The dollar weakened on Monday as a result of a combination of lacklustre data and outperformance by the euro and yen which rose after fear of a global slowdown which might be triggered by rate hikes, following hawkish comments by central bankers at the Jackson Hole Summit over the weekend.
The euro and the yen have been sold to buy higher yielding commodity currencies such as the aussie and kiwi due to the extremely low interest rates in Europe and Japan and the comparatively higher rates in commodity block countries. Global slow-down fears and the prospect of the U.S raising its interest rates would probably reduce demands for commodities, hitting the carry buy currencies, as a consequence, on Monday many traders were busy covering their euro and yen carry shorts to get out of these trades as the outlook soured.
U.S data – although not very market moving – did not help either, with Chicago PMI falling to 54.4, which was below expectations in August, and Dallas Fed Manufacturing to -15.8 when -3.8 had been forecast, also in August. Both figures did not bode well for the release of their ‘big brother’ the very market moving Manufacturing ISM tomorrow.
The euro rose on Monday after it was boosted by slightly higher-than-expected inflation data which helped reduce concerns about the spectre of deflation.
Inflation data showed prices rose by 0.2% in August on a yoy basis – the same as a year ago – and higher than the 0.1% expected. Core Inflation increased by 1.0% also beating the expected 0.9% and defying those who claimed the region was falling back into a disinflationary mode.
Other data was also positive, after German Retail Sales showed a 3.3% increase in July, easily beating the more muted 1.7% forecast, but still lower than the 5.1% of a year ago. Mom Retail Sales also outperformed the 1.1% rise estimated by analysts, coming out at 1.4% instead, from a negative result in June.
There was no real hard data for the pound on Monday, but the currency was mildly supported by comments from the BOE governor speaking at the Jackson Hole summit in Wyoming.
Governor Carney down-played the impact of the market turmoil in China on the U.K economy and kept his comments very much in line with previous BOE rhetoric. He said that the U.K was only modestly exposed to China and the down-turn there had to be balanced against continued strong domestic activity and growth.
He repeated that he saw current disinflation as a “temporary effect” and he saw the rate hike decision coming into “sharper focus” at year end. Overall he said recent events had not changed MPC thinking. The comments were seen as stubbornly hawkish by traders.
Data out of the U.K this week is dominated by August PMI’s including Manufacturing, Services and Construction.
The yen started Monday’s session in hot demand as traders sought safety after the Chinese stock market imploded. The gains were short lived as the dollar returned to form although analysts believed the yen looks set to gain back some lost ground, particularly with 17th September Fed meeting and possible interest rate hike looming.
Overnight data revealed that Japan’s national CPI rose 0.20% yoy in July, at par with market expectations, while retail trade advanced more than expected by 1.2% mom for the same month. Meanwhile the Unemployment Rate in Japan fell to 3.3% in July from 3.4% in June. Japanese household spending unexpectedly dropped in July by 0.2%.
Looking ahead investors will be awaiting for the industrial production data for July, however their main focus will remain on the effects the ending of propping up support for the stock market by the Chinese government is likely to have on the US stock market, and the U.S dollar, and to what extent the yen will be a beneficiary.