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USD policy rethink

Forget October; agility now required (USD)

Two weeks ago, Dallas Federal Reserve President Robert Kaplan said, “the central bank should begin to taper its monthly purchases of Treasury bonds in October”. On Friday, he backed off from that conviction. Now, Mr Kaplan would rather be “agile, open-minded, avoid being rigid”. His change of mind took the shine off the US dollar (USD).

For long enough, investors have been led to believe that tapering of the Fed’s QE programme (USD) will begin before the end of the year, carry on through 2022 and lead to higher interest rates in 2023. Robert Kaplan played an important part in the management of that expectation. On Friday, he hedged his bet, saying “I’ve got to take [Covid-19] into account, and will adjust my views accordingly”.

Although Mr Kaplan thinks “we’d be a lot healthier to start weaning off these purchases as soon as we’re able to”, his new-found hesitancy gave investors the chance to imagine that the free money tap might remain open for longer than they had previously thought. The safe-haven JPY was the biggest loser, down by an average of 0.3%, and the CHF and USD were only millimetres ahead. The Canadian dollar (CAD) was the clear leader with an average gain of 0.5%.

 

Retail sales (GBP and CAD)

At first glance the retail sales data from Britain (GBP) and Canada (CAD) showed the Loonie in a better light. GB monthly sales were down by 2.5% while in Canada they rose 4.2%. At second glance, the results from Britain looked even less impressive.

Data from Britain showed retail sales declining 2.5% in July after a paltry rise of 0.2% in June. In Canada (CAD) the report concerned June’s results, and the 4.2% rise shone brightly alongside Britain's (GBP) 0.2% increase for that month. Interestingly, neither set of data had an immediate impact on the GBP/CAD relationship. Sterling did eventually lose a cent to the Loonie but it owed more to Robert Kaplan’s policy wobble (USD) than to the economic data.

That was also true of some of the day’s other ecostats. Although Norwegian gross domestic product grew by less than half as much as expected in Q2, the NOK took second place, closely behind the CAD.

 

Provisional PMIs

Today’s theme is the provisional purchasing managers’ indices from Markit. The numbers are likely to be swerved, nationally and locally, by the ebb and flow of Covid lockdowns. Early figures from Australia and Japan tended to support that expectation.

The Australian readings (AUD) showed output contracting at a faster rate in August, with the composite index almost three points lower on the month at 43.5. “Lockdowns across various Australian states in August continued to dampen demand and output”. Investors were not surprised, and the AUD actually firmed after the announcement. The story from Japan (JPY) was very similar, with the composite index three points lower at 45.9. Covid restrictions and supply chain pressures took the blame.

The readings from Europe and America are all expected to come in comfortably above 50, though most are likely to be lower on the month. There are also data today for US existing home sales, Eurozone consumer confidence and, tonight, second quarter New Zealand retail sales (NZD).

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