Market Brief: Dollar stalls on Asian currency rebound

Central bank jawboning helped the Chinese yuan and Japanese yen stop the dollar’s advance this weekend, with the trade-weighted exchange rate roughly -0.3 percent below Friday’s close. North American equity futures are setting up for a modestly-positive open, Treasury yields are inching higher, oil prices are slipping, and most other major currencies are firmly rangebound against the dollar. 

The renminbi jumped more than 1 percent in Asian trading hours after the People’s Bank of China warned that it could intervene directly in markets to squeeze short-sellers and stabilize exchange rates. “We will not hesitate on taking actions when necessary to firmly correct the one-sided and pro-cyclical market moves, to resolutely address the actions which disturb market order, and to unswervingly avoid the overshooting risks in the exchange rate,” the central bank said after a meeting of the State Administration of Foreign Exchange. “Participants should voluntarily maintain a stable market,” and “resolutely avoid behaviours that disturb market orders such as conducting speculative trades”. Separate reports suggested that new approval processes would be required for purchases of $50 million or more US dollars, and state-owned banks were observed selling dollars against renminbi in both onshore and offshore markets. 

The yen also climbed when Bank of Japan Governor Kazuo Ueda suggested that policymakers would consider lifting interest rates out of negative territory if employee earnings and consumer prices keep rising through the end of the year. “Once we're convinced Japan will see sustained rises in inflation accompanied by wage growth, there are various options we can take,” Ueda said in an interview with the Yomiuri newspaper, “If we judge that Japan can achieve its inflation target even after ending negative rates, we'll do so”. The Bank’s loose-money policies - under which it keeps short-term interest rates at -0.1 percent and caps 10-year government bond yields at 1 percent - have pushed the currency into a nosedive against its higher-yielding rivals this year. A reversal could help provide stability, even if deep structural issues limit the likelihood of a sustained rally. 

There are no major data releases scheduled for today, leaving the Canadian dollar essentially rudderless in markets that remain convinced of a prolonged pause in the Bank of Canada’s monetary tightening cycle. Data on Friday showed the country adding 40,000 jobs in August, with year-over-year wage growth accelerating to a faster-than-anticipated 5.2 percent - but ongoing softness in consumer spending and steep declines in residential investment are seen limiting economic gains in the months ahead, forcing policymakers to remain on the sidelines. The exchange rate looks hemmed in between the 200-day moving average around 1.3460 and last week’s 1.3690 high, but correlations with crude prices have increased in recent weeks, suggesting that a breakout in increasingly-tight energy markets could provide the propellant for a rally. 

This Wednesday’s August consumer price print - the last major release to land before next week’s Federal Reserve meeting - isn’t likely to impact market odds on a September hike, but could help shape expectations for November and December. Economists expect a modest gasoline-powered acceleration in headline inflation, while the core calculation - closer to the measure targeted by policymakers - is seen slipping in sequential and year-over-year terms. 

Helping set the context, the Wall Street Journal’s “Fed Whisperer” - Nick Timiraos - published an article over the weekend suggesting that the central bank will keep rates unchanged on the 20th, while retaining the option to hike again later in the year. With officials now under a communications blackout ahead of the rate decision, he said a “more balanced bias on rates” had emerged as incoming data showed inflation slowing and labour markets cooling, but that late-year move would be kept on the table until more clarity was achieved. 

Still Ahead

TUESDAY

British labour market data are expected to show signs of cooling, with the unemployment rate ticking up to 4.3 percent in the three months ended July from 4.2 percent in the prior period. But wage gains are seen remaining elevated, with the private sector posting another circa-8.2-percent year-over-year gain, and keeping the Bank of England on its hiking trajectory for now. (02:00 EDT)

WEDNESDAY

August’s US consumer price index data is likely to paint a confused picture, with the headline print conflicting with the underlying details. The monthly pace of all-items price increases should increase to 0.5 percent (or higher) after a 0.2-percent gain in July as gasoline costs marched higher. But the core measures that exclude energy and food categories might exhibit continued signs of slowing, coming in around 0.2 percent month-over-month, essentially in line with the Fed’s 2-percent annualised inflation target. (08:30 EDT)

THURSDAY

With inflation running above target and expectations remaining stubbornly elevated, policymakers at the European Central Bank could choose to deliver a final rate increase, pushing its deposit rate to 4 percent. But with massive fissures opening under the real economy - with crumpling consumer and business sentiment, slowing US demand, and weak exports to China flagging a downturn ahead, officials may opt to stay on hold for now. (08:15 EDT)

US retail sales numbers could disappoint, particularly after a string of better-than-expected measures of US consumer demand. Because the measure focuses on tangible goods receipts (and mostly doesn’t incorporate the Barbenheimer or Taylor Swift phenomena) a negative print looks probable. (08:30 EDT)

The number of initial jobless claims submitted in the week ended is seen reverting higher after dropping to 216,000 in the prior week - but Labor Day-related distortions could again play havoc with the data. (08:30 EDT)

See our Economic Calendar for a more complete listing of upcoming data releases.