From a technical perspective, the US dollar looked vulnerable to start the week, but the 8.5% drop in Chinese shares in Shanghai provided additional fuel. The linkage between the two is that global headwinds may intensify and keep the Fed from raising rates in September. This seems like a premature judgment, but market pricing was never as convinced of a Fed hike as surveys suggested.
The euro, perhaps encouraged by a stronger than expected IFO (business climate at 108.0 in July up from 107.5 in June and defying expectations for a small decline), and continued improvement eurozone lending pushed to almost $1.1115 before running out of steam. The euro has not closed above its 20-day moving average (~$1.1007) in a little over a month. The downtrend off the June 18-22 July 10 high intersects today near $1.1070.
Falling stocks and softer US bond yields saw the dollar extend last week's drift lower against the yen. The dollar slipped to almost JPY123.25, matching the low from July 15. The 20-day average is seen just below JPY123.20, and a break would signal a move toward JPY122.80. Resistance is seen near JPY123.60. The Nikkei itself lost nearly 1.0%. It flirted with the 20-day average (~20340) but managed to close barely above it. Support is seen in the 20000-20120 area.
The gains in the dollar-bloc currencies seem like an anomaly. It is the first place that North American participants may look to fade the US dollar's weakness. Usually, negative news out of China weighs on those currencies. The New Zealand and Canadian dollars are gaining around 0.4% on the day against the greenback.
There does not appear to be a trigger outside of simply market positioning and a move to the sidelines (short-covering). The US dollar fell to CAD1.2980 in the European morning, but the pullback was greeted by fresh buying, and the greenback easily resurfaced above CAD1.30. Resistance is seen in the CAD1.3020-40 band. While the Australian dollar is practically flat, the New Zealand dollar recouped pre-weekend losses in full. It ran out of steam near $0.6620. Support is seen in the $0.6560-80 area.
Sterling continues last week's under-performance. Just like global headwinds spur questions about the timing of the Fed's lift-off, the same is true for the BOE. Many participants had taken the hook from the more hawkish MPC members and ran with it, with some forecasting a rate hike in the middle of Q4 '15.
The BOE's Andrew Haldane spoke for the less hawkish camp, suggesting that the UK economy is still healing and still has plenty of slack. Haldane argued against the rush to hike. Since July 17, the implied yield of the December 15 and June 2016 short-sterling futures have fallen 8-9 bp. Resistance on cable is pegged in the $1.5540-50 area. Above there, and sterling has scope for another cent advance. On the downside, support is seen ahead of the pre-weekend low near $1.5465.
We note the local press is reporting that Prime Minister Cameron will announce the EU referendum for October 2016. It is expected that he will make the announcement at the Tory Party Conference in October.
The sharp sell-off in Chinese stocks, the most since February 2007, has dragged other equity markets lower. The MSCI Emerging Markets Index is at new two-year lows. The ostensible trigger was news that industrial profits in China fell 0.3% from a year ago in June. Industrial profits were up 0.6% in May and 2.6% in April. In addition, reports suggest that the IMF is urging China to eventually unwind its support measures. This appeared to spook investors. The Shanghai Composite was 16% above the July 8 low before the weekend. The IMF did not seem to object to the government's intervention but wanted to ensure the deviation from market forces was temporary.
The US reports June durable goods orders today. It will allow economists to make last minute revisions to Q2 GDP forecasts. While the FOMC statement in the middle of the week is the key event, the first estimate of Q2 GDP (with annual revisions) is the data highlight of the week. The headline durable goods orders report will be lifted by civilian aircraft orders, but the rise in ex-defense and ex-aircraft orders will bode well for capex. Shipments of the same feed into GDP forecasts.
US stocks are set to open lower. Watch the 200-day moving average which comes in near 2063. Since 2012, a test of this moving average has been a good buying opportunity, though sometimes it takes a week or two for this to become clear. The S&P 500 closed near its lows before the weekend, and a gap lower opening is possible. The immediate key is what happens next. Is the gap filled quickly or does the selling pressure intensify?