Week Ahead: Anniversary of the End of Bretton Woods Sees Resilient Dollar and Firmer US Rates: Can it Persist?
<div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWcYc00CzAQwJppNKQnYOrm6_skGLMxLIDLpocCfkSHVLLM6RNqMdds2JcvDmXG7W6R6OHS9Mpj3wz7bTdLA8OMvUgT_tMWDruzCxv7opD8jV124iqpXrwshe3fdb39AISgGPJxNQ-K_HmjBVAy_GiaODyWo36GRCRYF0Amoix03Ll1YQ9doUA5qe0Z9WV/s957/End%20BW.jpg"><img alt="" border="0" data-original-height="612" data-original-width="957" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWcYc00CzAQwJppNKQnYOrm6_skGLMxLIDLpocCfkSHVLLM6RNqMdds2JcvDmXG7W6R6OHS9Mpj3wz7bTdLA8OMvUgT_tMWDruzCxv7opD8jV124iqpXrwshe3fdb39AISgGPJxNQ-K_HmjBVAy_GiaODyWo36GRCRYF0Amoix03Ll1YQ9doUA5qe0Z9WV/s400/End%20BW.jpg" width="400" /></a></div><p><span>Tuesday
marks the 52nd anniversary of the end of Bretton Woods currency arrangement,
which pegged the dollar to gold and other currencies to the dollar. Some
economists have tried framing their views in terms of Bretton Woods II and
there have even been proponents of Bretton Woods III, but these are informal
arrangements at best, no reciprocity, or mutual obligations. The point of the
matter is that the end of Bretton Woods ushered in the modern era of floating
currencies, which in practice has meant volatile exchange rates.<o:p></o:p></span></p><p><span>One of the big picture ideas from
international relations is hegemonic stability theory. It sees capitalism
working best when there is one country that can set and enforce international
rules of engagement. The attempts to resurrect Bretton Woods miss the insight
captured by Ian Bremmer's "G-Zero" concept. Bretton Woods was made
possible by the unsustainable asymmetry of power that existed in 1944. That
asymmetry of power has not existed for decades, and even with the collapse of the
Soviet Union, the US moved away ideologically from fixed exchange rates and
embraced market fundamentalism. Letting markets determine exchange rates has
resulted in the current low double digit actual (historic) three-month
volatility of the Antipodean currencies and Scandis. The volatility of the
other G10 currencies vary between about 6% (Canadian dollar) and 9% (Japanese
yen).<o:p></o:p></span></p><p><span>The volatility requires businesses and
investors to take currency swings into account and manage the risk.
Explanations for short-term movements tend to emphasis the flow of economic
news, surprises, and technical factors. In the week ahead, there are a few
concentrations of data points. The US, for example, reports July retail sales,
and so does China, the UK, and Mexico. The US, China, and the eurozone report
their latest industrial production figures. Japan, the UK, and Canada report
July CPI, and the UK and Australia provide new labor market readings.
Technically, the dollar has proven more resilient than we expected. We had
anticipated that the recovery since mid-July would end around the time of the
US CPI report. Momentum indicators are stretched, and some have begun turning
lower for the dollar, but the price action itself has yet to confirm our
suspicions. <o:p></o:p></span></p><p><b><span>United States:</span></b><span> After contracting in Q1 and Q2 22,
the US economy has been expanding faster that what the Fed has identified as
the non-inflationary pace of 1.8% for the past four quarters. The Atlanta Fed's
GDP tracker sees the economy accelerating in Q3 to more than twice the speed
limit. The three reports that highlight the week ahead of expected to improve
sequentially from June. The median forecast in Bloomberg's survey is for retail
sales to have risen by 0.4% after a 0.2% increase in June. However, the core
group that some GDP models use, which excludes autos, gasoline, building
materials, and food services, may slow from 0.6% in June to 0.4%. Housing
starts in June tumbled 8% and likely stabilized in July. Permits are also
likely to have steadied after falling 3.7% in June. Lastly, industrial output
slumped by 0.5% in June and likely recouped most of that in July. The market's
idea that the economy will slow from 2.4% in Q2 to 0.6% in Q3 is partly
predicated on a halving of the growth of consumption (1.6% in Q2 and projected at
0.8% here in Q3) and a sharp drop in private investment (from 5.7% in Q2 to
-1.1% in Q3). This week's reports directly impact the assessment of both. At
the same time, the soft-landing scenario does not look to be challenged in the
coming days, keeping the odds of a September rate hike low. <o:p></o:p></span></p><p><span>The Dollar Index is in the upper end its
recent range. It closed above 102.75, which is an important area from a
technical point of view. It is both the (38.2%) retracement objective of the
losses since the year's high was recorded in early March (~105.90) and the
(61.8%) retracement of the losses since the May 31 high (~104.70). The broadly
sideways movement so far here in August has allowed the Dollar Index to take
out the trendline connecting the May, July, and early August highs (starts the
new week near 102.45 and finishes the week around 102.25). The MACD is still
trending higher, but the Slow Stochastic has stalled, but has yet to turn down.
