Dollar – Large and in Charge; Aussie Hits a Perfect Storm

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Market Drivers August 23, 2018
Politics take Aussie below .7300
Dollar shows broad strength
Nikkei 0.22% Dax 0.07%
Oil $68/bbl
Gold $1186/oz.
Bitcoin $6400

Europe and Asia:
EUR EZ Flash PMI 54.4 vs. 54.5

North America:
EUR ECB Minutes 7:30
USD New Home Sales 10:00

Dollar strength dominated Asian and early European trade today with the greenback up across the board despite the release of FOMC minutes yesterday that the market viewed as less than bullish. The Fed appeared to have muted its hawkish rhetoric a bit by offering a more balanced view of the economy and acknowledging the downside risks from trade wars and housing. Still, the market expects the Fed to hike twice this year and the interest rate differential story is starting to weigh all the other majors.

To that end, Jackson Hole starts today, but the market moving events are scheduled for tomorrow when Fed Chair Jerome Powell takes the mike. Markets will want to see whether Mr. Powell mutes his hawkish stance, especially in light of President Trump’s harangue last weekend about Fed’s tightening monetary policy. It’s also perfectly possible that Mr. Powell will ignore Mr. Trump but will nevertheless acknowledge the downside risks to the economy caused by higher rates – especially in housing where Existing Homes Sales have declined four months in a row.

Meanwhile, today’s price action was dominated by political turmoil in Australia where the PM Turnbull is facing a challenge from his own party and will likely face a new leadership vote. Adding fuel to the fire was the Australian government’s decision to ban Chinese maker Huawei from participating in the build-out of the 5G infrastructure on security grounds. The news is sure to further aggravate the already shaky Sino-Australian relations and could be a source of constant pressure on Aussie. The pair dropped below the .7300 figure and has shown no signs of bounce just yet.

In Europe, the flash PMI data came in slightly below forecast at 54.4 versus 54.5 dragged down by manufacturing which is clearly feeling the pinch from Trump’s trade rhetoric. Trump has threatened to impose at 25% tax on all European car imports which would be disastrous for the region’s manufacturers and will certainly keep the pressure on the euro.

Aside from eco data the market heard from BUBA President Jens Weidmann who is widely seen as the next ECB President. In prepared remarks Mr. Weidmann reiterated the need for normalization but also stated that “That’s not to say that I’m ruling out greater risk-sharing between member states in general. But those that are explicitly calling for more risk-sharing must also be prepared to relinquish more sovereign rights to the European level.” This was a clear reference to Italy and what made it particularly interesting is the shift in tone from German officials. Prior to Trump Germany has been adamant about keeping fiscal policy the domain of individual member states. However, with the emergence of a bellicose US which has been acting more as a foe rather than an ally German authorities may be willing to consider a more united European federation that acts as a more credible counterweight to US economic dominance.

In North America today only New Home Sales on the docket with market anticipating a 2.2% rebound from last month’s 5.5% drop. Any positive print could help USDJPY climb towards the 111.00 level as it will assuage the recent fears about housing slowdown.

Boris Schlossberg
Managing Director

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