Dollar Finds Support, Pressuring Stocks
- The dollar reversed overnight losses against most major currencies on Monday. The People’s Bank of China announced it will end its 2-year dollar peg before a G-20 summit this week. Global stocks and commodity prices initially rose while interest rates dropped. Later the recovering dollar pressured the S&P 500, which declined 4.31 to 1,113.20 and commodities trimmed gains. Most key currency pairs are at important technical levels, which can be summarized by the dollar index’ technical situation. The yen was down modestly. Japan’s all industry activity index rose for the first month in three. Unable to penetrate the 1.25-area resistance, the EUR/USD fell to the 1.23-area support. Sterling dropped below the 1.48 handle. The Canadian dollar reversed overnight gains. The Australian dollar benefitted the most after Chinese authorities allowed the renminbi to appreciate, but the aussie later pared gains and stayed below the 0.88 handle.
- The dollar index reversed earlier losses following a successful test of the important 85-area support today. The index has consolidated gains since reaching a 15-month high two weeks ago. Today’s successful test means the index will likely rise in its trading channel again. The dollar weakness in the last two weeks has supported stock markets across the globe. New strength in the dollar will increase deflationary risks and pressure stocks. US and global stock markets seem to be building the second shoulder in a head-and-shoulder formation.
Financial and Economic News and Comments
US & Canada
- Nobel Prize-winning economist and Columbia University professor Robert Mundell signaled that China’s move to return to a more flexible exchange-rate policy may erode the stability in the global and Chinese economies. Keeping the yuan pegged to the dollar has been “a great source of stability” for China and the world, Mundell said, asserting that “it’s wrong for the US to force China to destabilize the renminbi, I myself don’t think it’s a good idea.”
- UK house prices grew 0.3% m/m June, a sixth successive month-on-month gain, to an average of £237,767 ($350,516), after a 0.7% m/m increase in May, Rightmove Plc reported. June house prices rose 5.0% y/y, a ninth straight year-on-year rise, following a 4.3% y/y May advance. London’s house prices increased 2.2% m/m to an average of £429,597 in June, a record high, and rose 8.2% y/y.
- Australia’s seasonally adjusted new motor vehicle sales fell 3.2% m/m to 88,484 units in May, the fourth fall in five months, after a 9.0% m/m increase in April, the Australian Bureau of Statistics reported. New motor vehicle sales rose 16.4% y/y sa, an eighth straight year-on-year rise, following April’s 29.1% y/y gain.
- Japan’s all industry activity index increased 1.8% m/m to 95.7 in April after a revised 0.7% m/m decline in March, indicating overall production by all sectors of the Japanese economy grew for the first time in three months, according to data from the Ministry of Economy, Trade and Industry. The index rose 3.8% y/y, a fourth consecutive year-on-year rise, following March’s upwardly revised 4.9% y/y advance.
- Japan’s nationwide department store sales slipped 1.8% y/y in May, a 27th straight year-on-year decline; however, easing from a 4.9% y/y drop in April, figures from the Japan Department Stores Association showed. Tokyo department store sales fell 2.1% y/y, also down for a 27th consecutive month, following April’s 3.7% y/y decrease.
FX Strategy Update