The next technical area is103.00 and then 103.40-60, which houses the 200-day
moving average and last month's high. A break of 101.60-75 would help confirm a
top.<o:p></o:p></span></p><p><b><span>China:</span></b><span> Beijing has taken more measures this year to make its
economic data less accessible. The market has long been skeptical of the
veracity of Chinese economic data and reports, when it is not being purposely
opaque. Adding to the sense of Kabuki theatre were reports in the <a href="https://www.ft.com/content/b2e0ad77-3521-4da9-8120-1f0c1fdd98f8" target="_blank">Financial
Times</a> that: "Multiple local brokerage analysts and researchers at
leading universities as well as state-run think-tanks said they had been
instructed by regulators, their employers and even domestic media outlets to
avoid speaking negatively about topics ranging from fears of capital flight to
softening prices." China reports July industrial output, retail sales,
property investment, property sales and surveyed jobless rate. To a large
extent, even if the data enjoyed more credibility, it has been rendered moot by
the Politburo's recognition of the need for more economic support. There may be
two takeaways. First, measures up until are not sufficient and the property
market is still broken. Second, in an exercise of affirmation-through-negation,
by increasing repression, officials recognize the discontent. The PBOC is
likely to increase the volume of funds at the one-year medium-term lending
facility while keep the rate steady at 2.65%. The poor July lending figures
added to the pessimism and saw the CSI 300 tumbled by 2.3% ahead of the
weekend, the largest loss since last October. A cut in reserve requirements
still seems to be an option, though the timing is uncertain. <o:p></o:p></span></p><p><b><span>The dollar's resilience and the poor
Chinese data (soft prices, falling exports, and weak lending) keeps the
pressure on the yuan. </span></b><span>The
dollar rose to almost CNY7.24 last week, and the 0.9% gain was the largest so
far in Q3. The PBOC's fixings still is helping moderate the dollar's rise. Last
month's high was near CNY7.2550 and the year's high set at the end of June was
by CNY7.2690. In November 2022, the greenback spiked to almost CNY7.3275.
Chinese officials could step up their game, but the move looks to be more about
the dollar than the yuan and with deflationary forces evident, there is little
urgency to turn the yuan around.<o:p></o:p></span></p><p><b><span>Japan: </span></b><span>Weakness in Japanese consumption and
slower wage growth took pressure off Japanese government bonds. The generic
10-year JGB yield jumped from around 0.45% before last month's BOJ decision to
almost 0.66%. The BOJ stepped in to buy government bonds twice in the first
week of August but did not intervene last week. Most of Japan's economic data
in the days ahead will not shed much fresh light on economic activity in the
world's third-largest economy. The preliminary estimate for Q2 GDP looks to be
in line with the Q1 performance of 0.7%, but it will be mostly accounted for by
net exports. Consumption and business investment appear to be weaker. The GDP
deflator is seen rising to 3.8% year-over-year (from 2.0%). The national CPI
may draw attention but the release, ago of Tokyo's July report steals much of
the thunder. Tokyo's headline CPI was steady at 3.2%. The core, which excludes
fresh food, eased to 3.0% from 3.2%. The measure that excludes fresh food and
energy rose to a new cyclical high of 4%. The new news may lie primarily with
the July trade figures. Seasonal patterns favor a deterioration from the JPY43
bln surplus reported in June. The July trade balance has deteriorated in 14 of
the past 20 years. And even it may not say much about the Japanese economy. The
decline in imports (12.9% year-over-year in June) reflects falling prices of
commodities and the softness of exports (1.5% year-over-year in June) reflects
weaker demand (and sanctions on China). <o:p></o:p></span></p><p><span>The dollar finished the week on a firm
note near a nanometer below JPY145, which may have traded before the weekend.
