There are three factors that can keep the dollar strong near term and probably send it a little stronger. The first is the ongoing energy shock primarily being felt through natural gas prices. These prices continue to rise as importers compete for inventory ahead of winter and the very uncertain supply situation. The second factor is the uncertainty as to whether the People's Bank of China (PBoC) will engineer another devaluation in the renminbi as it searches for growth. USD/CNH is now trading through 6.80 and a move through 6.82/84 will certainly raise speculation of something larger. The final factor is the US economy and the Fed story. Today sees the release of July industrial production and tomorrow the release of retail sales. The figures should temporarily allay US recession fears and prepare the markets for what could be a hawkish set of FOMC minutes tomorrow. The current backdrop suggests that the Fed probably wants tighter financial conditions – which implicitly include a firmer dollar.
Housing starts in Canada likely slowed last month, which would be the first back-to-back decline this year. The median forecast (Bloomberg's survey) calls for a 3.6% decline after an 8.4% fall in June. Still, the expected pace of 264k is still 10% higher since the end of last year. Yesterday, Canada reported that July existing home sales fell by 5.3%, the fifth consecutive decline. They have fallen by more than a third since February. The most important report today is the July CPI. A 0.1% increase, which is the median forecast in Bloomberg's survey would be the smallest of the year and the year-over-year pace to eased to 7.6% from 8.1%. If so, it is the first decline since June 2021. We think risks remain tilted towards the Bank continuing with a relatively ‘forceful” rate hike next month.
Germany continues to suffer both with low water levels on the Rhine and now a gas levy for German consumers. The gas levy could keep German inflation higher for longer and cause more headaches for the European Central Bank (ECB). The trade-weighted euro is a whisker away from the lows of the year and a slightly stronger dollar over the next 48 hours could easily see EUR/USD retesting parity. In terms of data today, look out for German and eurozone investor expectations for August. These should remain near the lows despite a decent last month for European equities.
Today's July UK employment data is somewhat of a mixed bag for sterling. This showed a slight slowing in hiring but strong average earnings – the latter pointing to hoarding of staff. We think the data supports a 50bp Bank of England hike on 15 September (45bp currently priced). A stronger dollar means that Cable can go sub 1.20 again.
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