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From a technical perspective, the US dollar looked vulnerable to start the week, but the 8.5% drop in Chinese shares in Shanghai provided additional fuel. The linkage between the two is that global headwinds may intensify and keep the Fed from raising rates in September. This seems like a premature judgment, but market pricing was never as convinced of a Fed hike than as surveys suggested.
Surveys suggest that a little more than 80% of the economists expect the Federal Reserve to hike rates in September. The September Fed funds futures, the most direct market instrument, have only about a 50% chance discounted.
The overextended technical condition of the dollar we highlighted previously came with a mixed performance last week. Against the top ten currencies, that dollar fell against five. The drop in oil prices and other commodity prices encouraged rate cut expectations in Australia and Canada, sending those currencies to new multi-year lows.
The yen has been on the sidelines this week. It is flat against the dollar. Japanese stocks and bonds are also little changed. The benchmark 10-year bond yield has fallen by less than two bp on the week, the least among the major bond markets.
1) Brazil’s government cut the primary surplus target for 2015 to 0.15% of GDP, 2) The situation in Turkey is becoming even more complicated, reinforcing our view that the tail risks are increasing, 3) It appears as if Ukraine has made its debt payment today, avoiding default, 4) Press is reporting that the Mexican FX commission is mulling additional measures to help support the peso, 5) The United Arab Emirates will link domestic gasoline and diesel fuel prices to global oil prices starting next month, 6) The SARB hiked rates 25 bp to 6%, as many expected, 7) The Czech central bank i
Contrasting data releases underscore the reemergence of the dollar bullish divergence meme that had appeared to stall in the vacuum of economic data in the first half of the week. Yesterday's unexpectedly large fall in US weekly initial jobless claims had seemed to put a floor under the dollar. Moreover, today's poor flash PMIs for China and the euro area drove home the point.
China has amassed one of the largest pools of capital. It was in the form of central bank reserves. At its peak, it was around $4 trillion. The composition of these reserves is a closely guarded secret. However, if the yuan is going to be including the IMF's SDR, it is anticipated that China report will have to report the currency allocation of its reserves. China would not necessarily publish these though IMF would include them in its aggregations process that it publishes quarterly.
The US dollar is under pressure today. There are many small triggers but the news stream itself is relatively mild. Ultimately, the inability to extend last week's momentum left the dollar bulls vulnerable. As we noted, that the momentum the dollar enjoyed took place without the backing up of short-term US interest rates to support the dusted-off divergence narrative as the Greek situation returned to chronic from acute and the Chinese stock markets stabilized.
The European Central Bank has been particularly busy. It is engaged in an asset-buying program. Despite a European Court of Justice ruling highlighting the conflict of interest between its bank supervisory function and role as creditor, the ECB is still part of the Troika official creditors and participated in the marathon negotiating sessions over Greece.
The ECB is closely monitoring the situation at Greek banks. It has not increased the ELA ceiling for the second consecutive week, following the Greek government's acceptance of the creditors' demands.
The relatively light news stream continues to facilitate corrective action in the capital markets. The advancing streak in global equities has broken while Chinese shares continue to stabilize after their recent dramatic slide. Peripheral bond markets are giving back some of their recent gains. The US dollar fell from its recent highs but it is largely in a consolidative mode.
It is a bit too familiar, isn't it? Greece received a new loan so it can service its debt to the official creditors. In exchange for the funds, of which practically none remains in Greece, the government has promised to carry out the reforms that the past few governments had agreed to but failed to implement. Greece may no longer be in arrears to the IMF, but it is making ends meet by delaying payments to local service providers.
The light news stream has spurred some position squaring by short-term momentum traders. This is giving the dollar a somewhat heavier tone, and weighing on European equity markets. European bonds and Treasuries are little changed, though slightly firmer.