News & Analysis

The dollar had a rough time of it this week, with the DXY index falling towards lows not seen since September 2018, while the Bloomberg dollar index, which takes into consideration a broader basket of currencies, fell close to its lowest point in 2020.

This week’s dollar weakness was a tale of two halves. The week started off with fresh fiscal stimulus announced by the EU in the form of the €750bn recovery fund, which buoyed market sentiment and led to a risk rally.

Towards the back-end of the week, that source of stimulus for FX markets to rally against the greenback faded, but rising Covid-19 cases in the US and stalling fiscal stimulus meant the dollar continued to waiver.

Now, with strained health infrastructure in select states, further tightening of restrictions is likely. This would undoubtedly lead to a more protracted recovery for the US economy and rising jobless claims data, of which we saw the beginnings last week where jobless claims rose for the first time since March. Despite preliminary Q2 GDP data scheduled for multiple economies next week, the jam packed US data calendar means global markets are likely to taking their cues from developments in America, especially with Jerome Powell’s Federal Reserve penciled in for Wednesday.

  • Monday 27th; German IFO indices for July at 09:00BST. Ahead of CPI and GDP releases later on in the week, the IFO business climate and expectations index gives markets arguably the timeliest measure of on the ground business conditions. The current conditions index has remained in negative territory below the 100 mark for just under a year now with expectations last posting a positive reading in September 2018. Since hitting a low in April due to the effects of lockdown measures, business confidence has progressively increased with the services and construction sub-indices almost posting positive readings at -6.0 and -7.5 in June respectively. The median expectation for the business climate, current assessment and expectation indices are 89.3, 85.0 and 94.0.
  • Wednesday 29th; South African CPI for June is released at 09:00BST. After headline inflation dropped below the SARB’s target range in May, prompting many, ourselves included, to change their expectations of last week’s SARB interest rate announcement, the headline inflation rate will be closely watched. CPI YoY nosedived to just 2.1% in May but expectations now suggest a mild 0.4% MoM increase in June which will lead to the headline rate recovering back towards the 3-6% target range. At last week’s SARB meeting, where rates were slashed by 25bps to 3.5%, the central bank barely altered their CPI forecast for the year. The MPC still expects inflation to average 3.4% this year. Currently the average sits at 3.66%. Factoring in the expected June print of 2.2%, this would drop to 3.4%. If inflation continues to drag below, or even at the bottom end of the SARB’s target range, further rate cuts will be imminent. The US Department of Energy crude inventory data is also released at 15:30BST with last week’s data showing an unexpected 4.893m build. With OPEC+ set to ease their supply cuts by 2m barrels per day to restrict output by 7.7m bpd, US inventories will be key to determine whether WTI can continue trading above $40 per barrel as demand conditions look shaky yet again.
  • The FOMC are also due up at 19:00BST on Wednesday with OIS and futures markets toying with the ideas of negative rates. Questions around a negative interest rate policy, forward guidance on QE and yield curve controls are only likely to resurface, especially with the additional downside risks seen since the June 3rd More on what we expect from the Fed below.
  • Thursday 30th; a deluge of GDP data is incoming. Firstly, Germany’s preliminary Q2 GDP reading is expected at 09:00BST with expectations sitting at a 9.0% QoQ contraction (-11.2% SA YoY). With Germany’s economy one of the first to re-open in mainland Europe, and the largest economy in the eurozone, how its Q2 data prints will be key for assessing the economic damage caused by Covid in the euro-area. The effects of this reading won’t be contained to just the euro, however, with NOK and SEK highly linked to economic conditions in Germany and the eurozone. The preliminary GDP reading will also be a good benchmark to measure the effectiveness the latest EU stimulus measures will have on driving growth back to pre-virus levels. Preliminary CPI data for July is also due from Germany at 13:00BST. The GDP fun doesn’t stop there. Mexico’s preliminary Q2 reading is scheduled for release at 12:00BST with expectations sitting at -21.2% for the non-seasonally adjusted YoY figure. Meanwhile, at 13:30BST the US advanced reading for Q2 is due. The US is experiencing a uniquely bad and persistent domestic epidemic, so the Q2 reading will establish a baseline for what may be a disappointing recovery in Q3 – more details are below. Released alongside the GDP data is initial jobless claims figures for the week ending July 25th. While there are still many flaws to this series it still provides the most timely data to analyse the US labour market. With last week showing the first rise in initial claims since March as lockdown measures begin to tighten again, this week’s data will bring in heightened attention.
  • Friday 31st; China’s official PMI readings kick start Friday’s session at 02:00BST. Ahead of the Caixin reading released on the 5th August, markets get a taste for how quickly the manufacturing and non-manufacturing sectors are growing with the official measure. Although this measure favours state-owned and large enterprises, as opposed to SME’s and privately owned companies surveyed in the Caixin measure, the trends remain broadly the same. After the manufacturing sector led the initial economic recovery, the non-manufacturing and services indices are beginning to take over. This is expected as fiscal stimulus targeting manufacturing and industrial output fades in H2, but sluggish new orders and especially new export orders remain a concern. Expectations suggest little change form July’s reading compared to the month previous, with readings of 50.8 and 54.5 expected for the manufacturing and non-manufacturing PMI. Following on from Germany’s GDP reading on Thursday, the Eurozone advanced GDP reading for Q2 is expected at 10:00BST. The median forecast for this data point supplied to Bloomberg sits at -14.7% YoY. The focus then quickly shifts to North America, where Canada’s May GDP reading is released at 13:30BST alongside June’s PCE inflation index for the US. Canada’s economy showed the very initial signs of easing lockdown restrictions in May so a minor improvement on April’s -17.1% YoY contraction is expected, with MoM growth expected at 2.9%. However, the impact such lagged data will have on markets is limited, especially if the data comes in close to the Bank of Canada’s Q2 projection of -15%; the median estimate provided to Bloomberg expects a reading of -15.2% for May. The US PCE data released at the same time is also expected to have a limited impact, mainly because the Fed has showed its willingness to focus more on buffeting the effects of the virus on the economy and labour market. Headline inflation is expected to rise from 0.5% to 0.9% in June with the core reading staying flat at 1.0% YoY.


