OVERNIGHT MARKET SUMMARY
The U.S. dollar fell to a new 10-month low against a basket of its major rivals after this morning’s economic data undershot market expectations and played up doubts about the outlook for further lending rate hikes this year. U.S. retail sales fell for a second straight month in June while consumer inflation was unchanged from May and followed a 0.1%(m/m) decline the previous month. Moderating price pressures suggest the Fed may be less willing to lift U.S. borrowing costs for a third time this year at either its September or December policy meetings.
Importantly, the morning’s data, particularly the cooler than expected CPI figures, seem to justify Fed Chair Janet Yellen’s more cautious tone this week in her Congressional testimony. The lack of meaningful evidence of a strong rebound in the economy in the second half of this year could continue to keep the dollar pressured.
The British pound added to its gains from earlier this week against the dollar, touching on its best level in 10 days, after Wednesday’s U.K. labor market data snapped a streak of disappointing economic reports and revived fading expectations for the Bank of England to lift U.K. borrowing costs in the months ahead.
The loonie was steady overnight but remains the week’s best performing major currency following the Bank of Canada’s first interest rate hike in nearly seven years on Wednesday. The BOC became the second G10 central bank to follow the Fed down the path of raising interest rates and its accompanying statement swung the door to another possible rate increase in the months ahead wide open.
The higher yielding Aussie and New Zealand dollars jumped to 15 and five and a half-month peaks respectively this week, benefiting from the slightly more dovish tone from Fed Chair Janet Yellen and the resulting view that their relative yield appeal over the greenback will likely be preserved for longer. The notion that U.S. rates will rise very gradually boosted higher yielding and riskier assets across the board this week.
USD: The dollar index fell to a new 10-month trough and the greenback slid to lows against most of its major counterparts after this morning’s economic data came in well under market expectations. Retail sales fell by 0.2%(m/m) in June, following a slightly revised 0.1%(m/m) drop in May. The so-called core sales figure, which is used in calculating the nation’s GDP, fell by 0.1%(m/m) in June following an unchanged reading in May. Moderating consumer spending, a key driver of the broader U.S. economy, could signal continued lackluster growth in the months ahead. More importantly, consumer inflation was unchanged in June, coming in well under the forecast for a rise of 0.1%(m/m). On an annual basis, CPI came in at just 1.6%, its lowest level since October of last year and has been on a steady downward trend since peaking at 2.7% in February. The lack of any evidence that growth or inflation pressures are mounting in the second half of this year will continue to cast doubts about the need for further Fed lending rate hikes and likely continue to pressure the dollar.
JPY: Yields on U.S. Treasury bonds, which had been in an upward trend over the better part of the past few weeks, plummeted on this morning’s disappointing U.S. economic reports. Elevated yields had helped underpin the greenback across the board but were particularly beneficial for the dollar’s performance against the yen. The greenback, which had traded at a four-month high against the yen earlier in the week, fell to a two-week low after this morning’s data.
GBP: Sterling added to this week’s gains following this morning’s disappointing U.S. economic reports, which pushed the greenback to a 10-day low versus the pound. Sterling continues to draw some support from Wednesday’s solid U.K. labor market data, which helped revive some hopes for a BOE rate hike in the months ahead.
AUD: The Aussie easily pierced through technical resistance against the broadly heavier greenback to hit its best level in 15 months while its antipodean neighbor, the New Zealand dollar, rose to a five and a half-month high. This week’s cautious commentary from Fed Chair Janet Yellen and this morning’s soft U.S. economic data have dampened expectations for Fed rate hikes later this year and have sent yield-hungry investors in search of higher returns in riskier assets. Higher yielders, riskier emerging market currencies and global equities are all enjoying a strong rally thanks to the more dovish outlook for the Fed.
|DOLLAR OVERNIGHT PERFORMANCE VERSUS|
|MARKETS AND COMMODITIES PERFORMANCE|
|US 10 YEAR