FX Daily: Holding patterns

The dollar received a lift from the better-than-expected retail sales data yesterday. As James Knightley highlights, the data has prompted investors to shift towards pricing a 25bp Federal Reserve rate cut on 18 September. However, there will be a myriad of data inputs into the Fed equation and the events calendar picks up next week. For today, however, the focus will be on August University of Michigan consumer confidence data. This survey will have been taken during the stock market rout at the start of August and could see consumer expectations sink further. This could be a little bearish for the dollar.

Elsewhere, firmer US rates have allowed USD/JPY to climb back towards 150 and have encouraged flows back into the high yielders like the Mexican peso and the South African rand. We still have our concerns over the peso given potential constitutional reforms next month and doubt investors will chase USD/MXN much under 18.50.

DXY is consolidating, but we have a bias for a drop to 102.15/25 next week.

Chris Turner

Journalists ask us whether we think EUR/USD at 1.10 represents some significant re-assessment of the euro. We think that is not the case and 1.10 more represents the fading story of US exceptionalism. That may all change after US elections in November. We spell out alternative paths for EUR/USD under specific policy assumptions in our election scenario analysis here. 

Chris Turner

USD/BRL has come off sharply from its early August spike to 5.80. The broad turn lower in the dollar and the global equity market recovery are helping. However, the commodity story is a worry for the Brazilian real. Brazil's terms of trade have dropped to the lowest levels since January 2023 as weak Chinese demand weighs on both soybeans and iron ore – two of Brazil's key exports. Brazil's terms of trade levels are more consistent with USD/BRL trading at 5.70/5.80. 

In addition, investors await the Brazilian government's 2025 budget plans – which are announced on 31 August. The market view is split here. If the Lula administration prioritises social spending, then fiscal targets will be missed and the real will be hit hard. However, some in the market suspect that the government will cut spending to try and keep the bond market on side. Typically fiscal weakness has always been the Achilles heel of Brazilian asset markets.

Given this late August event risk with the budget and the terms of trade drop, we suspect USD/BRL will struggle to break support in the 5.40/45 area.

Chris Turner

The end of the week should be quieter than previous days in the CEE region with only secondary data in Poland and the Czech Republic. In the morning, we will see PPI data in the Czech Republic for July, which our economists expect to see only a small pick-up from 1.0% to 1.1% year-on-year. Later, core inflation for July will be released, which should show a slight increase from 3.6% to 3.7% YoY and we expect further increases in the months ahead.

It was more or less a successful week for CEE currencies, especially in USD crosses as we turned bullish on the region at the end of the last week. We mentioned on Wednesday that the room for a further rally here is shrinking but yesterday's strong US data sent CEE FX into a brick wall. However, part of the CEE market was closed for a local public holiday and we should see some catch up with higher core rates today. The Czech koruna and Hungarian forint markets were open yesterday and saw some losses already. However, we still believe there is more space for the CEE currencies to rally. EUR/USD is coming back after the US data and some pressure on paying rates in CEE following higher core rates should again improve the picture for CEE currencies. We remain positive on the zloty and koruna, whereas for the forint we want to be more neutral at these levels. But it is clear that from these levels it will be harder for CEE to see further gains.

Frantisek Taborsky