The year's high was set slightly above JPY145 at the end of June. Above there,
the JPY146.00-15 area may see some resistance, but formidable resistance is not
seen until closer to JPY150 (last year's high was almost JPY152). A close now
below JPY143.80 may be needed to signal that the dollar's run from around
JPY137.25 in mid-July is over. That would seem to imply that US 10-year yields
peak soon too. The high for the year was set on August 4 near 4.20%.<o:p></o:p></span></p><p><b><span>United Kingdom: </span></b><span>Market expectations for the September BOE
meeting were scaled back after the softer than expected June CPI. In the coming
days, the UK will report the July CPI, job and wage data, and retail sales. In
the four months last year from June through October, UK CPI rose at an
annualized rate of nearly 10%. Ae the high monthly prints are replaced with
smaller increases, the year-over-year rate, which peaked at 11.1% last October
and was still at 10.1% as recently as March, will likely continue to moderate.
The Bank of England forecast a 5% rate at the end of the year. It was at 7.9%
in June. The tightness of the labor market and the rise in average weekly
earnings (6.9% in May 3-months year-over-year), a new cyclical high, will be
closely watched. That said, in the US real wages have been rising, but in the
UK weekly earnings are rising less than inflation. This may help explain why
household consumption rose by a meager 0.2% in Q1 and was flat in Q2. Still
average weekly earnings appear to have accelerated for the fourth consecutive
month in June. Separately, the payroll count may have fallen for the second
consecutive month. Retail sales (UK reports in volume terms) is a narrower
measure than household consumption. July retail sales will also be released
next week. The average monthly increase in Q2 was 0.4%, which is the most in a
quarter for two years. Given the comments from BOE officials, we suspect that
the employment data and CPI will overshadow retail sales. <o:p></o:p></span></p><p><span>Sterling set the high last week near
$1.2820 after the US CPI but reversed and settled below the previous day's low
in an outside down day on August 10. Even the stronger than expected Q2 GDP was
insufficient to lend sterling much support. The $1.2825-50 area is critical
resistance and a close above it is necessary to improve sterling's technical
tone. On the downside, a break of $1.2600 would be a potentially ominous
technical development. That said, the MACD is trending lower and is oversold.
The Slow Stochastic has turned up but looks fragile. Sterling's four-week down
draft is the longest losing streak since May 2022.<o:p></o:p></span></p><p><b><span>Eurozone:</span></b><span> The next batch of eurozone
data will be of little consequence to the market, and what shapes the outlook for
the next month's ECB meeting will not be found in June data: trade, industrial
and construction output, and a second look at Q2 GDP and quarterly employment
figures. Germany sees the August ZEW investor survey, but while more current is
unlikely to move the needle. The assessment of the current situation is simply
poor. It has been negative since late 2021. The average this year is -47.6,
almost twice as negative as the year ago period. The expectations component was
negative beginning March 2022, but managed to recover in January-April this
year but has fallen back below zero in the past three months. The stir caused
by Italy's plan to levy a tax on banks quickly appears to have eased without
causing much of an impact in it premium over Germany. The 10-year spread showed
little reaction and remained well below last month's high of around 175 bp. It
is hovering near the 20-day moving average a little below165 bp. Italy's
two-year premium showed more of a reaction, but it peaked near 70 bp, slightly
below the June and July highs. It finished last week around 65 bp. <o:p></o:p></span></p><p><span>The euro spiked to $1.1065 after the US
CPI and rose above the 20-day moving average for the first time in two weeks,
but it quickly reversed. It traded below $1.0945 before the weekend. The price
action was disappointing, and the euro fell for the fourth consecutive week,
which matches the longest losing streak since March 2022. The Slow Stochastic
has turned up and the MACD has leveled off. The choppy consolidative price
action is frustrating but still inclined to see this as a base forming after
pulling back from the year's high in mid-July near $1.1275. That said, a break
of this month's low (~$1.0910) could signal losses toward $1.08.<o:p></o:p></span></p><p><b><span>Canada: </span></b><span>There are two headwinds. First, is the
external environment. The risk-off phase works against the Canadian dollar.
Moreover, the correlation between the S&P 500 (proxy for risk) has
increased recently. Also, the Canadian dollar is sensitive to the broader trend
of the US dollar (proxy the Dollar Index). The second headwind is a series of
disappointing Canadian dollar. This includes the July employment report and
IVEY PMI, and the wider than expected June trade deficit. The Canadian dollar
has drawn little support from the seven-week roughly 21% rally in oil prices.
