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Market Briefing: Dollar Keeps Rising. We Don’t Know Why.

The dollar is climbing for a second day, but coherent explanations for the move are in short supply. One could argue that investors are clinging to safe havens as the prospect of a slowdown in the world’s second-largest economy darkens the outlook, but China’s peculiar growth model means it subtracts net demand from the rest of the world, and commodity-linked and growth-sensitive currencies appear to be holding ground so far.

Europe is relatively quiet. The pound exhibited no discernible reaction earlier this morning on signs of cooling in the British labour market, and the euro remains under pressure on news that Germany will impose a gas levy on its citizens, keeping inflation elevated.

We think currency traders might be bracing for a stubbornly-hawkish Federal Reserve ahead of next week’s Jackson Hole conference. Tomorrow’s July minutes are likely to illustrate a preference for raising rates by 50 basis points in September — as opposed to the larger 75-point move that has been mooted in markets — but the profound easing in financial conditions that has occurred since the meeting is bound to make policymakers uncomfortable. Jerome Powell could take steps to correct this, emphasizing a commitment to raising rates into restrictive territory and providing more clarity on the central bank’s quantitative tightening plans. In doing so, the Chair could trigger a shift in short-term dollar liquidity conditions that impacts foreign exchange markets.

Oil prices are down for a third consecutive session. West Texas Intermediate is trading for less than $89 a barrel and Brent is changing hands below $95 as traders position for weaker Chinese demand, rising shale production, and an Iran nuclear deal that could add as much as 1.4 million barrels a day to global output levels. Both benchmarks remain roughly 20 percent higher on year to date basis.

The Reserve Bank of Australia shifted onto a “data dependent” footing. Minutes from the central bank’s early-August meeting showed inflation is “now expected to peak later and higher than previously thought,” but “policy is not on a pre-set path,” as officials try to keep the economy on an “even keel”. Markets are convinced policymakers will lift rates by another 50 basis points in September before downshifting to smaller hikes in the following months. The Australian dollar is trading at slightly weaker levels, struggling to hold above the 70 mark against the dollar.

Canadian inflation pressures likely subsided in July. Consensus estimates show headline price growth slowing to a 7.6 percent annual pace last month from 8.1 percent in June. This has been fully priced into the Canadian dollar since last week’s US price data forced yields lower – meaning that the exchange rate could move dramatically on a surprise. The risk/reward ratio looks slightly skewed, with a weaker print likely to to trigger a larger move than vice versa.

Commodity prices are taking a proper shellacking. Both global oil benchmarks are off by more than 3 percent, copper is down, and iron ore is 4 percent cheaper as investors downgrade expectations for Chinese consumption and investment.

US housing starts are expected to fall, with data out at 8:30 likely to show an annualized pace closer to 1.52 million in July, down from 1.56 million a month earlier. High construction costs and tighter monetary policy have clobbered activity in the real estate sector, long one of the most important engines of growth in the American economy. A bigger-than-expected slowdown could feed through into lower employment projections, with implications for Federal Reserve policy in 2023.

Karl Schamotta, Chief Market Strategist

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