Dollar Closing August’s Second Week on an Up Note

August 12, 2022

Prior to the release of U.S. import price data, the dollar was showing overnight gains of 0.6% against the yen and sterling, 0.5% versus the DXY weighted index, 0.4% relative to the euro and 0.3% vis-a-vis the Aussie dollar. A number of factors are supporting the dollar: lessened inflation concerns after reports of lower-than-forecast CPI and PPI inflation, sound corporate earnings last quarter, recession worries that have been alleviated at least as far as the immediate future are concerned.

U.S. stock futures are 0.3% higher. In Japan whose market was shut Thursday, the Nikkei closed 2.6% higher today. Other stock markets in the Pacific Rim ended narrowly mixed. The German Dax has risen 0.5%, and equities show 0.3% gains so far in the U.K., Spain and Italy.

Among ten-year sovereign debt yields, the British gilt has climbed four basis points, while the U.S. treasury is down two basis points.

The prices of WTI oil, Bitcoin, and gold have dropped 1.5%, 1.1% and 0.8% so far today.

Spanish CPI inflation in July has been left unrevised from the preliminary estimate of 10.8%, a 454-month high and up from 2.9% a year earlier.

French CPI inflation in July likewise matched the estimate of 6.1%, a 37-year high.

Swedish CPI inflation in July receded 0.2 percentage points to a 2-month low of 8.5% and was up from 1.4% a year earlier.

Polish CPI inflation of 15.6% last month was the most in 309 months and up from 5.0% a year earlier.

Central bank interest rate hikes were announced late Thursday or today in Peru, Mexico and Uganda, and Federal Reserve presidents from the districts of San Francisco, Minneapolis and Chicago have made comments to dissuade investors from thinking the Fed might pause or greatly lessen its anti-inflationary policy actions in the wake of the U.S. July CPI and PPI reports.

The Central Reserve Bank of Peru‘s policy interest rate was raised by another 50 basis points, bringing such to 6.5%. It has been increased by a half percentage point in each of the first eight months of 2022 as well as in each of the last four months of 2021. There was an initial 25-basis point hike in August 2021 from the pandemic low of 0.25%. In total, the central bank rate has risen more sharply than CPI inflation over the past year, and the statement released today implies that more rate normalizing moves lie ahead. Peruvian CPI inflation has swelled from 3.8% in July 2021 to 8.74% currently, which is just below June’s highest level since 2002. Officials seek to lower inflation to back to the top of their 1-3% target range by the latter part of next year.

Officials at the Bank of Mexico by a unanimous vote agreed to lift their overnight interbank lending rate by 75 basis points to 8.5%, which matches the highest rate level since November 2005. From February 2020 through February 2021, the rate had been reduced 325 basis points in total to 4.0%, but rate increases that began in June 2021 now total 450 basis points. Mexican CPI inflation has accelerated from 5.8% in July 2021 to 8.15% last month, and a statement explaining today’s decision revises the projected future likely path of inflation higher for every quarter through 3Q 2023. Officials moreover conceded that while there are both upside and downside risks to their forecast, the balance of inflationary risks is skewed to the upside. Headline and core CPI next quarter are projected at 8.1% and 7.6%, respectively, but the updated forecast has both aligned with the 3% objective at 3.1% and 3.0% by 2Q 2024.

Officials at the Central Bank of Uganda had cut their policy interest rate three times by a total of 250 basis points to 6.5% between April 2020 and June 2021. With an increase of 50 basis points today, all of that reduction has been reversed since June 2022, and the rate level is back at 9.0%. Total CPI inflation of 7.9% now in Uganda is up from 2.1% a year earlier, and even core CPI of 6.3% still exceeds the target of 5%.

U.S. import prices conveyed the same hopeful gestalt as CPI and PPI data released earlier this week. A 1.4% plunge in import prices was the first monthly drop this year and the largest such decline since April 2020, and it resulted in a 28-month low 12-month increase of 8.8% versus 10.7% posted in June. Imported fuel prices sank 7.5%, but all other import pricesĀ  also posted a collective month-on-month decline in June (-0.5%). Export price inflation of 13.1% in July was down from 18.2% in June and the least in 16 months. The declines in in both import and export prices last month were greater than forecast.

A bunch of British economic indicators were reported this Friday:

  • Industrial production tumbled 0.9% on month in June but was 2.4% greater than a year earlier.
  • Construction output in June was 4.1% higher than a year earlier.
  • Monthly GDP fell 0.6% in June. That was the largest monthly slide since January 2021.
  • GDP in the second quarter was 0.1% lower than in 1Q, marking the first quarter-on-quarter decline since the first quarter of 2021 and resulting in a steep slowdown in year-on-year growth to 2.9% from 8.7% in the first quarter and 10.5% in the third quarter of last year.
  • Foreign trade has exerted a strong drag on the British economy. If Darwin awards were handed out to national governments, Britain’s decision to leave the EU not long before the pandemic and subsequent Russian invasion of Ukraine would deserve very strong considerations. The U.K. goods and services trade deficit widened from GBP 2.5 billion in June 2021 to GBP 11.4 billion a year later. The merchandise trade gap in June 2022 was GBP 22.8 billion.

Industrial production in the euro area advanced 0.7% on month 2.4% on year in June. The output of capital goods posted back-to-back monthly increases of 3.6% in May and 2.6% in June. Not all members of the bloc shared in the latest month’s solid increase of industrial production, however. Italian and Belgian production fell by 2.1% and 2.2% in the latest month.

GDP in Hong Kong grew 1.0% on quarter in 2Q after a 2.9% tumble in the first quarter. This favorable swing reflected lessening lockdowns in China but was not enough to prevent a 1.3% year-on-year decline in GDP.

Turkish industrial production and retail sales were 8.5% and 5.5% greater than a year earlier in June. Those increases were the smallest since January and March, respectively.

New Zealand’s manufacturing purchasing managers index broke above the 50 threshold to a 3-month high of 52.7. Food price inflation in New Zealand accelerated to a 4-month high of 7.4% in July.

On-year Chinese M2 money growth of 12.0% last month was the most so far in 2022, but the amount new yuan loans was 76% less than in June and the second smallest monthly total this year.

GDP in Taiwan contracted by 1.8% in 2Q, reversing the first quarter’s advance. On-year growth of 3.1% was the least in eight quarters.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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