Nine-Week High in Trade-Weighted Dollar Despite Adverse U.S. News

September 24, 2020

The dollar rose overnight to a nine-week trade-weighted high of 94.55. The U.S. currency touched a three-month high of NOK 9.5974 against the Norwegian krone, two-month highs of 1.1633 per euro and CHF 0.9269, and 1-month highs of $0.6516 against the New Zealand dollar and ZAR 17.2230 versus the South African rand. Gold, which tends to trend inversely with the dollar, slumped as low as a 2-month low of $1,848.84 per dollar overnight.

Dollar strength reflects hot money inflows seeking a safe haven and has happened in spite of more unsettling U.S. developments.

  • The U.S. Covid case count moved above 201k, and over 1100 U.S. deaths in the past 24 hours have been attributed to the pandemic.
  • Fresh urban protests erupted following the Breona Taylor court decision in Louisville.
  • The political fight over the supreme court vacancy may help Biden in the overall national vote but appears to be favoring Trump in key swing states.
  • President Trump doubled down on allegations of Democrat fraud in the coming election and refused to say he would relinquish his office peacefully should he lose. In such a scenario, the military’s allegiance could be decisive in settling the election’s winner.
  • New U.S. jobless insurance claims totaled 870k last week, marginally above 866k in the prior week and a tad above analyst expectations.
  • Federal Reserve Chairman Powell pleaded his case before Congress that the U.S. economy really needs continuing fiscal support to safeguard the economic recovery.
  • Stock market action overnight remained uneasy, with losses of 3.0% in India, 2.6% in South Korea, 2.5% in Taiwan, 1.8% in Hong Kong, 1.7% in China, 1.2% in Singapore, 1.1% in Japan, and 0.8% in Australia. Share prices have fallen so far today by 1.0% in Switzerland, 0.5% in the U.K., 0.3% in France, and 0.1% in Germany. Over the five business days ending yesterday, the DJIA and S&P both lost 4.5% of their value.

West Texas Intermediate crude oil slid 0.3% overnight, and the 10-year German bund and British gilt yields fell by 2 and 1 basis points, respectively.

Thursday’s been a active session from a central banking standpoint, with the publication to Bank of Japan minutes and policy reviews completed in Turkey, Norway, Switzerland and the Czech Republic. BOJ minutes express concern about a second Covid-19 wave and retained a commitment to ease if needed.

Officials at the Central Bank of Turkey made the biggest splash, hiking the one-week repo rate by two full percentage points to 10.25%, which reverses over half of the 375 basis points of reduction engineered earlier this year between January and May. This directional reversal was ostensibly done in light of this quarter’s “markedly” recovering Turkish economy and to “restore the disinflationary process” in light of a “higher-than-envisaged path” of inflation lately. Countering recent lira depreciation is a key goal as well, and the currency overnight rose 1.1% after the announcement from a record low of 7.7201 per dollar beforehand.

At the quarterly review of the Swiss National Bank‘s monetary policy, officials left their policy interest rate at -0.75%, making the case for a continuing expansive policy stance that also involves a commitment to engage in foreign exchange intervention as needed to counter an overvalued franc. Officials upgraded projected GDP growth in 2020 by a percentage point to negative 5.0% and also revised the projected CPI inflation path a tad upward. They predict on-year deflation of 0.8% this quarter instead of -1.0%. Positive inflation isn’t achieved until next spring and then by just 0.3%. From the second quarter of 2022, the inflation path is the same as predicted earlier, and as late at the second quarter of 2023, such is projected to have risen only to 0.5%. Swiss officials cited continuing downside risks to growth and prices such ongoing trade tensions and as a second wave of Covid-19 forcing new social-gathering restrictions.

The Czech National Bank‘s two-week repo rate was left at 0.25%. In four moves between February and May, that rate had been cut by 225 basis points. While recent economic data trends have been aligned with the expectation of officials, big downside risks continue. In a separate data release today, 6-month highs were reported for Czech consumer confidence and business sentiment.

The Bank of Norway‘s 0.00% policy rate was retained unanimously, and officials expect that level to be maintained for the coming “couple of years.” Core inflation has been lately above the target but should drop in light of the krone’s firm trend and a lack of wage pressure. The outlook for a return to pre-pandemic economic activity is accompanied by considerable uncertainty.

The German IFO Economic Institute released the September business climate survey whose overall index rose 0.9 points to a 7-month high of 93.4. Current conditions and expectations each improved. Among industrial sectors, manufacturing, trade, and construction climbed to 8-, 7- and 6-month highs, but services settled back to a 2-month low. Summarizing the results, IFO officials said Germany’s economy is stabilizing despite rising infections.

French business confidence advanced just two points to a reading of 92 in September (6-month high), having bottomed at 53 in April and begun the year at 102 in January.

The Confederation of British Industries’ monthly distributive trade index unexpectedly improved 17 points to a 17-month high of +11 in September.

New Zealand’s trade deficit imploded to NZD 353 million in August from NZD 1.642 billion a year earlier, as imports (-16%) fell twice as much as exports.

The Dutch EUR 12.624 billion current account surplus in 2Q was its smallest quarterly surplus in a year.

In the year through August, Icelandic PPI inflation of 4.4% represented a 4-month on-year high, and Finnish PPI deflation of 4.1% was the smallest 12-month rate of decline in 6 months.

U.S. new home sales rose 4.8% on month and 43.2% on year in August to 1.011 million.

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