reassurance over underlying economic trends,
although there is no significant evidence of acceleration or boom
conditions within the data.
Over the month, 49 of the indicators improved from the June reading
and 36 deteriorated, while 53 of the indicators made a positive
contribution to the index.
The production index was stronger at 0.23 from 0.07 in June, while
the sales, orders and inventories component was little changed and again
broadly neutral. The contribution from personal consumption and
housing also moved little at -0.06 for the month.
The employment reading improved to 0.09 from 0.05 in June and was
boosted by the robust July employment report and will maintain overall
confidence in the labour market.
In historic terms, a reading below -0.70 after a period of expansion
indicates an increased likelihood that a recession has begun. The
further improvement in July’s index and more solid grounding in positive
territory will continue to offer near-term reassurance and the focus
now will again be on whether the improvement can be sustained.
The inflation indicators remained subdued with no significant evidence of rising inflation pressures at this stage.
The index brings together the key national releases and provides a
useful snapshot of conditions, although the components are already in
the public domain, which limits the impact.
There was no significant reaction as bond markets in the US and
Europe continued to recover from a weak opening with US Treasuries into
positive territory as the 10-year yield dipped back to near 1.55% from
US August Flash Services PMI Declines to 6-Month Low
The Markit US PMI flash services-sector reading declined to 50.9 for
August from 51.4 the previous month and the lowest reading since
February. The data will maintain a cautious attitude towards the overall
outlook, although this data series been relatively downbeat throughout
New work expanded at the slowest pace since May and below historic
trends with concerns surrounding political uncertainty having some
negative impact. There was, however, a further increase in order
backlogs to the fastest rate since April 2015.
The increase in employment was at the slowest pace for 20 months with
the need to cut costs and subdued demand conditions leading to more
cautious hiring plans. According to Markit, the employment reading would
be consistent with average monthly employment growth of around 130,000
and the Fed would be uneasy over tightening with employment growth at
this pace unless there was clear evidence of rising inflationary
Although the overall rate of cost increases remained moderate, there
were comments surrounding higher staff costs and food prices. The rate
of increase in prices charged continued to increase at a subdued rate in
Service providers were more upbeat surrounding the prospects for
growth during the next 12 months and well above June lows with
expectations of a rebound in activity following the Presidential
The composite PMI output index declined to 51.5 from 51.8 the previous month.
The data overall maintains the relatively weak run of Markit
services-sector data seen during 2016. Although persistent weakness will
tend to lessen the impact expectations of an acceleration in growth
will be muted.
Corporate profits -2.4% (unchanged from first estimate)
Durables spending +9.9% vs +8.4% first estimate
Business investment -0.9% vs -2.2% first estimate
Business investment in IP/software +8.6% vs +3.5% first estimate
Home investment -7.7% vs -6.1% first estimate
GDP ex motor vehicles +1.0% vs +1.2% first estimate
goods news is that business investment wasn't quite as dismal as it
looked and the consumer spending was even stronger. The worry is that
the consumer isn't going to hold up, especially if auto sales tail off
Friday turned out to be a great day for the U.S. dollar. The greenback moved higher against all major currencies following Fed Chair Janet Yellen’s speech at Jackson Hole. Interestingly enough, it wasn’t her words that sent the dollar soaring. While Yellen said the rate-hike case strengthened in recent months, it was Fed Vice Chair Fischer’s comments
that really sparked the rally in the greenback. He was explicit when he
said Yellen’s comments were consistent with a possible September rate
hike and that 2 rate hikes this year is possible. Throughout the past
week, we heard consistently hawkish comments from U.S. policymakers who
all seem to agree that the country is close to full employment and that inflation is on the rise. While some members like Fed President Powell still believe the central bank can afford to be patient, if next Friday’s nonfarm payrolls report is strong, the odds for a September hike will rise significantly.
Friday’s Fed comments served as a strong reminder to the market that no one is as hawkish as the Fed although Fed Fund futures are currently pricing in a 63% chance of a December rate hike, which is only slightly above even. But if jobs and wages surprise to the upside, those odds could shoot above 75%. Yellen and Fischer have done a great job of setting the bottom for the dollar
and we anticipate further gains in the coming week. However Friday’s
strong move took many major currency pairs to key technical levels --
1.12 EUR/USD, 102 USD/JPY and 1.30 USD/CAD.
Some of those levels have been broken while others have been tested,
but either way, traders should look to buy the dollar on any shallow
corrections. We expect USD/JPY to hit 104, EUR/USD to drop below 1.11
and GBP/USD to test 1.30.
US personal income for July 0.4% vs. +0.4% est. Spending 0.3% vs. +0.3% est
Data for July 2016
US personal income for July was up 0.4% which was as expected. The
longer work hours and job growth helped to support wages. The prior
month was revised higher at +0.3% vs +0.2%.
spending was up 0.3% vs 0.2% estimate. Like wages, the prior month was
revised higher to +0.5% vs +0.4%. This is the 4th straight increase in
Real Personal spending,
however, was lower in July at +0.2% vs +0.3% estimate. The prior month
was revised higher to +0.4% from +0.3%.
surface, the data - with revisions - is not too bad. It gets the 3rd
quarter off to a good start. With the Fed still focused on the data,
this data supports the notion of an economy moving forward and
rebounding from the slow 1st half.