Q2 is bound to break most national GDP records as containment measures bite but will be key to measuring how deep the economic damage is



US GDP dominates calendar

Of the 21 economists brave enough to submit a forecast to Bloomberg for Thursday’s advance reading of Q2 gross domestic product, the most optimistic expected a 26.2% QoQ contraction. The median forecast was for a 34% contraction, and the Atlanta Fed nowcast, a canonical estimate of same-quarter GDP made without subjective adjustments, currently stands at -34.7%. The size of the contraction is a direct consequence of the lockdowns imposed across much of the economy in March and April, and will almost certainly be the sharpest ever peacetime fall in quarterly GDP. As an advance reading, the data will be fairly high-level, although some initial estimates for personal income and outlays will be available.

We take no view on what the number is likely to print at, but there are a few important caveats and observations to add:

  • In a broad sense, the Q2 growth figure will be the sum of substantial contractions in April and parts of May, and then a large recovery in activity beginning in May. One key area of uncertainty is the magnitude of the recovery – particularly in consumer spending. Ostensibly, consumer spending roared back into life in May and June, with retail sales rising 18.2% and 7.5% month-on-month in May and June respectively. However, fear of infection and impending lockdown measures may mean June’s advance retail sales report overstated certain aspects of overall consumer spending.
  • The single most important caveat that needs to be added is that significant re-tightening of restrictions on indoor hospitality and entertainment occurred across significant parts of the US in late June and July. Some 9 states, representing almost 40% of the population, increased restrictions, primarily on bars and indoor dining. Although many of these measures were taken after the period for Q2 GDP ended, forward-looking consumers may have already regulated their behavior away from riskier consumption activities.
  • Weekly initial jobless claims will be released at the same time as the GDP reading. Jobless claims rose for the first time since March last week, rising to above 1.4 million from 1.3 million the week prior. The development is significant as it suggests that the wave of recent restrictions on hospitality and indoor entertainment venues to control the Covid outbreak in the south may have reignited job losses in these sectors. Of the 4.8 million net job increase reported in June, almost 3 million were workers from hospitality, leisure, and retail sectors – exactly those workers most likely to be affected.

Virus developments point to risk of ongoing disruption in Q3

At a national level, the numbers of the covid-19 pandemic in the US are tentatively encouraging. Nationwide, new cases appear to have peaked, with the John Hopkins database reporting 68,7000 new cases on Thursday compared to 77,300 a week ago. This is still the most severe outbreak in the world. However, stabilization of the rate of case increases at a national level suggests that hospitalizations are likely to follow in the near future, given the fact that on balance, restrictions in the most affected states have been tightened over the past month.

On a state level, the data is less encouraging and suggests that restrictions on bars and indoor dining may persist well into Q3.

Populous states such as Florida, Texas, and California continue to see high rates of daily case counts. Although among this group some states such as Texas and California are showing signs of a peak in new cases, although this is tentative and may be reversed if the recent restrictions on bars and some indoor venues in the states do not prove sufficient for halting transmission. Alabama continued to set new records for daily cases, and has currently implemented minimal restrictions. The key data this week may therefore be case counts in these states: if new cases stabilize and drop in Texas and California, a more robust argument can be made for the second peak of the US nationwide pandemic to have occurred.


Daily case count increases in the selected states highlighted compared to other states nationally


FOMC considers forward guidance and incoming fiscal stimulus.

Enhanced forward guidance and tweaks to asset purchases will be the two main tools the FOMC are likely to consider on Wednesday’s meeting. The FOMC took a somewhat passive stance in June, discussing the enhancement of forward guidance but not taking the plunge. Meeting minutes revealed that “most participants” were on board with the idea of more explicit forward guidance for the future path of policy, and there were signs that a consensus is beginning to emerge about its nature. Inflation outcomes were supported by a number of participants and are the natural starting point. The ECB’s goal of sustainable convergence of inflation to target offers one example of the kind of language that could be used. In our view, enhanced forward guidance is likely at this meeting, but more aggressive measures such as yield curve control are likely to be deployed later in the year.

GOP intra-party negotiations on a new round of fiscal stimulus are expected to continue this weekend, meaning that details of a new fiscal relied package are likely to be released early next week. Although there is little sign of disruptions to Treasury markets of the sort seen in March, the prospect of new treasury issuance will be on the back of the FOMC’s minds this week. Yield curve control would be an effective means by which the Committee could signal a willingness to absorb any issuance, and the last meeting saw some favorable discussion of front-end yield curve control of the sort taken by Australia. However, with the current “whatever it takes” mandate for asset purchases still wide enough to allow the Fed to increase asset purchases suddenly in response to any sudden adverse developments in Treasury markets. With no press conference scheduled, it may be too early for adoption of yield curve control.


Ranko Berich, Head of Market Analysis
Simon Harvey, FX Market Analyst
Ima Sammani, Junior FX Market Analyst



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