Dollar Firm With Focus on Inflation and Central Bank Policy
July 21, 2023
The dollar rose overnight by 1.2% against the yen, 0.8% and 0.6% relative to the New Zealand and Australian currencies, 0.7% versus the Turkish lira and 0.2% vis-a-vis sterling. The euro kept pace with the dollar, and the Russian ruble jumped 1.1%. These movements correlated well with perceived monetary policy stances.
A full percentage point hike in the Central Bank of Russia’s overnight interest rate to 8.5% was twice as large as markets anticipated, and the action was accompanied by a hawkish statement that depicted the move as the first of multiple increases that will follow in the months ahead. Labor market shortages resulting from President Putin’s expensive war and previous ruble depreciation magnified proinflationary risks significantly within the past month, prompting central bank officials to revised the projected CPI inflation path upward to as much as 6.5% around the end of 2023. To restore balance in Russian supply and demand, a tighter monetary policy is required. At 8.5%, the interest rate is back at its level at the start of February 2022, the month that Putin launched military aggression against Ukraine. In two moves, the interest rate catapulted to 20.0% by the end of that month but held there only very briefly. Three 300-basis point cuts followed by late May 2022 and the final reduction to 7.5% was made last September.
The FOMC, European Central Bank, and Bank of Japan each have scheduled policy reviews next week. The Fed and ECB are expected to raise interest rates by around 25 basis points despite considerable decelerations in headline inflation. However, the Bank of Japan’s persistence in running an ultra-expansive policy is being perceived as increasingly out of touch with inflation reality its economy. Japanese June CPI data out today revealed 0.1 percentage point increases to 3.3% in both the total index and the core measure that excludes fresh food but includes energy. Core CPI has exceeded the 2.0% target every month since April 2022, and core inflation that excludes energy as well as fresh food printed at 4.2%, having been more than twice the target in each month of the second quarter. Nonetheless, BOJ Governor Ueda just days ago reaffirmed the need for patience to be sure that the rise of inflation isn’t transitory and that it is accompanied by a sustained acceleration of wage inflation.
The Central Bank of Turkey‘s rate hike yesterday was only half as much as market participants believed to be warranted, and the Turkish lira has fallen in response.
In other overnight financial market action, U.S. stock futures are marginally firmer. Stock markets in the Pacific Rim closed down 1.3% in India, 0.8% in Taiwan and 0.6% in Japan but up 0.8% in Hong Kong and 0.4% in South Korea. In Europe thus far, the German DAX is down 0.4%, but the British, Spanish, French and Italian indices are marginally higher. Ten-year sovereign debt yields have slid 2 basis points in Japan and a basis point in the U.S. and Germany, but the equivalent British gilt yield is 2 bps firmer. The price of WTI oil has leaped 1.2%, while those of Bitcoin and gold have edged 0.2% and 0.3% lower.
In Spanish parliamentary elections scheduled this Sunday, polls suggest that Socialist government of Pedro Sanchez will be replaced by a right of center coalition.
Other price data reported this Friday revealed
- A 14-month low in Icelandic CPI inflation of 7.6%, down from 8.9% in the previous month and a 161-month high of 10.0% in February.
- A 29-month low in Latvian producer price inflation of 0.4% in June after 4.4% in May and a record high of 37.7% in March 2022.
- A 2-month high in Irish wholesale price inflation but negative for a third straight month at -0.6%. WPI inflation had crested in October 2022 at a 70-month high of 8.0%.
- A 15-month low in Moroccan CPI inflation of 5.6%, cut almost in half from February’s record high of 10.1%.
- And a two-year low in Slovenian PPI inflation, which fell to 4.9% from 6.6% in the prior month and a record high of 22.5% set in May 2022.
After spiking to a 43-quarter high in the second quarter, business confidence in Hong Kong returned all the way back to its first-quarter reading, which coincidentally was also the year-earlier reading in 3Q 2022.
Danish business confidence ticked a point higher to an 11-month high this month.
British consumer confidence in July weakened six index points to a highly depressed 3-month low of -30, suggesting that a greater-than-forecast 0.7% rise of retail sales in June (also reported this Friday) does not signal a sustained faster trend of sales growth. A 1.0% year-on-year drop in retail sales was the 15th negative result in a row.
Spanish consumer confidence improved to a 20-month high in June from a 17-month low in March 2022.
Canadian retail sales stagnated in June after a 0.2% uptick in May. Sales were 0.5% greater than in June 2022, but over the five months ending June, sales growth at an annualized rate was slower than 0.05%.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: British retail sales, Canadian retail sales, Central Bank of Russia, Japanese CPI
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