Chief Investment Strategist
Summary: With yields moving lower, the US dollar’s consolidation path was cleared earlier in Asian session but focus turning back higher once again as US consumer confidence and JOLTS labor data is eyed today. EURUSD saw some short-lived gains on increased ECB rate hike bets, but has room to catch up to reflect the yuan and Chinese economy weakness. USDJPY wary of intervention but loosening labor market gives another reason to BOJ to delay policy normalization.
The US dollar failed to hold onto the post-Jackson Hole gains, more so as a sign of consolidation following six consecutive weeks of gains and ahead of a deluge of data due this week. Fed’s data-dependent mode warrants a steady look at the economic data, which starts to come out today with US consumer confidence and JOLTS job openings due. US consumer confidence surprised to the upside at 117 in July, the highest in two years. But with the summer sentiment waning and mortgage rates surging, risks are tilted towards a deterioration in the August print. University of Michigan sentiment survey also printed a mild decline for August last week after rising sharply for the past several months. Consumer spending is further likely to be constrained as pandemic savings run out and student loan forbearances come to an end, raising doubts about the sustainability of the US economic momentum through to the end of the year.
Labor market data will continue to be far more relevant compared to inflation readings now which are in a cyclical downtrend. Fed Chair Powell also noted in his Jackson Hole speech that Phillips Curve may have steepened, suggesting that inflation can continue to decline with only a marginal loosening in the labor market. This reaffirms that markets will remain increasingly sensitive to any labor market data in the months ahead. JOLTS job openings due today and is expected to fall slightly from June’s 9.58 million, which means that the number of vacancies per unemployed worker could remain steady around the June level of 1.6, still indicating labor market tightness and reaffirming Fed’s higher-for-longer message.
EURUSD could not break above 1.0835 resistance convincingly. ECB President Lagarde’s Jackson Hole speech has been reflected somewhat in the market pricing with September rate hike probability up to over 40% from 34% earlier. ECB Governing Council member Holzmann was also on the wires yesterday and gave hawkish remarks, saying that the ECB hasn’t defeated inflation and probably needs to raise interest rates again in September.
On the flip side, however, economic indicators in the Eurozone, and especially Germany, are fast deteriorating as was reflected in PMI numbers last week. This means EUR resilience could continue to be tested until the US economy slows more clearly. Also, it is worth considering that EUR has so far not completely reflected the weakness in the Chinese yuan. Given the Eurozone’s greater reliance on China compared to the US, it remains more prone to reflecting the weakness in China’s economy. The Chinese yuan is down 5% YTD while the EUR is still up over 1%, which suggests there may be room to catchup if clouds over China remain. Domestically, August inflation print for the Eurozone will be key this week, but ahead of that, Germany’s GfK Consumer Confidence Survey for September may be on watch today.
Ongoing fears of intervention have kept a lid on further JPY weakness for now. USDJPY traded sideways around 146.50 in Asia, however not catching up to the bid in US Treasuries with the 2-year yield now back below 5%. Japan’s labor market showed some signs of cooling as unemployment rate rose to 2.7% in July from 2.5% expected and job-to-applicant ratio declined to 1.29 from 1.30. The data comes at a time when the services sector is expected to continue hiring in anticipation of a pickup in travel demand, especially with China group tours also kicking off.
The loosening of the labor market may be another reason for Bank of Japan to continue with its easy monetary policy, suggesting JPY may remain under pressure until Treasuries yields start to cool off more meaningfully. Japanese government is also planning a supplementary budget in September, and an extensive package may put further pressure on the yen.
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