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Price action turns choppy on higher yields and Chinese contagion fears

The dollar is little changed after a series of data releases intersected with oil price gains last week to push long-term yields slightly higher – even as expectations for a pause at the Federal Reserve’s September meeting remained intact. More broadly, risk appetite remains relatively subdued and commodity-linked currencies are softening as troubles in the Chinese property sector keep global demand expectations under pressure and drive raw materials prices modestly lower.

North America

Tomorrow’s retail sales report looms as the next potential catalyst for dollar moves, with major uncertainties remaining around the durability of consumer spending in the world’s largest economy. Overall receipts are seen rising 0.2 percent in July as gas purchases climbed and vehicle sales began to stabilize after a series of big swings earlier in the year. Food services and travel sectors could post material gains if wealthier households splashed out in the summer months, offsetting weakness in the increasingly-strapped lower-income segments. An upside surprise could push yields even higher, while signs of a cooldown might help unwind some of last week’s gains.

Change in retail sales relative to December 2019, billions USD

Minutes taken during the Federal Reserve’s July meeting, out Wednesday, could show officials unconvinced that inflation is coming down at a sustainable pace – but markets should ignore this, given the raft of data out since. Traders seem to be bulling up into the late-August central bank meeting in Jackson Hole, suggesting that they’re growing more convinced Jerome Powell will respond to a series of surprisingly-supportive data releases by delivering a more hawkish message.

The Canadian dollar remains on the defensive ahead of tomorrow’s July inflation report, with markets anticipating numbers that support a pause at the Bank of Canada’s September meeting. The annual increase in headline prices is seen accelerating slightly to 2.9 percent from 2.8 percent in June on a rise in global energy costs, but an average of the core price measures followed more closely by policymakers is seen slowing sequentially, coming in around 3 percent, down from 3.5 in the prior month, with mortgage costs making an outsized contribution to the year-over-year calculation. A hotter than expected print could support a modest push higher, with the 100-day moving average at 1.3388 looking like a vulnerable resistance level if the currency enters an upside correction.


The euro is suffering the slings and arrows of outrageous fortune, weakening further as turmoil in the Chinese property sector weighs on the bloc’s export outlook. Country Garden Holdings Co., once the biggest property developer in China, is trading at deeply distressed levels on financial markets, and is reportedly asking creditors to accept an extension in bond repayments as it edges closer to default, symbolizing deeper strain in a real estate sector that contributes roughly a quarter of gross domestic product and remains the biggest driver for consumer sentiment. Bullish momentum in the euro has evaporated in recent weeks, with support levels moving down toward the 1.0835 low established in early July – but we think the importance of China in the European Union export mix could be overstated (US demand remains far more important), making room for an upside correction as the noise level subsides in coming days and weeks.

Share of European Union exports, %

Data out tomorrow and Wednesday in the UK is expected to show wage growth and core inflation pressures remaining too hot for comfort, keeping the Bank of England on course toward a September rate hike. Although other signs of labour market softness are emerging as vacancies and unemployment creep up, pay packets are seen rising 7.5 percent year over year in the three months through June, up from 7.3 percent previously. Headline consumer inflation might fall sharply for July on a big drop in the energy price cap imposed by regulators, but the more important core measure is forecast to remain stubbornly elevated around the 7.2 percent mark as services costs continue their rise. A surprise to the downside – with core printing at 7.1 percent or below – could see the pound add to recent losses, breaking back into the 1.25’s against the dollar on a widening in rate differentials.

Asia Pacific

Weaker-than-expected credit data last week helped reinforce calls for more easing from the People’s Bank of China
– with a rate cut seen coming as soon as Tuesday – but we think officials understand that lower benchmark borrowing costs won’t relieve stress in the property sector or alleviate deeper worries over the country’s growth trajectory. Instead, central bankers are likely to continue loosening policy at a more gradual pace, targeting overall financial system stability while hoping for more decisive confidence-boosting measures from other arms of the state.

China is expected to deliver another round of weak activity data later on Tuesday, including retail sales, industrial production, and fixed asset investment numbers. All three are likely to remain in enviably-positive territory, but signs of strain should be clearly evident – particularly on the household spending side. Mirroring dynamics seen in many Western countries during the pandemic, prints below current consensus forecasts could see markets rally as investors ramp up bets on official stimulus efforts.

Japan will provide a second-quarter growth update along with trade balance and inflation numbers for July this week, but the focus in markets will likely remain squarely on the Ministry of Finance, where officials are expected to escalate verbal suasion efforts as they prepare for another round of foreign exchange intervention. The dollar-yen rate dropped through the 145 mark over the weekend, nearing levels last seen in November ahead of the first official intervention since 1998 – but we note that Japanese authorities tend to avoid defining “lines in the sand”, instead focusing on volatility levels or “one-sided” exchange rate moves when deciding whether to step in.

Currency intervention, billions JPY

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