USD extends losses on expectations for a more dovish lean from the Fed while euro zone data supports the euro
- USD extends its decline ahead of FOMC meeting this week - USD moves decisively lower Monday, breaking key levels broadly. The broad based USD Index (DXY) hits a new low of 93.48 with key beneficiaries EUR ((hits a high of 1.1779), GBP (hits 1.2897) JPY (USDJPY hits a low of 105.12) and Gold (hits 1945). Momentum seems to be driving this, though markets also seem to eye this week’s FOMC meeting as a new WSJ article suggests there is growing concern amongst Fed officials about the vulnerability of the US economic recovery, as a result of the uneven health response across the country. This is leading to expectations of a more intense debate within the Fed about what further measures to introduce and to what extent the FOMC will look to tolerate future inflation overshoots – measures that could be implemented at the September meeting.
- USD: FOMC preview - Citi analysts do not expect any major surprises from this week’s FOMC meeting but risks appear tilted to more dovish. The team expects the debate, likely to be seen in minutes released August 19, will be on the exact form and wording of a stronger dovish forward guidance to be delivered at the September meeting. Expectations for a more dovish tilt follows recent dovish comments by Fed Governor Brainard (hawk) saying it is time for the Fed to pivot its forward guidance and asset purchases toward providing longer-run accommodation, amid a resurgence in coronavirus infections that risks the US recovery - “a thick fog of uncertainty still surrounds us, and downside risks predominate.” Fed President Harker follows, noting economy is in a “stubbornly long lasting downturn.” And WSJ reports that Fed officials would no longer look to pre-emptively raise rates to prevent inflation going above the 2% target, instead would look to inflation averaging 2% over a certain period of time.
- USD: Citi analysts also think the Fed may lean toward phrasing that indicates some comfort with overshooting the two percent inflation target – but does not explicitly guarantee an overshoot. For instance, committing to keep rates low until inflation is sustainably at or above 2%. Even this though could represent a sea-change in Fed thinking and potentially set the stage for the next leg lower in DXY following some consolidation in the near term. Note some positive vaccine news in the US overnight and COVID-19 infections slowing in key states in the US (Florida, California, Arizona) may add to a near term consolidation bias in DXY before resuming its next leg lower.
Data releases overnight – US durable goods gain largely expected, German IFO echoes PMI jump in July
- USD: US durable goods orders rise 7.3%MoM in June, above consensus for 6.9%. Excluding transportation, durable goods orders are up 3.3% and orders for nondefense capital goods excluding aircraft gain 3.3% while shipments rise 3.4%. The rebound in June though is largely expected as businesses resume purchases with orders for autos and parts leading the rebound and there could be further upside to auto orders over the next few months as producers ramp up auto production though still, average shipments of nondefense capital goods is down by 37.4% annualized in Q2. As such, Citi analysts pencil in a 3.6pp drag from business equipment investment in their estimate for a 31.1% annualized decline in Q2 real GDP (released Thursday).
- EUR: The German Ifo Business Climate index is up +4.3 points to 90.5 in July (Consensus 89.3) with expectations up +5.6 points to 97.0 (Consensus 93.4). At these levels, gross-fixed capital formation would normally be growing 2-3% YY, versus Citi’s current forecast of -10% YY in 3Q.The current assessment also rises +3.2 to 84.5 (consensus 85.0) with all sectors improving markedly. Bottom Line – German growth is likely to be stronger than surveys currently predict sequentially, but weaker in annual terms. As with the PMIs, domestic-oriented sectors are set to outperform export- and investment-oriented manufacturing.
Week Ahead – FOMC, EZ and Australian CPI, China manufacturing PMI
- USD: Fed FOMC meeting - Dovish risks include either an explicit commitment to overshoot 2% or adopting a very low unemployment threshold (e.g. 4.0%).
- USD: US Conference Board Consumer Confidence – Citi: 98.9, median: 94.8, prior: 98.1 – Citi analysts expect a modest increase in the Conference Board’s measure of consumer confidence in July. This would be in contrast to a decline in the University of Michigan measure of consumer sentiment, but in line with other measures of confidence that have begun to rise again.
- Euro zone HICP Inflation, July Flash Forecast: 0.2% YY, Prior: 0.3% YY - Despite sizable base effects, a likely sharp drop in core HICP from 0.8% YY in June to 0.4% YY in July should push the headline inflation rate lower. The 3pp temporary VAT rate cut in Germany appears to be the main culprit, as it will likely shave around 0.25pp off core euro zone HICP.
- AUD: Australian Q2 CPI Citi headline CPI forecast QoQ; -1.9%, Previous; 0.5%; Citi headline CPI forecast YoY; -0.4%, Previous; 1.8%; Citi underlying CPI forecast QoQ; 0.1%, Previous; 0.5%; Citi underlying CPI forecast YoY; 1.4%, Previous; 1.7% - At -1.9%, Citi analysts forecast the largest quarterly drop in Q2 headline CPI since 1953. Underlying inflation is also expected to remain muted on the back of a decline in employment and wage costs.
- CNY: China Manufacturing PMI July – Citi 51.5, Prior 50.9 – China’s manufacturing PMI could continue to inch up in July. The better than expected 2Q GDP, more fiscal transfers flowing to local government, bull capital market and RMB strength could boost sentiment.
This is is an extract from the Daily Currency Update, dated July 28, 2020. Please approach a Citigold Relationship Manager if you would like more information.