Indeed, it has fallen by almost 2% during oil's run. The highlight in the week
ahead is July CPI. The base effect means that a 0.2% increase in the
month-over-month pace, will cause the year-over-year rate to tick to 2.9% from
2.8%. It peaked last June at 8.1% and has not fallen in only two months subsequently.
The decline in Canada's inflation likely bottomed. The base effect warns that
the headline rate is likely to increase in August and September before again in
October, but then rising again into the end of the year. The underlying rates
of inflation have been steadily even if gradually falling. The bar to a Bank of
Canada rate hike at its September 6 meeting seems rather high, especially in
the context of the Fed pausing again.<o:p></o:p></span></p><p><span>The US dollar rallied from around CAD1.31
in mid-July to CAD1.35 last week. On an intraday basis, the trendline
connecting the year's high in mid-March (~CAD1.3860) and the late May high
(~CAD1.3650) was taken out but the greenback was not able to close above it.
The US dollar held below it ahead of the weekend (~CAD1.3470). This is also
true of the 200-day moving average (~CAD1.3450) –the greenback violated it on
an intraday basis but respected in on a settlement basis. The MACD is
overbought but the Slow Stochastic has curled down. A close below CAD1.3365
would lend credence to our suspicion that a high in place.<o:p></o:p></span></p><p><b><span>Australia:</span></b><span> The possible labor dispute at
several natural gas projects could put 10% of the world LNG production capacity
at risk, according to some estimates. Japan and South Korea are the largest
importer of LNG from the fields that are at risk. The recent strike votes sent
ripples through the nat gas market and appears to have intensified negotiations
to avoid a disruption. Separately, Australia reports July jobs data on August
17. Australia created about 255k jobs in H1, of which almost 220k were
full-time posts. This compares to around 345k and slightly more than 365k,
respectively, in H1 22. The unemployment rate stood at 3.5% in June, down a
smidgeon from 3.6% in June 2022. The participation rate is unchanged over the
past year at 66.8%. The anticipated takeaway from the July report is slower job
creation and a tick-up in the unemployment rate. And no reason to reassess the
likelihood of a September RBA rate hike. The futures market has downgraded the
probability of a hike this year, after Bullock takes the reins from Lowe after
next month's meeting.<o:p></o:p></span></p><p><span>The Australian dollar's price action has
been exceptionally poor. After rebounding to about $0.6615 after the US CPI
report, the Aussie reversed lower and posted a bearish outside down day.
Follow-through selling ahead of the weekend pushed it below $0.6500. The year's
low was set at the end of May slightly below $0.6450, and it is the next
obvious target. A break suggests potential to at least $0.6400. As we have seen
with some other currency pairs, the momentum indicators are mixed. The MACD is
falling and is over-extended. The Slow Stochastic is closer to turning. It has
flatlined in over-sold territory. A close above $0.6600 would stabilize the
technical tone. <o:p></o:p></span></p><p><b><span>Mexico: </span></b><span>Although inflation continues to ease in
Mexico, the central bank kept the overnight target rate at 11.25%. The rate has
been left unchanged since the quarter-point hike in March. In March, CPI stood
at 6.85%. Last month it was slightly below 4.80%. That implies a rise in real
rates. Adjusted for current inflation, Mexico’s real overnight rate is about
6.45%. Brazil's is around 10%, and it has begun an easing cycle. Chile
delivered a 100 bp rate cut last month has a real overnight rate around 3.75%.
Still, what will get Banxico to cut rates is unlikely to rest June retail
sales, the main economic report in the week ahead. The Mexican economy expanded
1% in Q1 and 0.9% in Q2. Yet, retail sales fell by 0.4% in Q1 are doing
considerably better in Q2. April and May together saw about a 0.8% increase.<o:p></o:p></span></p><p><span>The Mexican peso was one of the
few currencies in the world that managed to hold their own against the US
dollar last week. The peso rose by about 0.5% against the dollar. On August
3-4, the dollar peaked near MXN17.43 and in the last two sessions traded below
MXN17.00. The week's low was almost MXN16.91. The next downside target is
around MXN16.8450, with a break bringing the multiyear low into view set in
late July (~MXN16.6660). The MACD looks poised to turn lower in the coming
days, while the Slow Stochastic has rolled over. The MXN17.12-15 area should
offer resistance. <o:p></o:p></span></p><p>
</p><p><o:p> </o:p></p><p><br /></p><p><a href="http://www.marctomarket.com/p/disclaimer_28.html" target="_blank"><span>Disclaimer</span></a></p><p><br /></p><p><br /></p>
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