OVERNIGHT MARKET SUMMARY
The U.S. dollar index maintained a relatively positive tone overnight, rising to near at two-week high against a basket of its major rivals as investors, who had bet heavily against the greenback over recent weeks, trimmed those positions ahead of this morning’s economic data on wholesale inflation and weekly jobless claims. The dollar was trading on slightly stronger footing this week following data last week showing another solid month of hiring in July and a report this week highlighting a record number of job openings in June. Escalating tensions between the U.S. and North Korea have weighed on overall investor risk appetite and have helped support the greenback, particularly against its riskier and higher yielding rivals.
This morning, the dollar pared some of its overnight gains after the producer price index (PPI) fell by 0.1%(m/m) in July, which confounded expectations for a 0.1%(m/m) rise and was the first monthly decline in PPI in a year. The data once again highlighted a very benign inflation backdrop which has steadily eroded market expectations for another dollar-supportive Fed lending rate hike in December. Investors remain focused on tomorrow’s more important consumer price index. A cooler than expected print on CPI tomorrow could undermine much of the dollar’s improved tone from this week.
The greenback managed to bounce off of a two-week low against the Swiss franc but remained just off of a two-month trough against the Japanese yen. Similarly, gold hit a two-month peak of $1280/ ounce this morning as investors continued to pare exposure to riskier assets and sought safety in traditional safe harbors amid the escalating tensions between Washington and Pyongyang.
The pound fell to a three-week low against the greenback after the latest batch of U.K. economic data did little to improve sentiment toward the nation’s economy all but cemented the view that Bank of England borrowing costs are unlikely to rise anytime soon. Industrial output surprisingly jumped by 0.5%(m/m), but much of that was due to a spike in oil production. Separately, trade conditions worsened and U.K. exports suffered their largest monthly drop in a year in June.
The New Zealand dollar slipped to a one-month trough against the greenback after the Reserve Bank of New Zealand left its key cash rate unchanged as expected, but also signaled that it did not expect to make any changes to borrowing cost until 2020.
USD: The dollar index pared some of its overnight gains against a basket of its major rivals after this morning’s PPI for July surprisingly fell by 0.1%(m/m). The decline in wholesale inflation, which confounded forecasts for a modest rise, undermined some expectations for a rise in tomorrow’s more closely watched consumer inflation report. Inflation, both in wages and in general, has been notably absent in the current economic cycle and the steady decline in CPI since February has undermined expectations for the Fed to raise lending rates again toward the end of this year. While the dollar has enjoyed a slightly improved tone this week, its outlook would likely suffer from a cooler CPI tomorrow.
JPY: The Japanese yen jumped to a two-month peak along with gold overnight as investors continued to flock to the relative safety of Japanese assets amid escalating tensions between the U.S. and North Korea. The pullback in riskier assets like stocks, commodities and emerging market currencies, which have enjoyed a strong rally over the better part of recent months, is likely to continue as long as investors see rising risks to global financial market stability from geopolitical uncertainties. Such a scenario would likely continue to favor traditional safe-havens like the yen and Swiss franc.
GBP: The pound fell to a three-week low against the greenback after the latest U.K. economic reports did little to improve the outlook for the nation’s economy, which put in its slowest first-half economic growth in five years. U.K. industrial output surprisingly jumped by 0.5%(m/m) in June, but much of that was related to a spike in oil production. Broader manufacturing output was flat for the month. Britain’s trade deficit with the rest of the world widened to £12.72 billion in June, well above the £11.0 billion forecast, thanks largely to the biggest monthly drop in exports in a year. The BOE had forecast a pickup in exports, thanks to the weaker pound, to help the broader U.K. economy. The lack of support from rising exports dampens the already soft outlook for the U.K. economy and further dents any hopes for a BOE lending rate hike this year.
NZD: The kiwi fell to a one-month trough overnight after the RBNZ expectedly made no changes to its 1.75% cash rate but projected a steady course until 2020 for lending rates. While many had expected the RBNZ to sound a slightly more concerned tone with respect to the kiwi’s rise or even to downgrade its outlook for lending rates in the future, the NZD nevertheless fell across the board. The still generally risk-averse backdrop in global markets and the view that the RBNZ will not raise lending rates until 2020 undermined the kiwi’s allure.
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